UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




(Mark
One)




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




For
quarterly period ended December
31, 2008




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




For the
transition period from _____ to _____




COMMISSION
FILE NUMBER 033-24138-D




IMAGENETIX,
INC.


(Exact
name of registrant as specified in its charter)




NEVADA
                
                87-0463772(State
      or other jurisdiction of incorporation or
                  organization)
                
                (I.R.S.
      Employer Identification
No.)





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




Registrant’s
telephone number (including area code)  (858)
674-8455




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 xNo ̈





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


Large
      accelerated filer  ̈
            
            Accelerated
      filer  ̈
            
            Non-accelerated
      filer  ̈
            
            Smaller
      reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈  Nox




State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date:




Common Stock, $.001 par
    value
              11,010,788(Class)
              Outstanding
      at February 11, 2009









Imagenetix,
Inc.


INDEX


PagePART
      I.
                        FINANCIAL
      INFORMATIONItem
      1.
                        Financial
      Statements:
                        3Condensed
      Consolidated Balance Sheets as of December 31, 2008(unaudited)
      and March 31, 2008
                        3Condensed
      Consolidated Statements of Operations for the threeand
      nine months ended December 31, 2008 and 2007 (unaudited)
                        4Condensed
      Consolidated Statements of Cash Flows for thenine
      months ended December 31, 2008 and 2007 (unaudited)
                        5Notes
      to Unaudited Condensed Consolidated FinancialStatements
                        6Item
      2.
                        Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
                        11Item
      3.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        *Item
      4T.
                        Controls
      and Procedures
                        18PART
      II. OTHER INFORMATIONItem
      1.
                        Legal
      Proceedings
                        *Item
      1A.
                        Risk
      Factors
                        19Item
      2.
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        22Item
      3.
                        Defaults
      Upon Senior Securities
                        *Item
      4.
                        Submission
      of Matters to a Vote of Security Holders
                        *Item
      5.
                        Other
      Information
                        *Item
      6.
                        Exhibits
                        22SIGNATURES
                        
                        22*       No
      information provided due to inapplicability of the item.





2




PART
I – FINANCIAL INFORMATION




Item
1.  Financial Statements




Imagenetix,
Inc.


Condensed
Consolidated Balance Sheets





December 31,
                              
                              
                              March 31,2008
                              
                              
                              2008(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                              
                              $
                              1,704,625
                              
                              
                              $
                              1,022,555Accounts
      receivable, net
                              
                              
                              1,215,618
                              
                              
                              
                              765,492Inventories,
      net
                              
                              
                              1,475,224
                              
                              
                              
                              1,109,845Prepaid
      expenses and other current assets
                              
                              
                              151,516
                              
                              
                              
                              252,138Deferred
      tax asset
                              
                              
                              320,997
                              
                              
                              
                              862,497Total
      current assets
                              
                              
                              4,867,980
                              
                              
                              
                              4,012,527Property
      and equipment, net
                              
                              
                              125,715
                              
                              
                              
                              112,190Long-term
      prepaid expenses
                              
                              
                              33,000
                              
                              
                              
                              42,000Other
      assets
                              
                              
                              253,605
                              
                              
                              
                              218,155Total
      Assets
                              
                              $
                              5,280,300
                              
                              
                              $
                              4,384,872LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                              
                              $
                              700,072
                              
                              
                              $
                              713,324Accrued
      liabilities
                              
                              
                              70,418
                              
                              
                              
                              72,301Customer
      deposits
                              
                              
                              3,250
                              
                              
                              
                              63,216Contract
      payable
                              
                              
                              92,219
                              
                              
                              
                              46,200Short
      term license payable
                              
                              
                              11,803
                              
                              
                              
                              34,259Total
      current liabilities
                              
                              
                              877,762
                              
                              
                              
                              929,300Long
      term license payable
                              
                              
                              -
                              
                              
                              
                              2,980Total
      liabilities
                              
                              
                              877,762
                              
                              
                              
                              932,280Stockholders'
      equity:Preferred
      stock, $.001 par value; 5,000,000 sharesauthorized:
      none outstanding
                              
                              
                              -
                              
                              
                              
                              -Common
      stock, $.001 par value; 50,000,000 sharesauthorized:
      11,010,788 and 10,960,788 issued and outstanding atDecember
      31, 2008 and March 31, 2008
                              
                              
                              11,010
                              
                              
                              
                              10,960Capital
      in excess of par value
                              
                              
                              12,645,712
                              
                              
                              
                              12,481,407Accumulated
      deficit
                              
                              
                              (8,254,184
                              )
                              
                              
                              (9,039,775
                              )Total
      stockholders' equity
                              
                              
                              4,402,538
                              
                              
                              
                              3,452,592Total
      Liabilities and Stockholders' Equity
                              
                              $
                              5,280,300
                              
                              
                              $
                              4,384,872





See
accompanying  notes to unaudited condensed consolidated financial
statements.




3




Imagenetix,
Inc.


Condensed
Consolidated Statements of Operations


(Unaudited)





Three Months Ended
                          
                          
                          Nine Months EndedDecember 31,
                          
                          
                          December 31,
                          
                          
                          December 31,
                          
                          
                          December 31,2008
                          
                          
                          2007
                          
                          
                          2008
                          
                          
                          2007Net
      sales
                          
                          $
                          2,083,797
                          
                          
                          $
                          1,032,048
                          
                          
                          $
                          6,134,533
                          
                          
                          $
                          3,987,850Cost
      of sales
                          
                          
                          1,019,255
                          
                          
                          
                          646,973
                          
                          
                          
                          3,380,187
                          
                          
                          
                          2,266,833Gross
      profit
                          
                          
                          1,064,542
                          
                          
                          
                          385,075
                          
                          
                          
                          2,754,346
                          
                          
                          
                          1,721,017Operating
      expenses:General
      and administrative
                          
                          
                          564,415
                          
                          
                          
                          582,483
                          
                          
                          
