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 September 30,
2009




 ̈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 105


San 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





Yes  ̈     
                     
    No x





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 November 9, 2009







Imagenetix,
Inc.




INDEX





PagePART
      I.  FINANCIAL INFORMATIONItem
      1.
                                Financial
      Statements:Condensed
      Consolidated Balance Sheets as of September 30, 2009(unaudited)
      and March 31, 2009
                                3Condensed
      Consolidated Statements of Earnings for the threeand
      six months ended September 30, 2009 and 2008 (unaudited)
                                4Condensed
      Consolidated Statements of Cash Flows for the sixmonths
      ended September 30, 2009 and 2008 (unaudited)
                                5Notes
      to Unaudited Condensed Consolidated FinancialStatements
                                6Item
      2.
                                Management’s
      Discussion and Analysis or Plan of Operation
                                11Item
      3.
                                Quantitative
      and Qualitative Disclosures About Market Risk
                                *Item
      4T.
                                Controls
      and Procedures
                                17PART
      II. OTHER INFORMATIONItem
      1.
                                Legal
      Proceedings
                                *Item
      1A.
                                Risk
      Factors
                                17Item
      2.
                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                *Item
      3.
                                Defaults
      Upon Senior Securities
                                *Item
      4.
                                Submission
      of Matters to a Vote of Security Holders
                                *Item
      5.
                                Other
      Information
                                *Item
      6.
                                Exhibits
                                20SIGNATURES
                                21





*
            No
      information provided due to inapplicability of the
  item.


2




PART
I – FINANCIAL INFORMATION




Item 1.  Financial
Statements




Imagenetix,
Inc.


Condensed
Consolidated Balance Sheets





September
      30,
                                  
                                  
                                  March
      31,2009
                                  
                                  
                                  2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                  
                                  $
                                  545,316
                                  
                                  
                                  $
                                  1,225,723Accounts
      receivable, net
                                  
                                  
                                  1,088,141
                                  
                                  
                                  
                                  1,095,946Other
      receivable
                                  
                                  
                                  1,250,000
                                  
                                  
                                  
                                  -Inventories,
      net
                                  
                                  
                                  1,097,904
                                  
                                  
                                  
                                  1,337,241Prepaid
      expenses and other current assets
                                  
                                  
                                  224,812
                                  
                                  
                                  
                                  109,028Deferred tax asset
                                  
                                  
                                  400,200
                                  
                                  
                                  
                                  535,200Total
      current assets
                                  
                                  
                                  4,606,373
                                  
                                  
                                  
                                  4,303,138Property and equipment,net
                                  
                                  
                                  99,278
                                  
                                  
                                  
                                  115,918Long-term
      prepaid expenses
                                  
                                  
                                  24,000
                                  
                                  
                                  
                                  30,000Other
      assets
                                  
                                  
                                  120,627
                                  
                                  
                                  
                                  134,356Total Assets
                                  
                                  $
                                  4,850,278
                                  
                                  
                                  $
                                  4,583,412LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                                  
                                  $
                                  497,411
                                  
                                  
                                  $
                                  274,311Accrued
      liabilities
                                  
                                  
                                  82,421
                                  
                                  
                                  
                                  80,696Income
      tax payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  69,803Customer
      deposits
                                  
                                  
                                  37,274
                                  
                                  
                                  
                                  58,850Contract
      payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  43,645Short term license payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,980Total Current Liabilities
                                  
                                  
                                  617,106
                                  
                                  
                                  
                                  530,285Stockholders'
      equityPreferred
      stock, $.001 par value; 5,000,000 shares authorized: none
      outstanding
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Common
      stock, $.001 par value; 50,000,000 shares authorized: 11,010,788 issued
      and outstanding atSeptember
      30 and March 31, 2009, respectively
                                  
                                  
                                  11,010
                                  
                                  
                                  
                                  11,010Capital
      in excess of par value
                                  
                                  
                                  12,694,101
                                  
                                  
                                  
                                  12,651,936Accumulated deficit
                                  
                                  
                                  (8,471,939
                                  )
                                  
                                  
                                  (8,609,819
                                  )Total stockholders' equity
                                  
                                  
                                  4,233,172
                                  
                                  
                                  
                                  4,053,127Total Liabilities and Stockholders'
      Equity
                                  
                                  $
                                  4,850,278
                                  
                                  
                                  $
                                  4,583,412


See
accompanying  notes to unaudited condensed consolidated financial
statements.


3




Imagenetix,
Inc.


