UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




(Mark
One)




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




For
quarterly period ended December
31, 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 105San Diego,
      California  92127(Address
      of principal executive
offices)




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




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.


Yes xNo ̈





Indicate
by check mark whether the registrant 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
 ̈





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




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




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




Common Stock, $.001 par
    value
                      11,010,788(Class)
                      Outstanding
      at February 8,
2010







Imagenetix,
Inc.


INDEX





PagePART
      I.
                                      FINANCIAL
      INFORMATIONItem
      1.
                                      Financial
      Statements:Condensed
      Consolidated Balance Sheets as of December 31, 2009(unaudited)
      and March 31, 2009
                                      
                                      
                                      3Condensed
      Consolidated Statements of Earnings for the threeand
      nine months ended December 31, 2009 and 2008 (unaudited)
                                      
                                      
                                      4Condensed
      Consolidated Statements of Cash Flows for the ninemonths
      ended December 31, 2009 and 2008 (unaudited)
                                      
                                      
                                      5Notes
      to Unaudited Condensed Consolidated FinancialStatements
                                      
                                      
                                      6Item
      2.
                                      Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
                                      
                                      
                                      11Item
      3.
                                      Quantitative
      and Qualitative Disclosures About Market Risk
                                      
                                      
                                      *Item
      4T.
                                      Controls
      and Procedures
                                      
                                      
                                      17PART
      II.
                                      OTHER
      INFORMATIONItem
      1.
                                      Legal
      Proceedings
                                      
                                      
                                      18Item
      1A.
                                      Risk
      Factors
                                      
                                      
                                      18Item
      2.
                                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                                      
                                      
                                      20Item
      3.
                                      Defaults
      Upon Senior Securities
                                      
                                      
                                      *Item
      4.
                                      Submission
      of Matters to a Vote of Security Holders
                                      
                                      
                                      21Item
      5.
                                      Other
      Information
                                      
                                      
                                      *Item
      6.
                                      Exhibits
                                      
                                      
                                      22SIGNATURES





*
            No
      information provided due to inapplicability of the
  item.


2




PART
I – FINANCIAL INFORMATION




Item 1.  Financial
Statements




Imagenetix,
Inc.


Condensed
Consolidated Balance Sheets





December 31,
                                      
                                      
                                      March 31,2009
                                      
                                      
                                      2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                      
                                      $
                                      1,527,635
                                      
                                      
                                      $
                                      1,225,723Accounts
      receivable, net
                                      
                                      
                                      1,338,444
                                      
                                      
                                      
                                      1,095,946Inventories,
      net
                                      
                                      
                                      966,957
                                      
                                      
                                      
                                      1,337,241Prepaid
      expenses and other current assets
                                      
                                      
                                      166,529
                                      
                                      
                                      
                                      109,028Deferred
      tax asset
                                      
                                      
                                      550,000
                                      
                                      
                                      
                                      535,200Total
      current assets
                                      
                                      
                                      4,549,565
                                      
                                      
                                      
                                      4,303,138Property and equipment,net
                                      
                                      
                                      90,957
                                      
                                      
                                      
                                      115,918Long-term
      prepaid expenses
                                      
                                      
                                      21,000
                                      
                                      
                                      
                                      30,000Other
      assets
                                      
                                      
                                      113,762
                                      
                                      
                                      
                                      134,356Total
      Assets
                                      
                                      $
                                      4,775,284
                                      
                                      
                                      $
                                      4,583,412LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                                      
                                      $
                                      536,576
                                      
                                      
                                      $
                                      274,311Accrued
      liabilities
                                      
                                      
                                      72,110
                                      
                                      
                                      
                                      80,696Income
      tax payable
                                      
                                      
                                      -
                                      
                                      
                                      
                                      69,803Customer
      deposits
                                      
                                      
                                      28,311
                                      
                                      
                                      
                                      58,850Contract
      payable
                                      
                                      
                                      107,061
                                      
                                      
                                      
                                      43,645Short
      term license payable
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2,980Total
      Current Liabilities
                                      
                                      
                                      744,058
                                      
                                      
                                      
                                      530,285Stockholders'
      equityPreferred
      stock, $.001 par value; 5,000,000 sharesauthorized:
      none outstanding
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Common
      stock, $.001 par value; 50,000,000 sharesauthorized:
      11,010,788 issued and outstanding atDecember
      31 and March 31, 2009, respectively
                                      
                                      
                                      11,010
                                      
                                      
                                      
                                      11,010Capital
      in excess of par value
                                      
                                      
                                      12,786,314
                                      
                                      
                                      
                                      12,651,936Accumulated
      deficit
                                      
                                      
                                      (8,766,098
                                      )
                                      
                                      
                                      (8,609,819
                                      )Total
      stockholders' equity
                                      
                                      
                                      4,031,226
                                      
                                      
                                      
                                      4,053,127Total
      Liabilities and Stockholders' Equity
                                      
                                      $
                                      4,775,284
                                      
                                      
                                      $
                                      4,583,412


See
accompanying  notes to unaudited condensed consolidated financial
statements.