                          1,589,819
                          
                          
                          
                          1,915,846Payroll
      expense
                          
                          
                          249,375
                          
                          
                          
                          239,533
                          
                          
                          
                          842,320
                          
                          
                          
                          811,866Consulting
      expense
                          
                          
                          256,215
                          
                          
                          
                          229,870
                          
                          
                          
                          845,129
                          
                          
                          
                          709,223Operating
      expenses
                          
                          
                          1,070,005
                          
                          
                          
                          1,051,886
                          
                          
                          
                          3,277,268
                          
                          
                          
                          3,436,935Operating
      income (loss)
                          
                          
                          (5,463
                          )
                          
                          
                          (666,811
                          )
                          
                          
                          (522,922
                          )
                          
                          
                          (1,715,918
                          )Other
      income (expense):Other
      income
                          
                          
                          5,689
                          
                          
                          
                          5,808
                          
                          
                          
                          23,177
                          
                          
                          
                          27,594Settlement
      income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,785,000
                          
                          
                          
                          -Interest
      expense
                          
                          
                          (352
                          )
                          
                          
                          (1,014
                          )
                          
                          
                          (1,564
                          )
                          
                          
                          (3,513
                          )Other
      income
                          
                          
                          5,337
                          
                          
                          
                          4,794
                          
                          
                          
                          1,806,613
                          
                          
                          
                          24,081Income
      (loss) before income taxes
                          
                          
                          (126
                          )
                          
                          
                          (662,017
                          )
                          
                          
                          1,283,691
                          
                          
                          
                          (1,691,837
                          )Income
      tax expense (benefit)
                          
                          
                          100
                          
                          
                          
                          (267,300
                          )
                          
                          
                          498,100
                          
                          
                          
                          (230,900
                          )Income
      (loss)
                          
                          $
                          (226
                          )
                          
                          $
                          (394,717
                          )
                          
                          $
                          785,591
                          
                          
                          $
                          (1,460,937
                          )Basic
      income (loss) per share
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.04
                          )
                          
                          $
                          0.07
                          
                          
                          $
                          (0.13
                          )Diluted
      income (loss) per share
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.04
                          )
                          
                          $
                          0.07
                          
                          
                          $
                          (0.13
                          )Basic
      weighted average common shares outstanding
                          
                          
                          11,010,788
                          
                          
                          
                          10,953,283
                          
                          
                          
                          10,985,058
                          
                          
                          
                          10,912,565Diluted
      weighted average common shares outstanding
                          
                          
                          11,010,788
                          
                          
                          
                          10,953,283
                          
                          
                          
                          11,009,212
                          
                          
                          
                          10,912,565





See
accompanying  notes to unaudited condensed consolidated financial
statements.




4




Imagenetix,
Inc.


Condensed
Consolidated Statements of Cash Flows


(Unaudited)





Nine Months Ended December 31,2008
                      
                      
                      2007Operating
      activities:Net
      income (loss)
                      
                      $
                      785,591
                      
                      
                      $
                      (1,460,937
                      )Adjustments
      to reconcile net income (loss)to
      cash provided by (used in) operating activities:Amortization
      and depreciation
                      
                      
                      32,622
                      
                      
                      
                      37,041Provision
      for doubtful accounts
                      
                      
                      (774
                      )
                      
                      
                      30,000Provision
      for inventory obsolescence
                      
                      
                      13,372
                      
                      
                      
                      12,134Non
      cash expense related to issuance of warrantsand
      granting of stock options
                      
                      
                      139,356
                      
                      
                      
                      374,901Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                      
                      
                      (449,352
                      )
                      
                      
                      530,262(Increase)
      decrease in employee receivable
                      
                      
                      2,409
                      
                      
                      
                      1,548(Increase)
      decrease in inventories
                      
                      
                      (378,751
                      )
                      
                      
                      (59,839
                      )(Increase)
      decrease in other assets
                      
                      
                      132,213
                      
                      
                      
                      (38,527
                      )(Increase)
      decrease in deferred taxes
                      
                      
                      498,100
                      
                      
                      
                      (230,900
                      )Increase
      (decrease) in accounts payable
                      
                      
                      (13,253
                      )
                      
                      
                      224,157Increase
      (decrease) in accrued liabilities
                      
                      
                      (1,883
                      )
                      
                      
                      19,022Increase
      (decrease) in customer deposits
                      
                      
                      (59,966
                      )
                      
                      
                      (99,770
                      )Increase
      (decrease) in income taxes payable
                      
                      
                      -
                      
                      
                      
                      77,283Net
      cash provided by (used in) operating activities
                      
                      
                      699,684
                      
                      
                      
                      (583,625
                      )Investing
      activities:Purchases
      of property and equipment
                      
                      
                      (43,465
                      )
                      
                      
                      (19,014
                      )Proceeds
      from disposal of property and equipment
                      
                      
                      5,268
                      
                      
                      
                      -Net
      cash used in investing activities
                      
                      
                      (38,197
                      )
                      
                      
                      (19,014
                      )Financing
      activities:Proceeds
      from exercise of warrants
                      
                      
                      -
                      
                      
                      
                      90,888Proceeds
      from extension of warrants
                      
                      
                      -
                      
                      
                      
                      155,536Proceeds
      from contracts payable
                      
                      
                      92,219
                      
                      
                      
                      100,271Payments
      on contracts payable
                      
                      
                      (46,200
                      )
                      
                      
                      (80,941
                      )Payments
      on patent license financed
                      
                      
                      (25,436
                      )
                      
                      
                      (23,486
                      )Net
      cash provided by financing activities
                      
                      
                      20,583
                      
                      
                      
                      242,268Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      682,070
                      
                      
                      
                      (360,371
                      )Cash and cash
      equivalents, beginning of period
                      
                      
                      1,022,555
                      
                      
                      
                      958,896Cash and cash
      equivalents, end of period
                      
                      $
                      1,704,625
                      
                      
                      $
                      598,525Supplemental
      Disclosure of Cash Flow Information:Cash
      paid during the period for:Interest
                      
                      $
                      1,564
                      
                      
                      $
                      3,513Income
      taxes
                      
                      $
                      -
                      
                      
                      $
                      -Non
      Cash Investing and Financing Activities:Common
      stock issued for services
                      
                      $
                      25,000
                      
                      
                      $
                      -Non-cash
      dividend issued to certain warrant holders
                      
                      $
                      -
                      
                      
                      $
                      1,090,079




See
accompanying  notes to unaudited condensed consolidated financial
statements.