Condensed
Consolidated Statements of Earnings


(Unaudited)





Three Months Ended
                          
                          
                          Six Months EndedSeptember
      30,
                          
                          
                          September
      30,
                          
                          
                          September
      30,
                          
                          
                          September
      30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Net
      sales
                          
                          $
                          1,900,619
                          
                          
                          $
                          2,656,378
                          
                          
                          $
                          3,602,909
                          
                          
                          $
                          4,050,736Cost
      of sales
                          
                          
                          1,039,454
                          
                          
                          
                          1,541,221
                          
                          
                          
                          2,094,652
                          
                          
                          
                          2,360,932Gross
      profit
                          
                          
                          861,165
                          
                          
                          
                          1,115,157
                          
                          
                          
                          1,508,257
                          
                          
                          
                          1,689,804Operating
      expenses:General
      and administrative
                          
                          
                          574,976
                          
                          
                          
                          419,931
                          
                          
                          
                          1,382,925
                          
                          
                          
                          1,025,404Payroll
      expense
                          
                          
                          269,122
                          
                          
                          
                          220,755
                          
                          
                          
                          523,539
                          
                          
                          
                          592,945Consulting
      expense
                          
                          
                          294,506
                          
                          
                          
                          243,153
                          
                          
                          
                          574,906
                          
                          
                          
                          588,914Operating
      expenses
                          
                          
                          1,138,604
                          
                          
                          
                          883,839
                          
                          
                          
                          2,481,370
                          
                          
                          
                          2,207,263Operating
      income (loss)
                          
                          
                          (277,439
                          )
                          
                          
                          231,318
                          
                          
                          
                          (973,113
                          )
                          
                          
                          (517,459
                          )Other
      income (expense):Other
      income
                          
                          
                          781
                          
                          
                          
                          9,746
                          
                          
                          
                          2,198
                          
                          
                          
                          17,488Settlement
      income
                          
                          
                          1,250,000
                          
                          
                          
                          -
                          
                          
                          
                          1,250,000
                          
                          
                          
                          1,785,000Interest
      expense
                          
                          
                          -
                          
                          
                          
                          (523
                          )
                          
                          
                          (2,405
                          )
                          
                          
                          (1,212
                          )Other
      income
                          
                          
                          1,250,781
                          
                          
                          
                          9,223
                          
                          
                          
                          1,249,793
                          
                          
                          
                          1,801,276Income
      before income taxes
                          
                          
                          973,342
                          
                          
                          
                          240,541
                          
                          
                          
                          276,680
                          
                          
                          
                          1,283,817Income
      tax expense
                          
                          
                          420,800
                          
                          
                          
                          41,800
                          
                          
                          
                          138,800
                          
                          
                          
                          498,000Net
      income
                          
                          $
                          552,542
                          
                          
                          $
                          198,741
                          
                          
                          $
                          137,880
                          
                          
                          $
                          785,817Basic
      net income per share
                          
                          $
                          0.05
                          
                          
                          $
                          0.02
                          
                          
                          $
                          0.01
                          
                          
                          $
                          0.07Diluted
      net income per share
                          
                          $
                          0.05
                          
                          
                          $
                          0.02
                          
                          
                          $
                          0.01
                          
                          
                          $
                          0.07Basic
      weighted average common shares outstanding
                          
                          
                          11,010,788
                          
                          
                          
                          10,983,614
                          
                          
                          
                          11,010,788
                          
                          
                          
                          10,972,263Diluted
      weighted average common shares outstanding
                          
                          
                          11,059,348
                          
                          
                          
                          11,012,379
                          
                          
                          
                          11,095,768
                          
                          
                          
                          11,006,768





See
accompanying  notes to unaudited condensed consolidated financial
statements.


4




Imagenetix,
Inc.


Consolidated
Statements of Cash Flows


(Unaudited)





Six
      Months Ended September 30,2009
                                
                                
                                2008Operating
      activities:Net
      income
                                
                                $
                                137,880
                                
                                
                                $
                                785,817Adjustments
      to reconcile net income to cash provided by (used in) operating
      activities:Amortization
      and depreciation
                                
                                
                                26,570
                                
                                
                                
                                20,376Provision
      for doubtful accounts
                                
                                
                                11,000
                                
                                
                                
                                -Provision
      for inventory obsolescence
                                
                                
                                (24,551
                                )
                                
                                
                                23,498Non
      cash expense related to issuance of warrants and granting of stock
      options
                                
                                
                                42,165
                                
                                
                                
                                118,298Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                                
                                
                                (3,195
                                )
                                
                                
                                (360,372
                                )(Increase)
      decrease in other receivables
                                
                                
                                (1,250,000
                                )
                                
                                
                                2,409(Increase)
      decrease in inventories
                                
                                
                                263,888
                                
                                
                                
                                (480,017
                                )(Increase)
      decrease in other assets
                                
                                
                                (109,785
                                )
                                
                                
                                89,625(Increase)
      decrease in deferred taxes
                                
                                
                                138,800
                                
                                
                                