3




Imagenetix,
Inc.


Condensed
Consolidated Statements of Operations


(Unaudited)





Three Months Ended
                          
                          
                          Nine Months EndedDecember 31,
                          
                          
                          December 31,
                          
                          
                          December 31,
                          
                          
                          December 31,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Net
      sales
                          
                          $
                          1,765,049
                          
                          
                          $
                          2,083,797
                          
                          
                          $
                          5,367,958
                          
                          
                          $
                          6,134,533Cost
      of sales
                          
                          
                          878,224
                          
                          
                          
                          1,019,255
                          
                          
                          
                          2,972,876
                          
                          
                          
                          3,380,187Gross
      profit
                          
                          
                          886,825
                          
                          
                          
                          1,064,542
                          
                          
                          
                          2,395,082
                          
                          
                          
                          2,754,346Operating
      expenses:General
      and administrative
                          
                          
                          573,214
                          
                          
                          
                          564,415
                          
                          
                          
                          1,956,139
                          
                          
                          
                          1,589,819Payroll
      expense
                          
                          
                          325,386
                          
                          
                          
                          249,375
                          
                          
                          
                          848,925
                          
                          
                          
                          842,320Consulting
      expense
                          
                          
                          433,761
                          
                          
                          
                          256,215
                          
                          
                          
                          1,008,667
                          
                          
                          
                          845,129Operating
      expenses
                          
                          
                          1,332,361
                          
                          
                          
                          1,070,005
                          
                          
                          
                          3,813,731
                          
                          
                          
                          3,277,268Operating
      income (loss)
                          
                          
                          (445,536
                          )
                          
                          
                          (5,463
                          )
                          
                          
                          (1,418,649
                          )
                          
                          
                          (522,922
                          )Other
      income (expense):Other
      income
                          
                          
                          3,477
                          
                          
                          
                          5,689
                          
                          
                          
                          5,675
                          
                          
                          
                          23,177Settlement
      income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,250,000
                          
                          
                          
                          1,785,000Interest
      expense
                          
                          
                          -
                          
                          
                          
                          (352
                          )
                          
                          
                          (2,405
                          )
                          
                          
                          (1,564
                          )Other
      income
                          
                          
                          3,477
                          
                          
                          
                          5,337
                          
                          
                          
                          1,253,270
                          
                          
                          
                          1,806,613Income
      (loss) before income taxes
                          
                          
                          (442,059
                          )
                          
                          
                          (126
                          )
                          
                          
                          (165,379
                          )
                          
                          
                          1,283,691Income
      tax expense (benefit)
                          
                          
                          (147,900
                          )
                          
                          
                          100
                          
                          
                          
                          (9,100
                          )
                          
                          
                          498,100Income
      (loss)
                          
                          $
                          (294,159
                          )
                          
                          $
                          (226
                          )
                          
                          $
                          (156,279
                          )
                          
                          $
                          785,591Basic
      income (loss) per share
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.01
                          )
                          
                          $
                          0.07Diluted
      income (loss) per share
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.01
                          )
                          
                          $
                          0.07Basic
      weighted average common shares outstanding
                          
                          
                          11,010,788
                          
                          
                          
                          11,010,788
                          
                          
                          
                          11,010,788
                          
                          
                          
                          10,985,058Diluted
      weighted average common shares outstanding
                          
                          
                          11,010,788
                          
                          
                          
                          11,010,788
                          
                          
                          
                          11,010,788
                          
                          
                          
                          11,009,212





See
accompanying  notes to unaudited condensed consolidated financial
statements.




4




Imagenetix,
Inc.