5




IMAGENETIX,
INC.


Notes
to the Unaudited Condensed Consolidated Financial Statements





1.
            BASIS OF
      PRESENTATION





The
consolidated financial statements of Imagenetix, Inc. ("Imagenetix") presented
herein have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America. These statements should be read in conjunction
with our audited consolidated financial statements and notes thereto included in
Form 10-KSB for the year ended March 31, 2008.





In the
opinion of management, the interim consolidated financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. Operating results for the three  and nine
month periods are not necessarily indicative of the results that may be expected
for the year.





Earnings Per
Share





We follow
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." Under SFAS No. 128, basic earnings per share is calculated as earnings
available to common stockholders divided by the weighted average number of
common shares outstanding. Diluted earnings per share is calculated as net
income divided by the diluted weighted average number of common shares. The
diluted weighted average number of common shares is calculated using the
treasury stock method for common stock issuable pursuant to outstanding stock
options and common stock warrants. See Note 6 for discussion of commitments to
issue additional shares of common stock and warrants.





Stock Based
Compensation





We
account for stock based compensation under the provisions of FASB Statement No.
123R, “Accounting for Stock-Based Compensation” (“SFAS 123R”). SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options and restricted stock, to be recognized in the financial statements
based on their fair values.





We have
selected the Black-Scholes method of valuation for share-based compensation. The
charge is recognized in non cash compensation, which is included in stock-based
compensation expense, on a straight-line basis over the remaining service period
based on the options’ original estimate of fair value.





We apply
SFAS No. 123 in valuing options granted to consultants and estimate 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.





2.
            RECENT
      ACCOUNTING PRONOUNCEMENTS





In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities” (SFAS No. 161”). SFAS
No. 161 amends and expands the disclosure requirement for FASB Statement
No. 133, “Derivative Instruments and Hedging Activities”




6




IMAGENETIX,
INC.


Notes
to the Unaudited Condensed Consolidated Financial Statements
(Continued)





(“SFAS
No. 133”). It requires enhanced disclosure about (i) how and why an
entity uses derivative instruments, (ii) how derivative instruments and
related hedge items are accounted for under SFAS No. 133 and its related
interpretations, and (iii) how derivative instruments and related hedge
items affect an entity’s financial position, financial performance, and cash
flows. SFAS No. 161 is effective for the Company as of April 1, 2009.
The Company is currently assessing the impact of SFAS 161 on its consolidated
financial position and results of operations.





In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles.” SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP. The current GAAP hierarchy has been criticized because it
is directed to the auditor rather than the entity, it is complex, and it ranks
FASB Statements of Financial Accounting Concepts, which are subject to the same
level of due process as FASB Statements of Financial Accounting Standards, below
industry practices that are widely recognized as generally accepted but that are
not subject to due process. The Board believes the GAAP hierarchy should be
directed to entities because it is the entity (not its auditors) that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. The adoption of FASB 162 is not expected
to have a material impact on the Company’s consolidated financial position and
results of operations.





In
April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of
Intangible Assets”, (FSP 142-3). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill
and Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning
after December 15, 2008. The Company is currently assessing the impact of
FSP 142-3 on its consolidated financial position and results of
operations.





3.
            ACCOUNTS
      RECEIVABLE





Accounts
receivable are carried at the expected realizable value. Accounts receivable
consisted of the following:




December 31,
                        
                        
                        March 31,2008
                        
                        
                        2008Accounts
      receivable - trade
                        
                        $
                        1,319,844
                        
                        
                        $
                        870,492Allowance
      for doubtful accounts
                        
                        
                        (104,226
                        )
                        
                        
                        (105,000
                        )Accounts
      receivable, net
                        
                        $
                        1,215,618
                        
                        
                        $
                        765,492





At
December 31, 2008, we had three customers which accounted for 24%, 23% and 18%
of our accounts receivable balances.At March 31,
2008, we had two customers which accounted for 16% and 12% of our accounts
receivable balances.





For the
nine months ended December 31, 2008, we had three significant customers which
accounted for 25%, 22% and 16% of sales.  For the nine months ended
December 31, 2007, we had four significant customers which accounted for 24%,
16%, 13% and 11% of sales.




7




IMAGENETIX,
INC.


Notes
to the Unaudited Condensed Consolidated Financial Statements
(Continued)





4.
            INVENTORIES





Inventories
consist of the following:





December 31,
                  
                  
                  March 31,2008
                  
                  
                  2008Raw
      materials
                  
                  $
                  1,156,123
                  
                  
                  $
                  824,807Finished
      products
                  
                  
                  261,691
                  
                  
                  
                  295,615Boxes,
      labels, tubes & bottles
                  
                  
                  221,324
                  
                  
                  
                  139,9651,639,138
                  
                  
                  
                  1,260,387Reserve
      for obsolescence
                  
                  
                  (163,914
                  )
                  
                  
                  (150,542
                  )$
                  1,475,224
                  
                  
                  $
                  1,109,845




5.
            OTHER
      ASSETS





The
following is a summary of intangible assets which are included in “Other Assets”
on the balance sheet:





December 31,
                  
                  
                  March 31,2008
                  
                  
                  2008Trademarks
                  
                  $
                  13,032
                  
                  
                  $
                  13,032Patent
                  
                  
                  172,965
                  
                  
                  
                  172,965Deferred
      tax asset
                  
                  
                  131,100
                  
                  
                  
                  87,700317,097
                  
                  
                  
                  273,697Less
      accumulated amortization
                  
                  
                  63,492
                  
                  
                  
                  55,542$
                  253,605
                  
                  
                  $
                  218,155




6.
            EQUITY
      TRANSACTIONS





During
the current fiscal year, we recorded $25,000 as non-cash general and
administrative expenses as a result of issuing 50,000 restricted shares of
common stock to an individual who had met certain sales levels under a marketing
and sales agreement.