                                498,000Increase
      (decrease) in accounts payable
                                
                                
                                223,100
                                
                                
                                
                                470,487Increase
      (decrease) in accrued liabilities
                                
                                
                                1,725
                                
                                
                                
                                9,294Increase
      (decrease) in customer deposits
                                
                                
                                (21,576
                                )
                                
                                
                                6,700Increase (decrease) in income taxes
      payable
                                
                                
                                (69,803
                                )
                                
                                
                                -Net cash provided by operating
      activities
                                
                                
                                (633,782
                                )
                                
                                
                                1,184,115Investing
      activities:Purchases
      of property and equipment
                                
                                
                                -
                                
                                
                                
                                (40,246
                                )Proceeds from disposal of property and
      equipment
                                
                                
                                -
                                
                                
                                
                                5,268Net cash used in investing
      activities
                                
                                
                                -
                                
                                
                                
                                (34,978
                                )Financing
      activities:Payments
      on contracts payable
                                
                                
                                (43,645
                                )
                                
                                
                                (46,200
                                )Payments on patent license
      financed
                                
                                
                                (2,980
                                )
                                
                                
                                (16,788
                                )Net cash used in financing
      activities
                                
                                
                                (46,625
                                )
                                
                                
                                (62,988
                                )Net
      increase (decrease) in cash and cash equivalents
                                
                                
                                (680,407
                                )
                                
                                
                                1,086,149Cash and cash
      equivalents, beginning of
      period
                                
                                
                                1,225,723
                                
                                
                                
                                1,022,555Cash and cash
      equivalents,end of
      period
                                
                                $
                                545,316
                                
                                
                                $
                                2,108,704Supplemental
      Disclosure of Cash Flow Information:Cash
      paid during the period for:Interest
                                
                                $
                                2,405
                                
                                
                                $
                                690Income
      taxes
                                
                                $
                                69,803
                                
                                
                                $
                                -Non
      Cash Investing and Financing Activities:Common
      stock issued for services
                                
                                $
                                -
                                
                                
                                $
                                25,000


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-K for the year ended March 31, 2009.





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 six month
periods are not necessarily indicative of the results that may be expected for
the year.





Earnings Per
Share





We follow
the Financial Accounting Standards Board Acounting Standards Codification
("ASC") No. 260.  Under ASC No. 260, 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 a discussion of commitments to
issue additional shares of common stock and warrants.





Stock Based
Compensation





We
account for stock based compensation under ASC Nos. 718 and 505. ASC Nos. 718
and 505 require all share-based payments to employees, including grants of
employee stock options, 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
ASC Nos. 718 and 505 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.





Research
and Development





We incur
expenses to further develop our products and formulas, commission entities to
perform clinical trials and evaluate potential products to expand our
portfolio.  In addition, we recently received a new patent for a drug
candidate which, if successful, will address periodontal diseases.  We have
started the initial new drug process and have completed several animal
studies.  During the three and six months ended September 30, 2009 we
incurred research and development expenses of $11,220 and $50,895, respectively,
compared to $20,357 and $68,223 for the corresponding periods of the previous
fiscal year.


6





IMAGENETIX,
INC.


Notes
to the Unaudited Condensed Consolidated Financial Statements
(Continued)





2.
            NEW
      ACCOUNTING STANDARDS





In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Codification No. 105, FASB Accounting Standards and the
Hierarchy of Generally Accepted Accounting Principles(“ASC 105”). ASC
105 replaces SFAS 162 and establishes the FASB Accounting Standards Codification
(“Codification”) as the single source of authoritative U.S. generally accepted
accounting principles (“GAAP”) recognized by the FASB to be applied by
nongovernmental entities, except for rules and interpretive releases by the
Securities and Exchange Commission (“SEC”) which are sources of authoritative
GAAP for SEC registrants. ASC 105 and the Codification are effective for interim
and annual periods ending after September 15, 2009. We adopted ASC 105 on
July 1, 2009, and all references made to GAAP within our consolidated financial
statements now use the new Codification numbering system. The Codification does
not change or alter existing GAAP and, therefore, the adoption of ASC 105 did
not have an impact on our financial position, results of operations or cash
flows.





A variety
of proposed or otherwise potential accounting standards are currently under
study by standard-setting organizations and various regulatory agencies. 
Because of the tentative and preliminary nature of these proposed standards,
management has not determined whether implementation of such proposed standards
would be material to the Company’s consolidated financials
statements.