Consolidated
Statements of Cash Flows


(Unaudited)





Nine Months Ended December 31,2009
                                    
                                    
                                    2008Operating
      activities:Net
      income (loss)
                                    
                                    $
                                    (156,279
                                    )
                                    
                                    $
                                    785,591Adjustments
      to reconcile net income (loss)to
      cash provided by (used in) operating activities:Amortization
      and depreciation
                                    
                                    
                                    39,855
                                    
                                    
                                    
                                    32,622Provision
      for doubtful accounts
                                    
                                    
                                    11,000
                                    
                                    
                                    
                                    (774
                                    )Provision
      for inventory obsolescence
                                    
                                    
                                    (41,142
                                    )
                                    
                                    
                                    13,372Non
      cash expense related to issuance of warrantsand
      granting of stock options
                                    
                                    
                                    134,378
                                    
                                    
                                    
                                    139,356Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                                    
                                    
                                    (253,498
                                    )
                                    
                                    
                                    (449,352
                                    )(Increase)
      decrease in employee receivable
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,409(Increase)
      decrease in inventories
                                    
                                    
                                    411,426
                                    
                                    
                                    
                                    (378,751
                                    )(Increase)
      decrease in other assets
                                    
                                    
                                    (48,500
                                    )
                                    
                                    
                                    132,213(Increase)
      decrease in deferred taxes
                                    
                                    
                                    (9,100
                                    )
                                    
                                    
                                    498,100Increase
      (decrease) in accounts payable
                                    
                                    
                                    262,264
                                    
                                    
                                    
                                    (13,253
                                    )Increase
      (decrease) in accrued liabilities
                                    
                                    
                                    (8,586
                                    )
                                    
                                    
                                    (1,883
                                    )Increase
      (decrease) in customer deposits
                                    
                                    
                                    (30,539
                                    )
                                    
                                    
                                    (59,966
                                    )Increase
      (decrease) in income taxes payable
                                    
                                    
                                    (69,803
                                    )
                                    
                                    
                                    -Net
      cash provided by (used in) operating activities
                                    
                                    
                                    241,476
                                    
                                    
                                    
                                    699,684Investing
      activities:Purchases
      of property and equipment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (43,465
                                    )Proceeds
      from disposal of property and equipment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,268Net
      cash used in investing activities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (38,197
                                    )Financing
      activities:Proceeds
      from contracts payable
                                    
                                    
                                    114,391
                                    
                                    
                                    
                                    92,219Payments
      on contracts payable
                                    
                                    
                                    (50,975
                                    )
                                    
                                    
                                    (46,200
                                    )Payments
      on patent license financed
                                    
                                    
                                    (2,980
                                    )
                                    
                                    
                                    (25,436
                                    )Net
      cash provided by financing activities
                                    
                                    
                                    60,436
                                    
                                    
                                    
                                    20,583Net
      increase (decrease) in cash and cash equivalents
                                    
                                    
                                    301,912
                                    
                                    
                                    
                                    682,070Cash and cash
      equivalents, beginning of period
                                    
                                    
                                    1,225,723
                                    
                                    
                                    
                                    1,022,555Cash and cash
      equivalents, end of period
                                    
                                    $
                                    1,527,635
                                    
                                    
                                    $
                                    1,704,625Supplemental
      Disclosure of Cash Flow Information:Cash
      paid during the period for:Interest
                                    
                                    $
                                    2,405
                                    
                                    
                                    $
                                    1,564Income
      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 nine 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 Accounting 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 nine months ended December 31, 2009 we
incurred research and development expenses of $14,188 and $65,083, respectively,
compared to $16,444 and $84,667, respectively, 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 was 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:




December 31,
                  
                  
                  March 31,2009
                  
                  
                  2009Accounts
      receivable - trade
                  
                  $
                  1,410,444
                  
                  
                  $
                  1,156,946Allowance
      for doubtful accounts
                  
                  
                  (72,000
                  )
                  
                  
                  (61,000
                  )Accounts
      receivable, net
                  
                  $
                  1,338,444
                  
                  
                  $
                  1,095,946





At
December 31, 2009, we had three customers which accounted for 51%, 18% and 10%,
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
nine months ended December 31, 2009, we had three significant customers which
accounted for 32%, 18% and 15%, respectfully, of sales.  For the nine
months ended December 31, 2008, we had three significant customers which
accounted for 25%, 22% and 16%, respectfully, of sales.


7





IMAGENETIX,
INC.