We
recorded non-cash compensation expense for stock options and warrants issued to
employees and consultants of $13,641 and $93,561 for the three and nine months
ended December 31, 2008 and $35,147 and $234,313 for the three and nine months
ended December 31, 2007.  Also, we recorded non-cash general and
administrative expense for warrants granted to individuals of $7,417 and $45,795
for the three and nine months ended December 31, 2008 and none and $140,588 for
the three and nine months ended December 31, 2007.





The
significant assumptions used in the Black-Scholes model to estimate the
compensation and general and administrative expense for the issuance of stock
options and warrants are as follows:





8




IMAGENETIX,
INC.


Notes
to the Unaudited Condensed Consolidated Financial Statements
(Continued)





Three months ended December 31,
              
              Nine months ended December 31,2008
              
              2007
              
              2008
              
              2007Expected
      term of options and warrants
              
              5
      years
              
              3
      years
              
              5
      years
              
              3
      years to 5 yearsExpected
      volatility
              
              61%
              
              55%
              
              56%
      to 61%
              
              55%
      to 71%Expeceted
      dividends
              
              None
              
              None
              
              None
              
              NoneRisk-free
      interest rate
              
              2.84%
              
              3.09%
              
              2.84%
      to 3.54%
              
              3.09%
      to 4.55%Forteitures
              
              0%
              
              0%
              
              0%
              
              0%




A summary
of the options outstanding follows:





For the Nine Months EndedDecember 31, 2008WeightedAverageExerciseOptions
                                        
                                        Shares
                                        
                                        
                                        PriceOutstanding
      at beginning of year
                                        
                                        
                                        944,000
                                        
                                        
                                        $
                                        1.00Granted
                                        
                                        
                                        305,000
                                        
                                        
                                        
                                        0.65Cancelled
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Exercised
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Outstanding at end of the
      period
                                        
                                        
                                        1,249,000
                                        
                                        
                                        
                                        0.92Exercisable at end of the the
      period
                                        
                                        
                                        1,096,500
                                        
                                        
                                        $
                                        0.95Weighted
      average fair value of optionsgranted
      during the period
                                        
                                        
                                        305,000
                                        
                                        
                                        $
                                        0.36




As of
December 31, 2008, the unamortized portion of stock compensation expense on all
existing stock options was $27,280.





A summary
of warrants outstanding follows:





For the Nine Months EndedDecember 31, 2008WeightedAverageExerciseWarrants
                          
                          Shares
                          
                          
                          PriceOutstanding
      at beginning of year
                          
                          
                          3,902,957
                          
                          
                          $
                          1.18Granted
                          
                          
                          255,000
                          
                          
                          
                          0.97Cancelled
                          
                          
                          -
                          
                          
                          
                          -Exercised
                          
                          
                          -
                          
                          
                          
                          -Outstanding
      at end of the period
                          
                          
                          4,157,957
                          
                          
                          
                          1.17Exercisable
      at end of the the period
                          
                          
                          4,107,957
                          
                          
                          $
                          1.17Weighted
      average fair value of warrantsgranted
      during the period
                          
                          
                          255,000
                          
                          
                          $
                          0.19




9




IMAGENETIX,
INC.


Notes
to the Unaudited Condensed Consolidated Financial Statements
(Continued)





7.
            INCOME
      TAXES





We file
income tax returns in the U.S. federal jurisdiction and the state of
California.  With few exceptions, we are no longer subject to U.S.
federal, state and local or non-U.S. income tax examinations by tax authorities
for years before 2004.





We
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, on April 1, 2007.  As a result of the implementation of
Interpretation 48, we did not recognize an increase in the liability for
unrecognized tax benefits.  No unrecognized tax benefits are being
reported for the three and nine months ended December 31, 2008.





Included
in the balance at December 31, 2008, were no tax positions for which the
ultimate deductibility is highly certain but for which there is uncertainty
about the timing of such deductibility.  Because of the impact of
deferred tax accounting, other than interest and penalties, the disallowance of
the shorter deductibility period would not affect the annual effective tax rate
but would accelerate the payment of cash to the taxing authority to an earlier
period.





Our
policy is to recognize interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expenses.





8.
            LITIGATION
      SETTLEMENT





In May
2008, we received $2,100,000 ($1,785,000 after costs) as a result of entering
into a settlement agreement with a company we alleged was infringing on the
Celadrin trademark.  In addition, we entered into a supply agreement
with the same company whereby we provide Celadrin for use in their
products.





10





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





THE
FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR
FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF
FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "RISK FACTORS."
SEE ALSO OUR ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED MARCH 31,
2008.




Overview




We
develop, formulate and market 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® a product formulation which we sell
to the mass market through retailers and on a private label basis to wholesale
customers.





A key
part of our marketing strategy is to provide to our wholesale customers a
"turnkey" approach to the marketing and distribution of our products. This
turnkey approach provides these 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 sell
directly to the mass markets through retailers InflameAway, our own Celadrin®
branded product.  We also develop and sell 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 also  offer Celadrin®
products through wholesale customers that in turn offer their products
containing Celadrin® to mass market retailers.





Management's discussion and analysis or
plan of operation is 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 four 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.   
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.




11




2.    Inventories


Inventories
are carried at the lower of cost or market. Cost is determined by the first-in
first-out method.  At each period end, management adjusts the
inventory allowance based on estimates.  These estimates take into
account spoilage, yields, obsolescence and overstocked inventory
amounts.