3.
            ACCOUNTS
      RECEIVABLE





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





September
      30,
                  
                  
                  March
      31,2009
                  
                  
                  2009Accounts
      receivable – trade
                  
                  $
                  1,160,141
                  
                  
                  $
                  1,156,946Allowance
      for doubtful accounts
                  
                  
                  (72,000
                  )
                  
                  
                  (61,000
                  )Accounts
      receivable, net
                  
                  $
                  1,088,141
                  
                  
                  $
                  1,095,946





At
September 30, 2009, we had two customers which accounted for 25% and 22%,
respectfully, of our accounts receivable balances.At March 31,
2009, we had four customers which accounted for 29%, 26%, 17% and 15%,
respectfully, of our accounts receivable balances.





For the
six months ended September 30, 2009, we had three significant customers which
accounted for 26%, 23% and 16%, respectfully, of sales.  For the six months
ended September 30, 2008, we had three significant customers which accounted for
22%, 21% and 17%, respectfully, of sales.


7





IMAGENETIX,
INC.


Notes
to the Unaudited Condensed Consolidated Financial Statements
(Continued)





4.
            INVENTORIES





Inventories
consist of the following:





September
      30,
                    
                    
                    March
      31,2009
                    
                    
                    2009Raw
      materials
                    
                    $
                    616,355
                    
                    
                    $
                    802,117Finished
      products
                    
                    
                    359,433
                    
                    
                    
                    417,024Boxes,
      labels, tubes & bottles
                    
                    
                    246,147
                    
                    
                    
                    266,6821,221,935
                    
                    
                    
                    1,485,823Reserve
      for obsolescence
                    
                    
                    (124,031
                    )
                    
                    
                    (148,582
                    )$
                    1,097,904
                    
                    
                    $
                    1,337,241





5.
            OTHER
      ASSETS





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


September
      30,
                      
                      
                      March
      31,2009
                      
                      
                      2009Trademarks
                      
                      $
                      13,032
                      
                      
                      $
                      13,032Patent
                      
                      
                      172,965
                      
                      
                      
                      172,965Deferred
      tax asset
                      
                      
                      10,700
                      
                      
                      
                      14,500196,697
                      
                      
                      
                      200,497Less
      accumulated amortization
                      
                      
                      76,070
                      
                      
                      
                      66,141$
                      120,627
                      
                      
                      $
                      134,356





6.
            EQUITY
      TRANSACTIONS





We
recorded non-cash compensation expense for stock options and warrants issued to
employees and consultants of $5,705 and $42,165 for the three and six months
ended September 30, 2009 and $41,632 and $118,298 for the three and six months
ended September 30, 2008.





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:





Three months ended September
      30,
                  
                  Six months ended September
    30,2009
                  
                  2008
                  
                  2009
                  
                  2008Expected
      term of options and warrants
                  
                  -
                  
                  5
      years
                  
                  5
      years
                  
                  5
      yearsExpected
      volatility
                  
                  -
                  
                  56%
                  
                  73%
                  
                  56%
      to 61%Expeceted
      dividends
                  
                  -
                  
                  None
                  
                  None
                  
                  NoneRisk-free
      interest rate
                  
                  -
                  
                  3.12%
      to 3.33%
                  
                  2.95%
                  
                  3.12%
      to 3.54%Forteitures
                  
                  -
                  
                  0%
                  
                  0%
                  
                  0%


8





IMAGENETIX,
INC.


Notes
to the Unaudited Condensed Consolidated Financial Statements
(Continued)





A summary
of the options outstanding follows:





For
      the Six Months EndedSeptember 30, 2009WeightedAverageExerciseOptions
                                
                                Shares
                                
                                
                                PriceOutstanding
      at beginning of year
                                
                                
                                1,249,000
                                
                                
                                $
                                1.49Granted
                                
                                
                                240,000
                                
                                
                                
                                0.31Cancelled
                                
                                
                                -
                                
                                
                                
                                -Exercised
                                
                                
                                -
                                
                                
                                
                                -Outstanding at end of the
      period
                                
                                
                                1,489,000
                                
                                
                                
                                1.30Exercisable at end of the the
      period
                                
                                
                                1,369,000
                                
                                
                                $
                                1.39Weighted
      average fair value of options granted during the period
                                
                                
                                240,000
                                
                                
                                $
                                0.19





As of
September 30, 2009, the unamortized portion of stock compensation expense on all
existing stock options was $17,114.