Notes
to the Unaudited Condensed Consolidated Financial Statements
(Continued)





4.
            INVENTORIES





Inventories
consist of the following:




December 31,
                    
                    
                    March 31,2009
                    
                    
                    2009Raw
      materials
                    
                    $
                    600,435
                    
                    
                    $
                    802,117Finished
      products
                    
                    
                    277,788
                    
                    
                    
                    417,024Boxes,
      labels, tubes & bottles
                    
                    
                    196,174
                    
                    
                    
                    266,6821,074,397
                    
                    
                    
                    1,485,823Reserve
      for obsolescence
                    
                    
                    (107,440
                    )
                    
                    
                    (148,582
                    )$
                    966,957
                    
                    
                    $
                    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:




December 31,
                      
                      
                      March 31,2009
                      
                      
                      2009Trademarks
                      
                      $
                      13,032
                      
                      
                      $
                      13,032Patent
                      
                      
                      172,965
                      
                      
                      
                      172,965Deferred
      tax asset
                      
                      
                      8,800
                      
                      
                      
                      14,500194,797
                      
                      
                      
                      200,497Less
      accumulated amortization
                      
                      
                      81,035
                      
                      
                      
                      66,141$
                      113,762
                      
                      
                      $
                      134,356





6.
            EQUITY
      TRANSACTIONS





We
recorded non-cash compensation and non-cash general and administrative expense
for stock options and warrants issued to employees and consultants of $92,213
and $134,378, respectively, for the three and nine months ended December 31,
2009 and $21,058 and $139,356, respectively, for the three and nine months ended
December 31, 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 December 31,
                                
                                Nine months ended December 31,2009
                                
                                2008
                                
                                2009
                                
                                2008Expected
      term of options and warrants
                                
                                5
      years
                                
                                5
      years
                                
                                5
      years
                                
                                5
      yearsExpected
      volatility
                                
                                78%
                                
                                56%
                                
                                73%
      to 78%
                                
                                56%
      to 61%Expeceted
      dividends
                                
                                None
                                
                                None
                                
                                None
                                
                                NoneRisk-free
      interest rate
                                
                                2.16%
      to 2.20%
                                
                                3.12%
      to 3.33%
                                
                                2.16%
      to 2.95%
                                
                                3.12%
      to 3.54%Forteitures
                                
                                0%
                                
                                0%
                                
                                0%
                                
                                0%




8




IMAGENETIX,
INC.


Notes
to the Unaudited Condensed Consolidated Financial Statements
(Continued)





A summary
of the options outstanding follows:





For the Nine Months EndedDecember 31, 2009WeightedAverageExerciseOptions
                                              
                                              Shares
                                              
                                              
                                              PriceOutstanding
      at beginning of year
                                              
                                              
                                              1,249,000
                                              
                                              
                                              $
                                              1.49Granted
                                              
                                              
                                              340,000
                                              
                                              
                                              
                                              0.42Cancelled
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Exercised
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Outstanding
      at end of the period
                                              
                                              
                                              1,589,000
                                              
                                              
                                              
                                              1.26Exercisable
      at end of the the period
                                              
                                              
                                              1,469,000
                                              
                                              
                                              $
                                              1.34Weighted
      average fair value of optionsgranted
      during the period
                                              
                                              
                                              340,000
                                              
                                              
                                              $
                                              0.23





As of
December 31, 2009, the unamortized portion of stock compensation expense on all
existing stock options was $75,475.





A summary
of other warrants outstanding follows:





For the Nine Months EndedDecember 31, 2009WeightedAverageExerciseWarrants
                                          
                                          Shares
                                          
                                          
                                          PriceOutstanding
      at beginning of year
                                          
                                          
                                          4,077,957
                                          
                                          
                                          $
                                          1.18Granted
                                          
                                          
                                          300,000
                                          
                                          
                                          
                                          0.70Cancelled
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Exercised
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Outstanding
      at end of the period
                                          
                                          
                                          4,377,957
                                          
                                          
                                          
                                          1.15Exercisable
      at end of the the period
                                          
                                          
                                          4,377,957
                                          
                                          
                                          $
                                          1.15Weighted
      average fair value of warrantsgranted
      during the period
                                          
                                          
                                          300,000
                                          
                                          
                                          $
                                          0.39





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 than 50 percent
likely of being realized upon ultimate settlement with a taxing authority having
full knowledge of all relevant information.




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 December 31, 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 during the nine months ended December 31,
2009.





9.
            FINANCIAL
      STATEMENT DISCLOSURES





We  evaluated
events through February 8, 2010 for consideration as a subsequent event to be
included in our December 31, 2009 financial statements, issued February 8,
2010.


10





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





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.


11





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.





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 nine months ended
December 31, 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 nine
months ended December 31, 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.