3.   Revenue
Recognition




We
recognize revenue in accordance with the SEC’s Staff Accounting Bulletin
No. 104, “Revenue Recognition in Financial Statements” (SAB104), Statement
of Financial Accounting Standards No. 48, “Revenue Recognition When Right
of Return Exists” (SFAS 48), and Emerging Issues Task Force Abstract (EITF)
No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products.” SAB 104 requires that four
basic criteria be met before revenue can be recognized: 1) there is evidence
that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or
determinable; and 4) collectibility is reasonably assured. SFAS 48 states that
revenue from sales transactions where the buyer has the right to return the
product shall be recognized at the time of sale only if (1) the seller’s
price to the buyer is substantially fixed or determinable at the date of sale;
(2) the buyer has paid the seller, or the buyer is obligated to pay the
seller and the obligation is not contingent on resale of the product;
(3) the buyer’s obligation to the seller would not be changed in the event
of theft or physical destruction or damage of the product; (4) the buyer
acquiring the product for resale has economic substance apart from that provided
by the seller; (5) the seller does not have significant obligations for
future performance to directly bring about resale of the product by the buyer;
and (6) the amount of future returns can be reasonably estimated. We
recognize revenue upon determination that all criteria for revenue recognition
have been met. The criteria are usually met at the time title passes to the
customer, which usually occurs upon shipment. Revenue from shipments where title
passes upon delivery is deferred until the shipment has been
delivered.




We
account for payments made to customers in accordance with EITF 01-09, which
states that cash consideration (including a sales incentive) given by a vendor
to a customer is presumed to be a reduction of the selling prices of the
vendor’s products or services and, therefore, should be characterized as a
reduction of revenue when recognized in the vendor’s income statement, rather
than a sales and marketing expense. We have various agreements with customers
that provide for discounts and rebates. These agreements are classified as a
reduction of revenue. Certain other costs associated with customers that meet
the requirements of EITF 01-09 are recorded as sales and marketing
expense.




We
guarantee customer satisfaction. Our policy requires the customer to return the
unused product to the retailer from whom  they originally purchased
it.  We pay the retailer for the returned product plus a handling
cost. We periodically assess the adequacy of this policy and will record a
liability as necessary.   For the three and nine months ended
December 31, 2008, there were no returns that would indicate a liability needed
to be recorded.




We review
gross revenue for estimated returns of private label contract manufacturing
products and direct-to-consumer products. The estimated returns are based upon
the trailing nine months of private label contract manufacturing gross sales and
our historical experience for both private label contract manufacturing and
direct-to-consumer product returns. However, the estimate for product returns
does not reflect the impact of a large product recall resulting from product
nonconformance or other factors as such events are not predictable nor is the
related economic impact estimable.   For the three and nine
months ended December 31, 2008, there were no returns that would suggest a
liability needed to be recorded.




As part
of the services we provide to our private label contract manufacturing
customers, we may perform, but are not required to perform, certain research and
development activities related to the development or improvement of their
products. While our customers typically do not pay directly for this service,
the cost of this service is included as a component of the price we charge to
manufacture and deliver their products.




12




4.   Income
Taxes


Deferred
income taxes are provided using the liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences.  Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax
bases.  Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.  Deferred tax
assets and liabilities are adjusted for the effects of the changes in tax laws
and rates of the date of enactment.





When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained.  The benefit of a tax
position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any.  Tax positions taken are
not offset or aggregated with other portions.  Tax positions that meet
the more-likely-than-not recognition threshold are measured as the largest
amount of tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority.  The portion of the
benefits associated with the tax positions taken that exceed the amount measured
as described above is reflected as a liability for unrecognized tax benefits in
the accompanying balance sheet along with any associated interest and penalties
that would be payable to the taxing authorities upon examination.




Selected
Financial Information




Results
of Operations




Three
Months Ended December 31, 2008 Compared to Three Months Ended December 31,
2007




Three Months Ended
                
                
                Increase12/31/08
                
                
                12/31/07
                
                
                (Decrease)
                
                
                %Statements
      of Operations:Net
      sales
                
                $
                2,084,000
                
                
                $
                1,032,000
                
                
                $
                1,052,000
                
                
                
                101.9
                %Cost
      of goods sold
                
                
                1,019,000
                
                
                
                647,000
                
                
                
                372,000
                
                
                
                57.5
                %%
      of net sales
                
                
                48.9
                %
                
                
                62.7
                %
                
                
                -13.8
                %
                
                
                -22.0
                %Gross
      profit
                
                
                1,065,000
                
                
                
                385,000
                
                
                
                680,000
                
                
                
                176.6
                %%
      of net sales
                
                
                51.1
                %
                
                
                37.3
                %
                
                
                13.8
                %
                
                
                37.0
                %Operating
      expensesGeneral
      and administrative
                
                
                565,000
                
                
                
                582,000
                
                
                
                (17,000
                )
                
                
                -2.9
                %Payroll
      expense
                
                
                249,000
                
                
                
                240,000
                
                
                
                9,000
                
                
                
                3.8
                %Consulting
      expense
                
                
                256,000
                
                
                
                230,000
                
                
                
                26,000
                
                
                
                11.3
                %Total
      operating expenses
                
                
                1,070,000
                
                
                
                1,052,000
                
                
                
                18,000
                
                
                
                1.7
                %Interest
      expense
                
                
                -
                
                
                
                (1,000
                )
                
                
                (1,000
                )
                
                NMOther
      income
                
                
                5,000
                
                
                
                6,000
                
                
                
                (1,000
                )
                
                
                -16.7
                %Provision
      for (benefit from) taxes
                
                
                -
                
                
                
                (267,000
                )
                
                
                (267,000
                )
                
                NMNet
      income (loss)
                
                
                -
                
                
                
                (395,000
                )
                
                
                395,000
                
                
                NMNet
      income (loss) per share basic
                
                
                -
                
                
                
                (0.04
                )
                
                
                0.04
                
                
                NMNet
      income (loss) per share diluted
                
                
                -
                
                
                
                (0.04
                )
                
                
                0.04
                
                
                NM




Net
Sales




Net sales
for the quarter ended December 31, 2008 increased $1,052,000, a 101.9% increase,
to $2,084,000 compared to $1,032,000 for the quarter ended December 31,
2007.  The primary reason for the sales increase was attributed to
sales to MonaVie under a supply agreement coupled with an increase in sales of
our weight loss product.  Sales of our own branded product, Inflame
Away, that identifies Celadrinâ as its marquee ingredient,
also contributed to the increase but was partially offset by product rebates and
giveaways in support of marketing InflameAway through retail distribution
channels.   We anticipate, the new marketing program coupled with
additional distribution agreements to wholesale and multi-level marketing
customers to result in improved sales during the balance of our current fiscal
year.