A summary
of other warrants outstanding follows:





For
      the Six Months EndedSeptember 30, 2009WeightedAverageExerciseWarrants
                        
                        Shares
                        
                        
                        PriceOutstanding
      at beginning of year
                        
                        
                        4,077,957
                        
                        
                        $
                        1.18Granted
                        
                        
                        -
                        
                        
                        
                        -Cancelled
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Outstanding at end of the
      period
                        
                        
                        4,077,957
                        
                        
                        
                        1.18Exercisable at end of the the
      period
                        
                        
                        4,077,957
                        
                        
                        $
                        1.18Weighted
      average fair value of warrants granted during the period
                        
                        
                        -
                        
                        
                        $
                        -





7.
            INCOME
      TAXES





We have
adopted ASC 740 which prescribes a comprehensive model of how a company should
recognize, measure, present, and disclose in its financial statements uncertain
tax positions that the company has taken or expects to take on a tax
return.  ASC 740 states that a tax benefit from an uncertain position may
be recognized if it is "more likely than not" that the position is sustainable,
based upon its technical merits. The tax benefit of a qualifying position is the
largest amount of tax benefit that is greater




9





IMAGENETIX,
INC.


Notes
to the Unaudited Condensed Consolidated Financial Statements
(Continued)





Upon
adoption of ASC 740, there was no impact to our consolidated financial
statements.  We estimate that the unrecognized tax benefit will not change
significantly within the next twelve months.  We will continue to classify
income tax penalties and interest as part of general and administrative expense
in our statements of operations.  Accrued interest on uncertain tax
positions is not significant.  There are no penalties accrued as of
September 30, 2009.  The following table summarizes the open tax years for
each major jurisdiction:





Jurisdiction
                  
                  Open Tax
                    YearsFederal
                  
                  2006
      – 2008California
                  
                  2006
      – 2008





As we
have had significant net operating loss carry forwards, even if certain of our
tax positions were disallowed, it is not foreseen that we would have to pay any
taxes in the near future. Consequently, we do not calculate the impact of
interest or penalties on amounts that might be disallowed.





8.
              PURCHASE
      AND SUPPLY BUYOUT AGREEMENT





In
September 2009, we entered into an agreement with one of our customers whereby
they bought out the remaining order commitments under a previous Purchase and
Supply Agreement.  As part of the buyout agreement, we agreed to a one time
payment of $1,250,000 to satisfy their purchase commitments which were scheduled
to continue through May 2013.  Also, as part of the agreement, we were not
required to ship any product.  The negotiated amount was reflected as other
income and other accounts receivable for the quarter ended September 30,
2009.  We received the payment of $1,250,000 on October 1,
2009.





9.
            FINANCIAL
      STATEMENT DISCLOSURES





We 
evaluated events through November 9, 2009 for consideration as a subsequent
event to be included in our September 30, 2009 financial statements, issued
November 9, 2009.


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-K FOR THE YEAR ENDED MARCH 31,
2009.




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.





2. 
  Inventory


Inventory
is 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.





11





3. 
 Revenue Recognition




We
recognize revenue in accordance with the SEC’s Staff Accounting Bulletin
No. 104, “Revenue Recognition in Financial Statements” (SAB104) and ASC
605.   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. ASC 605 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 ASC 605, 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 ASC 605 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 six months ended September 30, 2009,
there were no returns that would suggest 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 six 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 six months
ended September 30, 2009, 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.





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.


12




Selected
Financial Information




Results
of Operations




Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008




Three Months EndedIncrease9/30/09
                
                
                9/30/08
                
                
                (Decrease)
                
                
                %Statements
      of Operations:Net
      sales
                
                $
                1,900,619
                
                
                $
                2,656,378
                
                
                $
                (755,759
                )
                
                
                -28.5
                %Cost
      of goods sold
                
                
                1,039,454
                
                
                
                1,541,221
                
                
                
                (501,767
                )
                
                
                -32.6
                %%
      of net sales
                
                
                54.7
                %
                
                
                58.0
                %
                
                
                -3.3
                %
                
                
                -5.7
                %Gross
      profit
                
                
                861,165
                
                
                
                1,115,157
                
                
                
                (253,992
                )
                
                
                -22.8
                %%
      of net sales
                
                
                45.3
                %
                
                
                42.0
                %
                
                
                3.3
                %
                
                
                7.9
                %Operating
      expensesGeneral
      and administrative
                
                
                574,976
                
                
                
                419,931
                
                
                
                155,045
                
                
                
                36.9
                %Payroll
      expense
                
                
                269,122
                
                
                
                220,755
                
                
                
                48,367
                
                
                
                21.9
                %Consulting
      expense
                
                
                294,506
                
                
                
                243,153
                
                
                
                51,353
                
                
                
                21.1
                %Total
      operating expenses
                
                
                1,138,604
                
                
                
                883,839
                
                
                
                254,765
                
                
                
                28.8
                %Interest
      expense
                
                
                -
                
                
                
                (523
                )
                
                
                523
                
                
                NMSettlement
      income
                
                
                1,250,000
                
                
                
                -
                
                
                
                1,250,000
                
                
                NMOther
      income
                
                
                781
                
                
                
                9,746
                
                
                
                (8,965
                )
                
                
                -92.0
                %Provision
      for taxes
                
                
                420,800
                
                
                