12




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




Selected
Financial Information




Results
of Operations




Three
Months Ended December 31, 2009 Compared to Three Months Ended December 31,
2008




Three Months EndedIncrease12/31/09
                    
                    
                    12/31/08
                    
                    
                    (Decrease)
                    
                    
                    %Statements
      of Operations:Net
      sales
                    
                    $
                    1,765,000
                    
                    
                    $
                    2,084,000
                    
                    
                    $
                    (319,000
                    )
                    
                    
                    -15.3
                    %Cost
      of goods sold
                    
                    
                    878,000
                    
                    
                    
                    1,019,000
                    
                    
                    
                    (141,000
                    )
                    
                    
                    -13.8
                    %%
      of net sales
                    
                    
                    49.7
                    %
                    
                    
                    48.9
                    %
                    
                    
                    0.8
                    %
                    
                    
                    1.7
                    %Gross
      profit
                    
                    
                    887,000
                    
                    
                    
                    1,065,000
                    
                    
                    
                    (178,000
                    )
                    
                    
                    -16.7
                    %%
      of net sales
                    
                    
                    50.3
                    %
                    
                    
                    51.1
                    %
                    
                    
                    -0.8
                    %
                    
                    
                    -1.7
                    %Operating
      expensesGeneral
      and administrative
                    
                    
                    573,000
                    
                    
                    
                    565,000
                    
                    
                    
                    8,000
                    
                    
                    
                    1.4
                    %Payroll
      expense
                    
                    
                    325,000
                    
                    
                    
                    249,000
                    
                    
                    
                    76,000
                    
                    
                    
                    30.5
                    %Consulting
      expense
                    
                    
                    434,000
                    
                    
                    
                    256,000
                    
                    
                    
                    178,000
                    
                    
                    
                    69.5
                    %Total
      operating expenses
                    
                    
                    1,332,000
                    
                    
                    
                    1,070,000
                    
                    
                    
                    262,000
                    
                    
                    
                    24.5
                    %Interest
      expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    NMOther
      income
                    
                    
                    3,000
                    
                    
                    
                    5,000
                    
                    
                    
                    (2,000
                    )
                    
                    
                    -40.0
                    %Provision
      for (benefit from) taxes
                    
                    
                    (148,000
                    )
                    
                    
                    -
                    
                    
                    
                    (148,000
                    )
                    
                    NMNet
      income (loss)
                    
                    
                    (294,000
                    )
                    
                    
                    -
                    
                    
                    
                    (294,000
                    )
                    
                    NMNet
      income (loss) per share basic
                    
                    
                    (0.03
                    )
                    
                    
                    -
                    
                    
                    
                    (0.03
                    )
                    
                    NMNet
      income (loss) per share diluted
                    
                    
                    (0.03
                    )
                    
                    
                    -
                    
                    
                    
                    (0.03
                    )
                    
                    NM




Net
Sales




Net sales
for the quarter ended December 31, 2009 decreased $319,000, a 15.3% decrease, to
$1,765,000 compared to $2,084,000 for the quarter ended December 31,
2008.  The primary reasons for the sales decrease are a reduction of
approximately $726,000 in distributor sales as a result of entering into an
acceleration agreement with one of our customers during the previous fiscal
quarter and  a reduction of approximately $300,000 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 $733,000. 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 remained stable at 49% for the quarter
ended December 31, 2008 compared to 50% for the quarter ended December 31,
2009.


13




General and
Administrative




General
and administrative expenses remained stable at $573,000 for the quarter ended
December 31, 2009 compared to $565,000 for the quarter ended December 31, 2008.
We anticipate future increases in general and administrative expenses as expect
to increase our advertising campaign for our Inflame Away product and an
increase in clinical research studies.




Payroll
Expense




Payroll
expense increased to $325,000 for the quarter ended December 31, 2009, an
increase of 30.5% or $76,000 compared to $249,000 for the quarter ended December
31, 2008. This increase was a result of non-cash compensation increases related
to employee stock options, an increase in bonuses and a general increase in
salaries during the current fiscal period compared to the previous year fiscal
period.




Consulting
Expenses




Consulting
expenses increased to $434,000 for the quarter ended December 31, 2009, an
increase of 69.5% or $178,000 compared to $256,000 for the quarter ended
December 31, 2008. This increase was a result of the costs to initiate a public
relations and investor relations program of approximately $30,000, the expenses
of the annual meeting of approximately $16,000 and an increase in product
demonstrations at club stores of approximately $120,000.




Provision for Income
Taxes




An income
tax benefit of $148,000 was recognized during the current quarter compared to
none recognized during the quarter ended December 31, 2008.