13




Cost of Goods
Sold




Cost of
goods sold as a percentage of net sales was 48.9% for the quarter ended December
31, 2008 compared to 62.7% for the quarter ended December 31,
2007.  The reduction in the cost of goods sold percentage is
related  to a reduction in the costs related to the rebate and
giveaway marketing strategy for the  InflameAway product from the
costs incurred during the corresponding quarter of the previous fiscal
year.  Rebate and giveaway programs are customary in the mass market
distribution channel.  We anticipate levels of promotional activities
used to launch the awareness of InflameAway will continue to be reduced in the
future resulting in more stable cost of goods sold percentages.




General and
Administrative




General
and administrative expenses decreased by $17,000, a 2.9% decrease, to $565,000
for the quarter ended December 31, 2008 from $582,000 for the quarter ended
December 31, 2007.  The primary reason for the decrease was a
reduction in bad debt expense during the current fiscal quarter compared to the
corresponding quarter of the previous fiscal year.  We anticipate
increases in general and administrative expenses as a result of increasing our
advertising campaign for our Inflame Away product and an increase in clinical
research studies.




Payroll
Expense




Payroll
expense remained stable at $249,000 for the quarter ended December 31, 2008
compared to $240,000 for the quarter ended December 31,
2007.   The increase was a result of normal salary
increases.




Consulting
Expenses




Consulting
expenses increased to $256,000 for the quarter ended December 31, 2008, an
increase of 11.3% or $26,000 compared to $230,000 for the quarter ended December
31, 2007.  This increase was a result of increased support expenses
related to upcoming expansion of  radio advertising for
InflameAway.




Provision for Income
Taxes




As a
result of break-even profit for the quarter ended December 31, 2008, no income
tax expense was recognized during the current quarter compared to an income tax
benefit of $267,000 being recognized during the quarter ended December 31,
2007.




14


Nine
months Ended December 31, 2008 Compared to Nine months Ended December 31,
2007
 
 Nine Months Ended
                    
                    
                    Increase12/31/08
                    
                    
                    12/31/07
                    
                    
                    (Decrease)
                    
                    
                    %Statements
      of Operations:Net
      sales
                    
                    $
                    6,135,000
                    
                    
                    $
                    3,988,000
                    
                    
                    $
                    2,147,000
                    
                    
                    
                    53.8
                    %Cost
      of goods sold
                    
                    
                    3,380,000
                    
                    
                    
                    2,267,000
                    
                    
                    
                    1,113,000
                    
                    
                    
                    49.1
                    %%
      of net sales
                    
                    
                    55.1
                    %
                    
                    
                    56.8
                    %
                    
                    
                    -1.8
                    %
                    
                    
                    -3.1
                    %Gross
      profit
                    
                    
                    2,755,000
                    
                    
                    
                    1,721,000
                    
                    
                    
                    1,034,000
                    
                    
                    
                    60.1
                    %%
      of net sales
                    
                    
                    44.9
                    %
                    
                    
                    43.2
                    %
                    
                    
                    1.8
                    %
                    
                    
                    4.1
                    %Operating
      expensesGeneral
      and administrative
                    
                    
                    1,590,000
                    
                    
                    
                    1,916,000
                    
                    
                    
                    (326,000
                    )
                    
                    
                    -17.0
                    %Payroll
      expense
                    
                    
                    842,000
                    
                    
                    
                    812,000
                    
                    
                    
                    30,000
                    
                    
                    
                    3.7
                    %Consulting
      expense
                    
                    
                    845,000
                    
                    
                    
                    709,000
                    
                    
                    
                    136,000
                    
                    
                    
                    19.2
                    %Total
      operating expenses
                    
                    
                    3,277,000
                    
                    
                    
                    3,437,000
                    
                    
                    
                    (160,000
                    )
                    
                    
                    -4.7
                    %Interest
      expense
                    
                    
                    (2,000
                    )
                    
                    
                    (4,000
                    )
                    
                    
                    2,000
                    
                    
                    
                    -50.0
                    %Settlement
      income
                    
                    
                    1,785,000
                    
                    
                    
                    -
                    
                    
                    
                    1,785,000
                    
                    
                    NMOther
      income
                    
                    
                    23,000
                    
                    
                    
                    28,000
                    
                    
                    
                    (5,000
                    )
                    
                    
                    -17.9
                    %Provision
      for (benefit from) taxes
                    
                    
                    498,000
                    
                    
                    
                    (231,000
                    )
                    
                    
                    729,000
                    
                    
                    
                    -315.6
                    %Net
      income (loss)
                    
                    
                    786,000
                    
                    
                    
                    (1,461,000
                    )
                    
                    
                    2,247,000
                    
                    
                    NMNet
      income (loss) per share basic
                    
                    
                    0.07
                    
                    
                    
                    0.13
                    
                    
                    
                    0.17
                    
                    
                    NMNet
      income (loss) per share diluted
                    
                    
                    0.07
                    
                    
                    
                    0.13
                    
                    
                    
                    0.17
                    
                    
                    NM
  Net
Sales
 
 Net sales
for the nine months ended December 31, 2008 increased $2,147,000, a 53.8%
increase, to $6,135,000 compared to $3,988,000 for the nine months ended
December 31, 2007.  The primary reason for the sales increase was
attributed to the initial sales to MonaVie under a supply agreement coupled with
an increase  in our weight loss product.  Sales of our own
branded product, Inflame Away, that identifies Celadrinâ as its marquee ingredient,
also contributed to the increase but was offset by product rebates and giveaways
in support of marketing InflameAway through retail distribution
channels.   We anticipate, the new marketing program coupled with
additional distribution agreements to wholesale and multi-level marketing
customers to result in improved sales during the balance of our current fiscal
year.
 