                41,800
                
                
                
                (379,000
                )
                
                
                -906.7
                %Net
      income
                
                
                552,542
                
                
                
                198,741
                
                
                
                353,801
                
                
                
                178.0
                %Net
      income per share basic
                
                
                0.05
                
                
                
                0.02
                
                
                
                0.03
                
                
                
                150.0
                %




Net
Sales




Net sales
for the quarter ended September 30, 2009 decreased $755,759, a 28.5% decrease,
to $1,900,619 compared to $2,656,378 for the quarter ended September 30,
2008.  The primary reasons for the sales decrease are a reduction of
approximately $1,100,000 in distributor sales as a result of entering into an
acceleration agreement with one of our customers which was reflected as other
income and  a reduction of approximately $150,000 in sales of our weight
loss product offset by increases in sales of our own branded product, Inflame
Away Celadrinâ, to the
mass market segment of approximately $260,000 and the introduction of a new
probiotic product to enhance immune health, BioGuardâ, which added approximately
$150,000. We anticipate, sales for the mass market segment to continue to
provide 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 58% for the quarter ended
September 30, 2008 to 55% for the quarter ended September 30, 2009.  This
decrease was primarily due to increased sales of our branded products providing
an economy of scale related to promotions and allowances.




General and
Administrative




General
and administrative expenses increased by $155,045, a 36.9% increase, to $574,976
for the quarter ended September 30, 2009 from $419,931 for the quarter ended
September 30, 2008.  The primary reason for the increase was an approximate
$140,000 increase in advertising expenses for InflameAway.  We anticipate
continued 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.


13




Payroll
Expense




Payroll
expense increased to $269,122 for the quarter ended September 30, 2009, an
increase of 21.96% or $48,367, compared to $220,755 for the quarter ended
September 30, 2008.   This increase was a result of bonuses during the
current fiscal period.




Consulting
Expenses




Consulting
expenses increased to $294,506 for the quarter ended September 30, 2009, an
increase of 21.1% or $51,353 compared to $243,153 for the quarter ended
September 30, 2008.  This increase was a result of initiating a public
relations and investor relations programs during the current
quarter.




Settlement
Income




During
the quarter ended September 30, 2009, we entered into an agreement with one of
our customers whereby they bought out their remaining order commitments in
exchange for a cancellation of a supply agreement.  We agreed to a one time
payment of $1,250,000 to satisfy their purchase commitments which were scheduled
to continue through May 2013.




Provision for Income
Taxes




Income
tax expense of $420,800 was recognized during the current quarter compared to
$41,800 recognized during the quarter ended September 30, 2008.




Six
Months Ended September 30, 2009 Compared to Six Months Ended September 30,
2008




Six Months EndedIncrease9/30/09
                
                
                9/30/08
                
                
                (Decrease)
                
                
                %Statements
      of Operations:Net
      sales $
                
                
                3,602,909
                
                
                $
                4,050,736
                
                
                $
                (447,827
                )
                
                
                -11.1
                %Cost
      of goods sold
                
                
                2,094,652
                
                
                
                2,360,932
                
                
                
                (266,280
                )
                
                
                -11.3
                %%
      of net sales
                
                
                58.1
                %
                
                
                58.3
                %
                
                
                -0.2
                %
                
                
                -0.3
                %Gross
      profit
                
                
                1,508,257
                
                
                
                1,689,804
                
                
                
                (181,547
                )
                
                
                -10.7
                %%
      of net sales
                
                
                41.9
                %
                
                
                41.7
                %
                
                
                0.2
                %
                
                
                0.5
                %Operating
      expensesGeneral
      and administrative
                
                
                1,382,925
                
                
                
                1,025,404
                
                
                
                357,521
                
                
                
                34.9
                %Payroll
      expense
                
                
                523,539
                
                
                
                592,945
                
                
                
                (69,406
                )
                
                
                -11.7
                %Consulting
      expense
                
                
                574,906
                
                
                
                588,914
                
                
                
                (14,008
                )
                
                
                -2.4
                %Total
      operating expenses
                
                
                2,481,370
                
                
                
                2,207,263
                
                
                
                274,107
                
                
                
                12.4
                %Interest
      expense
                
                
                (2,405
                )
                
                
                (1,212
                )
                
                
                (1,193
                )
                
                
                98.4
                %Settlement
      income
                
                
                1,250,000
                
                
                
                1,785,000
                
                
                
                (535,000
                )
                
                
                -30.0
                %Other
      income
                
                
                2,198
                
                
                
                17,488
                
                
                
                (15,290
                )
                
                
                -87.4
                %Provision
      for taxes
                
                
                138,800
                
                
                
                498,000
                
                
                
                (359,200
                )
                