Nine
months ended December 31, 2009 Compared to Nine months ended December 31,
2008




Nine Months EndedIncrease12/31/09
                
                
                12/31/08
                
                
                (Decrease)
                
                
                %Statements
      of Operations:Net
      sales
                
                $
                5,368,000
                
                
                $
                6,135,000
                
                
                $
                (767,000
                )
                
                
                -12.5
                %Cost
      of goods sold
                
                
                2,973,000
                
                
                
                3,380,000
                
                
                
                (407,000
                )
                
                
                -12.0
                %%
      of net sales
                
                
                55.4
                %
                
                
                55.1
                %
                
                
                0.3
                %
                
                
                0.5
                %Gross
      profit
                
                
                2,395,000
                
                
                
                2,755,000
                
                
                
                (360,000
                )
                
                
                -13.1
                %%
      of net sales
                
                
                44.6
                %
                
                
                44.9
                %
                
                
                -0.3
                %
                
                
                -0.6
                %Operating
      expensesGeneral
      and administrative
                
                
                1,956,000
                
                
                
                1,590,000
                
                
                
                366,000
                
                
                
                23.0
                %Payroll
      expense
                
                
                849,000
                
                
                
                842,000
                
                
                
                7,000
                
                
                
                0.8
                %Consulting
      expense
                
                
                1,009,000
                
                
                
                845,000
                
                
                
                164,000
                
                
                
                19.4
                %Total
      operating expenses
                
                
                3,814,000
                
                
                
                3,277,000
                
                
                
                537,000
                
                
                
                16.4
                %Interest
      expense
                
                
                (2,000
                )
                
                
                (2,000
                )
                
                
                -
                
                
                
                0.0
                %Settlement
      income
                
                
                1,250,000
                
                
                
                1,785,000
                
                
                
                (535,000
                )
                
                
                -30.0
                %Other
      income
                
                
                6,000
                
                
                
                23,000
                
                
                
                (17,000
                )
                
                
                -73.9
                %Provision
      for (benefit from) taxes
                
                
                (9,000
                )
                
                
                498,000
                
                
                
                (507,000
                )
                
                NMNet
      income (loss)
                
                
                (156,000
                )
                
                
                786,000
                
                
                
                (942,000
                )
                
                NMNet
      income (loss) per share basic
                
                
                (0.01
                )
                
                
                0.07
                
                
                
                (0.08
                )
                
                NMNet
      income (loss) per share diluted
                
                
                (0.01
                )
                
                
                0.07
                
                
                
                (0.08
                )
                
                NM




14




Net
Sales




Net sales
for the nine months ended December 31, 2009 decreased $767,000, a 12.5%
decrease, to $5,368,000 compared to $6,135,000 for the nine months ended
December 31, 2008. The primary reasons for the sales decrease are a reduction of
approximately $1,566,000 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 decrease in sales of approximately $574,000 for our weight loss
product offset by an increase of approximately $1,374,000 in sales of our
branded products to the mass market segment. 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 remained stable at 55% for both the nine
months ended December 31, 2009 and December 31, 2008.




General and
Administrative




General
and administrative expenses increased by $366,000, a 23.0% increase, to
$1,956,000 for the nine months ended December 31, 2009 from $1,590,000 for the
nine months ended December 31, 2008. The primary reason for the increase was an
approximate $290,000 increase in advertising expenses for InflameAway and other
general increases related to product introduction. 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 remained stable at $829,000 for the nine months ended December 31, 2009,
compared to $842,000 for the nine months ended December 31, 2008.




Consulting
Expenses




Consulting
expenses increased to $1,009,000 for the nine months ended December 31, 2009, an
increase of 19.4% or $164,000 compared to $845,000 for the nine months ended
December 31, 2008. This increase was a result of the costs to initiate a public
relations and investor relations program of approximately $30,000, the expenses
of the annual meeting of approximately $16,000 and an increase in product
demonstrations at club stores of approximately $120,000.




Settlement
Income




During
the nine months ended December 31, 2008, we received $2,100,000 ($1,785,000
after costs) as a result of entering into a settlement agreement with a company
we alleged was infringing on the Celadrin trademark. In addition, we entered
into a supply agreement with the same company whereby we would provide Celadrin
for use in their products. During the nine months ended December 31, 2009, we
entered into a buyout agreement whereby we received $1,250,000 for the
cancellation of the supply agreement.




Provision for Income
Taxes




An income
tax benefit of $9,000 was recognized during the nine months ended December 31,
2009 compared to income tax expense of $498,000 recognized during the nine
months ended December 31, 2008.