 Cost of Goods
Sold
 
 Cost of
goods sold as a percentage of net sales decreased from 56.8% for the nine months
ended December 31, 2007 to 55.1% for the nine months ended December 31,
2008.  This decrease was primarily due to a reduction in the costs
related to the rebate and giveaway marketing strategy discussed above. We
anticipate levels of promotional activities used to launch the awareness of
InflameAway will be reduced in the future.
 
 General and
Administrative
 
 General
and administrative expenses decreased by $326,000, a 17.0% decrease, to
$1,590,000 for the nine months  ended December 31, 2008 from
$1,916,000 for the nine months ended December 31, 2007.  The primary
reasons for the decrease were an approximate $268,000 decrease in advertising
expenses related to the launch of InflameAway coupled with decreases in expenses
related to clinical research studies and travel expenses.  We
anticipate increases in general and administrative expenses as a result of
increasing our advertising campaign for our Inflame Away product and an increase
in clinical research studies.
  15
  Payroll
Expense
 
 Payroll
expense increased to $842,000 for the nine months ended December 31, 2008, an
increase of 3.7% or $30,000, compared to $812,000 for the nine months ended
December 31, 2007.   This increase was a result of normal salary
increases.
 
 Consulting
Expenses
 
 Consulting
expenses increased to $845,000 for the nine months ended December 31, 2008, an
increase of 19.2% or $136,000 compared to $709,000 for the nine months ended
December 31, 2007.  This increase was a result of increased litigation
expenses related to the settlement of a potential trademark infringement case
coupled with increased audit fees related to requirements to include
management’s assessment of internal controls in financial
statements.  We anticipate consulting fees to decrease since
litigation has been successfully concluded.
 
 Settlement
Income
 
 During
the nine months ended December 31, 2008, we received $2,100,000 ($1,785,000
after costs) as a result of entering into a settlement agreement with a company
we alleged was infringing on the Celadrin trademark.  In addition, we
entered into a supply agreement with the same company whereby we provide
Celadrin for use in their products.
 
 Provision for Income
Taxes
 
 As a
result of income for the nine months ended December 31, 2008, an income tax
expense of $498,000 was recognized during the current fiscal year compared to
$231,000 of income tax benefit being recognized during the nine months ended
December 31, 2007.
  16
  Capital
Resources
  Working
      CapitalIncrease12/31/08
                            
                            
                            3/31/08
                            
                            
                            (Decrease)Current
      assets
                            
                            $
                            4,867,980
                            
                            
                            $
                            4,012,527
                            
                            
                            $
                            855,453Current
      liabilities
                            
                            
                            877,762
                            
                            
                            
                            929,300
                            
                            
                            
                            (51,538
                            )Working
      capital
                            
                            $
                            3,990,218
                            
                            
                            $
                            3,083,227
                            
                            
                            $
                            906,991Long-term
      liability
                            
                            $
                            -
                            
                            
                            $
                            2,980
                            
                            
                            $
                            (2,980
                            )Stockholders'
      equity
                            
                            $
                            4,402,538
                            
                            
                            $
                            3,452,592
                            
                            
                            $
                            949,946Statements
      of Cash Flows Select InformationNine Months Ended
                            
                            
                            Increase12/31/08
                            
                            
                            12/31/07
                            
                            
                            (Decrease)Net
      cash provided by (used in):Operating
      activities
                            
                            $
                            699,684
                            
                            
                            $
                            (583,625
                            )
                            
                            $
                            1,283,309Investing
      activities
                            
                            $
                            (38,197
                            )
                            
                            $
                            (19,014
                            )
                            
                            $
                            (19,183
                            )Financing
      activities
                            
                            $
                            20,583
                            
                            
                            $
                            242,268
                            
                            
                            $
                            (221,685
                            )Balance
      Sheet Select InformationIncrease12/31/08
                            
                            
                            3/31/08
                            
                            
                            (Decrease)Cash
      and cash equivalients
                            
                            $
                            1,704,625
                            
                            
                            $
                            1,022,555
                            
                            
                            $
                            682,070Accounts
      receivable, net
                            
                            $
                            1,215,618
                            
                            
                            $
                            765,492
                            
                            
                            $
                            450,126Inventories,
      net
                            
                            $
                            1,475,224
                            
                            
                            $
                            1,109,845
                            
                            
                            $
                            365,379Accounts
      payable and accrued expenses
                            
                            $
                            770,490
                            
                            
                            $
                            785,625
                            
                            
                            $
                            (15,135
                            )
  Liquidity
 
 We have
historically financed our operations internally and through debt and equity
financings. At December 31, 2008, we had cash holdings of $1,704,625, an
increase of $682,070 compared to March 31, 2008. Our net working capital
position at December 31, 2008, was $3,990,218 compared to $3,083,227 as of March
31, 2008.  We have initiated a direct mass market strategy with our
own product, Inflame Away.  Although, a significant portion of our
working capital may be needed to implement this strategy, we believe that our
cash position is sufficient to fund our operating activities for at least the
next 12 months.
 
 New
Accounting Pronouncements
 
 See Note
2- Recent Accounting Pronouncements- to our condensed consolidated financial
statements included in Item 1 of this Form 10-Q for discussion of recent
accounting pronouncements.
  17
  ITEM
4T.     CONTROLS AND PROCEDURES.
 