                
                -72.1
                %Net
      income
                
                
                137,880
                
                
                
                785,817
                
                
                
                (647,937
                )
                
                
                -82.5
                %Net
      income per share basic
                
                
                0.01
                
                
                
                0.07
                
                
                
                (0.06
                )
                
                
                -85.7
                %Net
      income per share diluted
                
                
                0.01
                
                
                
                0.07
                
                
                
                (0.06
                )
                
                
                -85.7
                %




Net
Sales




Net sales
for the six months ended September 30, 2009 decreased $447,827, a 11.1%
decrease, to $3,602,909 compared to $4,050,736 for the six months ended
September 30, 2008.   The primary reasons for the sales decrease are a
reduction of approximately $1,250,000 in distributor sales as a result of
entering into an acceleration agreement with one of our customers which was
reflected as other income offset by an increase of approximately $635,000 in
sales of our branded products and an increase in sales of approximately $175,000
for our weight loss product.  We anticipate, sales for the mass market
segment to continue to provide improved sales during the balance of our current
fiscal year.


14




Cost of Goods
Sold




Cost of
goods sold as a percentage of net sales remained stable at  58.1% for the
six months ended September 30, 2009 compared to 58.3% for the six months ended
September 30, 2008.




General and
Administrative




General
and administrative expenses increased by $357,521, a 34.9% increase, to
$1,382,925 for the six months ended September 30, 2009 from $1,025,404 for the
six months ended September 30, 2008.  The primary reason for the increase
was an approximate $326,000 increase in advertising expenses for
InflameAway.  We anticipate continued increases in general and
administrative expenses as a result of increasing our advertising campaign for
our InflameAway product and an increase in clinical research
studies.




Payroll
Expense




Payroll
expense decreased to $523,539 for the six months ended September 30, 2009, a
decrease of 11.7% or $69,406, compared to $592,945 for the six months ended
September 30, 2008.   This decrease was a result of bonuses during the
previous fiscal period as a result of a legal settlement not being duplicated
during the current fiscal period.




Consulting
Expenses




Consulting
expenses decreased to $574,906 for the six months ended September 30, 2009, a
decrease of 2.4% or $14,008 compared to $588,914 for the six months ended
September 30, 2008.  This decrease was a result of litigation expenses
related to the settlement of a potential trademark infringement case during the
prior fiscal year period not being duplicated during the current fiscal year
period offset by the initiation of public relations and investor relations
programs during the current fiscal period.




Settlement
Income




During
the six months ended September 30, 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 would provide
Celadrin for use in their products.  During the six months ended September
30, 2009, we entered into a buyout  agreement whereby we received
$1,250,000 for the cancellation of the supply agreement.




Provision for Income
Taxes




Income
tax expense of $138,800 was recognized during the six months ended September 30,
2009 compared to $498,000 recognized during the six months ended September 30,
2008.


15




Capital
Resources




Working
      CapitalIncrease9/30/09
                  
                  
                  3/31/09
                  
                  
                  (Decrease)Current
      assets
                  
                  $
                  4,606,373
                  
                  
                  $
                  4,303,138
                  
                  
                  $
                  303,235Current
      liabilities
                  
                  
                  617,106
                  
                  
                  
                  530,285
                  
                  
                  
                  86,821Working
      capital
                  
                  $
                  3,989,267
                  
                  
                  $
                  3,772,853
                  
                  
                  $
                  216,414Long-term
      debt
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Stockholders'
      equity
                  
                  $
                  4,233,172
                  
                  
                  $
                  4,053,127
                  
                  
                  $
                  180,045





Statements
of Cash Flows Select Information


Six Months Ended
                  
                  
                  Increase9/30/09
                  
                  
                  9/30/08
                  
                  
                  (Decrease)Net
      cash provided by (used in):Operating
      activities
                  
                  $
                  (633,782
                  )
                  
                  $
                  1,184,115
                  
                  
                  $
                  (1,817,897
                  )Investing
      activities
                  
                  $
                  -
                  
                  
                  $
                  (34,978
                  )
                  
                  $
                  34,978Financing
      activities
                  
                  $
                  (46,625
                  )
                  
                  $
                  (62,988
                  )
                  
                  $
                  16,363





Balance
Sheet Select Information


Increase9/30/09
                  
                  
                  3/31/09
                  
                  
                  (Decrease)Cash
      and cash equivalients
                  
                  $
                  545,316
                  
                  
                  $
                  1,225,723
                  
                  
                  $
                  (680,407
                  )Accounts
      receivable, net
                  
                  $
                  1,088,141
                  
                  
                  $
                  1,095,946
                  
                  
                  $
                  (7,805
                  )Inventories,
      net
                  
                  $
                  1,097,904
                  
                  
                  $
                  1,337,241
                  
                  
                  $
                  (239,337
                  )Accounts
      payable and accrued expenses
                  