15




Capital
Resources




Working
Capital


Increase12/31/09
                  
                  
                  3/31/09
                  
                  
                  (Decrease)Current
      assets
                  
                  $
                  4,549,565
                  
                  
                  $
                  4,303,138
                  
                  
                  $
                  246,427Current
      liabilities
                  
                  
                  744,058
                  
                  
                  
                  530,285
                  
                  
                  
                  213,773Working
      capital
                  
                  $
                  3,805,507
                  
                  
                  $
                  3,772,853
                  
                  
                  $
                  32,654Long-term
      debt
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Stockholders'
      equity
                  
                  $
                  4,031,226
                  
                  
                  $
                  4,053,127
                  
                  
                  $
                  (21,901
                  )





Statements
of Cash Flows Select Information


Nine Months Ended
                  
                  
                  Increase12/31/09
                  
                  
                  12/31/08
                  
                  
                  (Decrease)Net
      cash provided by (used in):Operating
      activities
                  
                  $
                  241,476
                  
                  
                  $
                  699,684
                  
                  
                  $
                  (458,208
                  )Investing
      activities
                  
                  $
                  -
                  
                  
                  $
                  (38,197
                  )
                  
                  $
                  38,197Financing
      activities
                  
                  $
                  60,436
                  
                  
                  $
                  20,583
                  
                  
                  $
                  39,853





Balance
Sheet Select Information


Increase12/31/09
                  
                  
                  3/31/09
                  
                  
                  (Decrease)Cash
      and cash equivalients
                  
                  $
                  1,527,635
                  
                  
                  $
                  1,225,723
                  
                  
                  $
                  301,912Accounts
      receivable, net
                  
                  $
                  1,338,444
                  
                  
                  $
                  1,095,946
                  
                  
                  $
                  242,498Inventories,
      net
                  
                  $
                  966,957
                  
                  
                  $
                  1,337,241
                  
                  
                  $
                  (370,284
                  )Accounts
      payable and accrued expenses
                  
                  $
                  608,686
                  
                  
                  $
                  355,007
                  
                  
                  $
                  253,679




Liquidity




We have
historically financed our operations internally and through debt and equity
financings. At December 31, 2009, we had cash holdings of $1,527,635, an
increase of $301,912 compared to March 31, 2009. Our net working capital
position at December 31, 2009, was $3,805,507 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 the drug is successfully comercialized, 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.




16




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.




ITEM 4T.    
CONTROLS AND PROCEDURES.




Disclosure Controls and
Procedures


The
Company maintains disclosure controls and procedures that are designed to
provide reasonable assurance that information required to be disclosed in
reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) is
recorded, processed, summarized, and reported within the specified time periods
and accumulated and communicated to the Company’s management, including its
Principal Executive Officer and Principal Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.





The
Company’s management, under the supervision and with the participation of its
Principal Executive Officer and its Principal Financial Officer, evaluated the
effectiveness of its disclosure controls and procedures (as defined in Rules
13a-15(e) or 15d-15(e) promulgated under the Exchange Act) as of the end of the
period covered by this report. Based on that evaluation, the Company’s Principal
Executive Officer and Principal Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of December 31, 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 December 31, 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 changes in the Company’s internal control over financial
reporting during the quarter ended December 31, 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.




17




PART
II. OTHER INFORMATION





ITEM
1.      LEGAL PROCEEDINGS





Sun
Research Arbitration





On
November 23, 2009, Sun Research, Inc., a sales distributor for Imagenetix,
submitted a demand for arbitration with the American Arbitration Association
related to a Regional Distributor Agreement entered into on March 31, 2008. Sun
Research asserts that under the terms of the Agreement, it is entitled to
compensation from an acceleration agreement Imagenetix entered into with a
customer. Sun Research has demanded damages of approximately $265,625 (excluding
claims for costs, interests and attorneys fees). The Company denies the
allegations and believes the claims to be frivolous and totally devoid of merit.
The Company has retained litigation counsel and intends to vigorously defend the
claims. The amount, if any, of ultimate liability with respect to the foregoing
cannot be determined. Despite the inherent uncertainties of litigation, the
Company at this time does not believe that Sun Research's claim will have a
material adverse impact on its financial condition, results of operations, or
cash flows.




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.





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 nine months ended December 31, 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 nine months ended December 31, 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.




18




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





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





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





We are
subject to laws and regulations which cover:





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





•
            the
      health and safety of food and
drugs;





•
            trade
      practice and direct selling laws;
and





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


Compliance
with these laws and regulations is time consuming and expensive. Moreover, new
regulations could be adopted that would severely restrict the products we sell
or our ability to continue our business. We are unable to predict the nature of
any future laws, regulations, interpretations or applications, nor can we
predict what effect additional governmental regulations or administrative
orders, when and if promulgated, would have on our business in the future. These
future changes could, however, require the reformulation or elimination of
certain products; imposition of additional record keeping and documentation
requirements; imposition of new federal reporting and application requirements;
modified methods of importing, manufacturing, storing or distributing certain
products; and expanded or different labeling and substantiation requirements for
certain products and ingredients. Any or all of these requirements could harm
our business.