 Disclosure Controls and
Procedures
 
 The
Company maintains disclosure controls and procedures that are designed to
provide reasonable assurance that information required to be disclosed in
reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) is
recorded, processed, summarized, and reported within the specified time periods
and accumulated and communicated to the Company’s management, including its
Principal Executive Officer and Principal Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
 
 The
Company’s management, under the supervision and with the participation of its
Principal Executive Officer and its Principal Financial Officer, evaluated the
effectiveness of its disclosure controls and procedures (as defined in
Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) as of the
end of the period covered by this report. Based on that evaluation, the
Company’s Principal Executive Officer and Principal Financial Officer concluded
that the Company’s disclosure controls and procedures were effective as of
December 31, 2008 to provide reasonable assurance in the Company’s financial
reporting.
  Remediation of Certain Weaknesses and
Changes in Internal Controls
 
 As
discussed in the Company’s Annual Report on Form 10-KSB for the year ended March
31, 2008, filed with the SEC on June 25, 2008, during the financial reporting
process for the fiscal year end March 31, 2008, the
following  weaknesses in the Company’s internal control over financial
reporting were identified:
 
 (1)
Deficiencies in Segregation of Duties. The Chief Executive Officer and the Chief
Financial Officer are actively involved in the preparation of the financial
statements, and therefore cannot provide an independent review and quality
assurance function within the accounting and financial reporting group. The
limited number of qualified accounting personnel discussed above results in an
inability to have independent review and approval of financial accounting
entries. Furthermore, management and financial accounting personnel have
wide-spread access to create and post entries in the Company’s financial
accounting system. There is a risk that a material misstatement of the financial
statements could be caused, or at least not be detected in a timely manner, due
to insufficient segregation of duties, and
 
 (2) Our
financial statement closing process did not identify all the journal entries
that needed to be recorded as part of the closing process for certain complex
and non-routine transactions. As part of the audit, our independent registered
public accounting firm proposed certain entries that should have been recorded
as part of the normal closing process. Our internal control over financial
reporting did not detect such matters and, therefore, was not effective in
detecting misstatements in the financial statements.
 
 To
address the material weakness, during the nine months ended December 31, 2008,
we performed additional analysis and other post-closing procedures in an effort
to ensure our consolidated financial statements included in this quarterly
report have been prepared in accordance with generally accepted accounting
principles.  We continue to implement a plan whereby during fiscal
year 2009 sufficient testing to satisfy COSO requirements will be performed. The
absence of the ability to conclude as to the sufficiency of internal controls,
is a material weakness.
 
 Management
believes that there are no material inaccuracies or omissions of material fact
and, to the best of its knowledge, believes that the condensed consolidated
financial statements for the three and nine months ended December 31, 2008,
fairly present in all material respects the financial condition and results of
operations for the Company in conformity with accounting principles generally
accepted in the United States of America.
 
 Other
than as described above, there have not been any other changes in the Company’s
internal control over financial reporting during the quarter ended December 31,
2008, which have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
  18
  Limitations on the Effectiveness of
Controls
 
 A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met. The
Company’s management, including its Principal Executive Officer and its
Principal Financial Officer, do not expect that the Company’s disclosure
controls will prevent or detect all errors and all fraud. Further, the design of
a control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. 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. Over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with associated policies or procedures. Because of
the inherent limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
 
 PART
II.                OTHER
INFORMATION
 
 ITEM
1A.  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 58% of our
products and which represented approximately 74% of our sales for the year ended
March 31, 2008. 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
largest customers accounted for 29% and 16% of our net sales for the year ended
March 31, 2008 and 25%, 22% and 16% of our net sales for the nine months ended
December 31, 2008.  The loss 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.
  19
  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;
 
 •   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. 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.
 
 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
11,010,788 common shares outstanding of which 10,960,788 are freely tradeable or
saleable under Rule 144.  We also have outstanding common stock
warrants and stock options exercisable into up to 5,406,957 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.
  20
  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.
 
 "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
  21
  •
              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
2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 During
the quarter ended December 31, 2008, we issued common stock purchase warrants as
follows:
 
 Common Stock Purchase WarrantsName
                        
                        Date of Issuance
                        
                        Number of Shares
                        
                        
                        Exercise Price
                        
                        Expiraton DateSuccess
      Web
                        
                        10/30/2008
                        
                        
                        80,000
                        
                        
                        $
                        0.80
                        
                        10/30/2013
  With
respect to the above securities issuances, the Registrant relied on exemptions
provided by Section 4(2) of the Securities Act of 1933, as amended (the
“Securities Act”) and Rule 506 under the Securities Act. No advertising or
general solicitation was employed in offering the securities. The securities
were issued to a limited number of persons all of whom were accredited investors
as that term is defined in Rule 501 of Regulation D under the
Securities Act. All were capable of analyzing the merits and risks of their
investment, acknowledged in writing that they were acquiring the securities for
investment and not with a view toward distribution or resale, and understood the
speculative nature of their investment. All securities issued contained a
restrictive legend prohibiting transfer of the shares except in accordance with
federal securities laws.
 
 There
were no proceeds received from the issuance of the above
securities.
 
 ITEM
6.     EXHIBITS.
  Exhibit No.
                          
                          Title31.1
                          
                          302
      Certification of William P. Spencer, Chief Executive
    Officer31.2
                          
                          302
      Certification of Lowell W. Giffhorn, Chief Financial
    Officer32.1
                          
                          906
      Certification of William P. Spencer, Chief Executive
    Officer32.2
                          
                          906
      Certification of Lowell W. Giffhorn, Chief Financial
    Officer
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 IMAGENETIX,
INC.
 a Nevada
corporation
 Date:  February
      11, 2009
                          By
                          :
      /s/ WILLIAM P. SPENCERWilliam
      P. SpencerChief
      Executive Officer(Principal
      Executive Officer and duly authorizedto
      sign on behalf of the
Registrant)
  22