                  $
                  579,832
                  
                  
                  $
                  355,007
                  
                  
                  $
                  224,825




Liquidity




We have
historically financed our operations internally and through debt and equity
financings. At September 30, 2009, we had cash holdings of $545,316, a decrease
of $680,407 compared to March 31, 2009. On October 1, 2009, we received
$1,250,000 as an acceleration of a supply agreement.  Our net working
capital position at September 30, 2009, was $3,989,267 compared to $3,772,853 as
of March 31, 2009.  We have initiated a direct mass market strategy with
our own products, InflameAway and BioGuard.  In addition, we recently
received a new patent for a drug candidate which, if successful, will address
periodontal diseases.  We have started the initial new drug process and
have completed several animal studies.
A significant portion of our working capital may be needed to implement the mass
market advertising campaign and the new drug development trials.  We
believe that our cash position plus potential debt or equity financings will be
sufficient to fund our operating activities for at least the next 12
months.





New
Accounting Standards





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.


16




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
September 30, 2009 to provide reasonable assurance in the Company’s financial
reporting.





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 quarter ended September 30, 2009, 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.





There
have not been any other changes in the Company’s internal control over financial
reporting during the quarter ended September 30, 2009, which have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.





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.




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.


17





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 66% of our
products and which represented approximately 74% of our sales for the year ended
March 31, 2009. 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 23%, 19% and 17% of our net sales for the year
ended March 31, 2009 and 29% and 16% for the year ended March 31, 2008. 
During the six months ended September 30, 2009, we entered into a buyout
agreement with our largest customer which will result in no significant revenue
from that customer in future periods.  We have several other customers with
increased revenue during the six months ended September 30, 2009 which will, at
least, partially offset the loss of this significant customer.  If not
replaced by other large customers, the loss of any significantly large customer
could reduce our revenue and adversely affect our cash flow and earnings, if
any.





We
Rely upon Other Outside Suppliers to Produce Our Products Which Could Delay Our
Product Deliveries.





All of
our products are produced by outside manufacturers who process ingredients
provided to them by our suppliers and with whom we have contracts. Our profit
margins and our ability to deliver products on a timely basis are dependent upon
these manufacturers and suppliers. Should any of these manufacturers or
suppliers fail to provide us with product, we would be required to obtain new
manufacturers and suppliers, which would be costly and time consuming and could
delay our product deliveries.





Product
Liability Claims Against Us Could Be Costly.





Some of
our nutritional supplements contain newly-introduced ingredients or combinations
of ingredients, and we have little long-term health information about
individuals consuming those ingredients. If any of these products were thought
or proved to be harmful, we could be subject to litigation. Although we carry
product liability insurance in the face amount of $1,000,000 per occurrence and
$2,000,000 in the aggregate and require our suppliers and manufacturers to
include us as insured parties on their product liability insurance policies, our
coverage may not be adequate to protect us from potential product liability
claims and costs of defense.





We
Are Subject to Intense Competition from Other Nutritional Supplement Marketers
Which Could Reduce Our Revenue and Profit Margins.





Competition
in the nutritional supplement market is intense. We compete with numerous
companies that have longer operating histories, more products and greater name
recognition and financial resources than we do. In order to compete, we could be
forced to lower our product prices, which would reduce our revenue and profit
margins.





We
Are Highly Regulated, Which Increases Our Costs of Doing Business.





We are
subject to laws and regulations which cover:





•the formulation,
manufacturing, packaging, labeling, distribution, importation, sale and storage
of our
products;





• 
 the health and safety of food and drugs;





• 
 trade practice and direct selling laws; and





•   product claims and
advertising by us; or for which we may be held
responsible.


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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 which are freely tradeable or saleable
under Rule 144.  We also have outstanding common stock warrants and stock
options exercisable into up to 5,566,957 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.





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 an investor from obtaining a market price equal to
his purchase price when he attempts to sell our securities in the open market.
In these situations, the investor may be required to either sell our securities
at a market price which is lower than his purchase price, or to hold our
securities for a longer period of time than he 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.


19





"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 pennystocks;





•
            All
      compensation received by the broker-dealer in connection with the
      transaction;





•
            Current
      quotation prices and other relevant market data;
  and





•
            Monthly account statements
      reflecting the fair market value of the securities. In addition, theserules 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 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


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SIGNATURES




In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.




IMAGENETIX,
      INC.a
      Nevada corporation





Date:  November
      9, 2009
              By:
              /s/ WILLIAM P. SPENCERWilliam
      P. SpencerChief
      Executive Officer(Principal
      Executive Officer and duly authorizedto
      sign on behalf of the
Registrant)


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