There
Are Limitations on the Liability of Our Officers and Directors Which May
Restrict Our Stockholders from Bringing Claims.





Our
Bylaws substantially limit the liability of our officers and directors to us and
our stockholders for negligence and breach of fiduciary or other duties to us.
This limitation may prevent stockholders from bringing claims against our
officers and directors in the future.





Shares
of Our Common Stock Which Are Eligible for Sale by Our Stockholders May Decrease
the Price of Our Common Stock.





We have
11,010,788 common shares outstanding which are freely tradeable or saleable
under Rule 144. We also have outstanding common stock warrants and stock options
exercisable into up to 5,966,957 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:




19




•
            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.





"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
2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




During
the quarter ended December 31, 2009, we issued common stock purchase warrants as
follows:




20




Common
Stock Purchase Warrants


Name
                            
                            Date of Issuance
                            
                            Number of Shares
                            
                            
                            Exercise Price
                            
                            Expiraton DateFrank
      Sajovic
                            
                            10/7/2009
                            
                            
                            100,000
                            
                            
                            $
                            0.70
                            
                            10/7/2014Jeffrey
      Kraws
                            
                            11/20/2009
                            
                            
                            100,000
                            
                            
                            $
                            0.70
                            
                            11/20/2014Karen
      Goldfarb
                            
                            11/20/2009
                            
                            
                            100,000
                            
                            
                            $
                            0.70
                            
                            11/20/2014





With
respect to the above securities issuances, the Registrant relied on exemptions
provided by Section 4(2) of the Securities Act of 1933, as amended (the
“Securities Act”) and Rule 506 under the Securities Act. No advertising or
general solicitation was employed in offering the securities. The securities
were issued to a limited number of persons all of whom were accredited investors
as that term is defined in Rule 501 of Regulation D under the Securities Act.
All were capable of analyzing the merits and risks of their investment,
acknowledged in writing that they were acquiring the securities for investment
and not with a view toward distribution or resale, and understood the
speculative nature of their investment. All securities issued contained a
restrictive legend prohibiting transfer of the shares except in accordance with
federal securities laws.





There
were no proceeds received from the issuance of the above
securities.





ITEM
4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





At our
fiscal 2009 Annual Meeting of Shareholders held on November 17, 2009, the
following individuals were elected to the Board of Directors of the Company:
William Spencer, Robert Burg, Barry King, Jeffrey McGonegal and Debra
Spencer.





The
following proposals were approved at our Annual Meeting of
Shareholders:





1.
            Proposal to increase the number
      of shares authorized under our 2000 Stock Option Plan from 1,500,000 to
      2,000,000:




Votes For
                    
                    Votes Against
                    
                    Votes
                      Abstaining3,968,518
                    
                    1,660,648
                    
                    3,459,461








2.
            Proposal to ratify management’s
      selection of HJ Associates & Consultants, LLP as our independent
      auditors:




Votes For
                    
                    Votes Against
                    
                    Votes
                      Abstaining9,086,993
                    
                    300
                    
                    1,334




3.
              Election
      of
Directors:





Director
                      
                      Votes For
                      
                      Votes Abstaining
                        and/or AgainstWilliam
      Spencer
                      
                      8,918,827
                      
                      169,800Robert
      Burg
                      
                      8,901,427
                      
                      184,200Barry
      King
                      
                      8,913,727
                      
                      174,900Jeffrey
      McGonegal
                      
                      8,895,104
                      
                      193,523Debra
      Spencer
                      
                      7,530,935
                      
                      1,557,692




21




ITEM
6.EXHIBITS.





Exhibit
      No.
                  
                  Title31.1
                  
                  302
      Certification of William P. Spencer, Chief Executive
    Officer31.2
                  
                  302
      Certification of Lowell W. Giffhorn, Chief Financial
    Officer32.1
                  
                  906
      Certification of William P. Spencer, Chief Executive
    Officer32.2
                  
                  906
      Certification of Lowell W. Giffhorn, Chief Financial
    Officer




SIGNATURES




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:  February
      8, 2010
                  By
                  : /s/ WILLIAM P. SPENCERWilliam
      P. SpencerChief
      Executive Officer(Principal
      Executive Officer and duly authorizedto
      sign on behalf of the
Registrant)




22