**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-QSB**




(Mark
      One)




x Quarterly
      Report Under Section 13 Or 15(d) Of The Securities Exchange Act Of
      1934




For
      quarterly period ended **September
      30, 2006**




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




For
      the
      transition period from _____ to _____




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




**IMAGENETIX,
      INC.**


(Exact
      name of small business issuer as specified in its charter)




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





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




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




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. **Yes**  **x**  **No**  ̈




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


Yes  ̈  **No** **x**




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
            
            10,721,400(Class)
            
            Outstanding
                at November 6, 2006




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









**Imagenetix,
      Inc.**




**INDEX**


PagePART
                  I.FINANCIAL
                  INFORMATIONItem
                  1.
              Financial
                  Statements:Consolidated
                    Balance Sheets as of September 30, 2006 (unaudited)and March
                    31, 2006
              3Consolidated
                  Statements of Operations for the three and six months ended September
                  30,
                  2006 and 2005 (unaudited)
              4Consolidated
                  Statements of Cash Flows for the six months ended September 30,
                  2006 and
                  2005 (unaudited)
              5Notes
                to Unaudited Consolidated Financial Statements
              6Item
                  2.
              Management’s
                  Discussion and Analysis or Plan of Operation
              15Item
                  3.
              Controls
                and Procedures
              22PART
                  II.OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              23Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              *Item
                  3.
              Defaults
                  Upon Senior Securities
              *Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              *Item
                  5.
              Other
                  Information
              *Item
                  6.
              Exhibits
              23SIGNATURES




*  No
      information provided due to inapplicability of the item.


2




**PART
      I - FINANCIAL INFORMATION**




**Item
      1. Financial Statements**




**Imagenetix,
        Inc.**
 **Consolidated
        Balance Sheets**


September
                  30,
              
              March
                  31,2006
              
              2006(Unaudited)ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              1,039,841
              
              $
              1,808,016Accounts
                  receivable, net
              
              
              1,016,399
              
              
              811,198Inventories,
                  net
              
              
              1,906,032
              
              
              1,741,468Prepaid
                  expenses
              
              
              147,857
              
              
              220,747Income
                  tax receivable
              
              
              529,667
              
              
              617,570Deferred
                  tax asset
              
              
              152,700
              
              
              94,200Total
                  current assets
              
              
              4,792,496
              
              
              5,293,199Property
                  and equipment, net
              
              
              99,448
              
              
              97,574Other
                  assets
              
              
              497,775
              
              
              503,301$
              5,389,719
              
              $
              5,894,074LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  liabilities:Accounts
                  payable
              
              $
              612,397
              
              $
              740,461Accrued
                  liabilities
              
              
              54,145
              
              
              51,949Customer
                  deposits
              
              
              93,595
              
              
              48,485Short
                  term license payable
              
              
              30,397
              
              
              29,209Total
                  current liabilities
              
              
              790,534
              
              
              870,104Long
                  term license payable
              
              
              53,371
              
              
              68,873Stockholders'
                  equityPreferred
                  stock, $.001 par value; 5,000,000 sharesauthorized:
                  none outstanding
              
              
              -
              
              
              -Common
                  stock, $.001par value; 50,000,000 sharesauthorized:
                  10,721,400 issued and outstanding atSeptember
                  30 and March 31, 2006
              
              
              10,721
              
              
              10,721Capital
                  in excess of par value
              
              
              10,373,801
              
              
              10,342,395Accumulated
                  earnings (deficit)
              
              
              (5,838,708
              )
              
              (5,398,019
              )Total
                  stockholders' equity
              
              
              4,545,814
              
              
              4,955,097$
              5,389,719
              
              $
              5,894,074


*See
        accompanying summary of accounting policies and notes to unaudited consolidated
        financial statements.*


3


**Imagenetix,
          Inc.**
 **Consolidated
        Statements of Operations**
 (Unaudited)
  Three
                  Months Ended
              
              Six
                  Months EndedSeptember
                  30,
              
              September
                  30,
              
              September
                  30,
              
              September
                  30,2006
              
              2005
              
              2006
              
              2005Net
                  sales
              
              $
              1,333,016
              
              $
              2,016,295
              
              $
              2,264,586
              
              $
              4,886,040Cost
                  of sales
              
              
              669,870
              
              
              1,152,244
              
              
              1,173,670
              
              
              2,607,343Gross
                  profit
              
              
              663,146
              
              
              864,051
              
              
              1,090,916
              
              
              2,278,697Operating
                  expenses:General
                  and administrative
              
              
              172,627
              
              
              1,227,156
              
              
              550,898
              
              
              1,660,273Payroll
                  expense
              
              
              205,242
              
              
              272,344
              
              
              365,725
              
              
              450,076Consulting
                  expense
              
              
              343,844
              
              
              207,782
              
              
              667,393
              
              
              469,199Operating
                  expenses
              
              
              721,713
              
              
              1,707,282
              
              
              1,584,016
              
              
              2,579,548Operating
                  income
              
              
              (58,567
              )
              
              (843,231
              )
              
              (493,100
              )
              
              (300,851
              )Other
                  income (expense):Other
                  income
              
              
              7,099
              
              
              9,105
              
              
              16,989
              
              
              18,017Interest
                  expense
              
              
              (1,772
              )
              
              (4,551
              )
              
              (3,687
              )
              
              (17,532
              )Other
                  income (expense)
              
              
              5,327
              
              
              4,554
              
              
              13,302
              
              
              485Income
                  (loss) before income taxes
              
              
              (53,240
              )
              
              (838,677
              )
              
              (479,798
              )
              
              (300,366
              )Provision
                  for (benefits from) taxes
              
              
              (21,794
              )
              
              (348,000
              )
              
              (70,515
              )
              
              (113,700
              )Net
                  income (loss)
              
              $
              (31,446
              )
              $
              (490,677
              )
              $
              (409,283
              )
              $
              (186,666
              )Basic
                  income (loss) per share
              
              $
              (0.00
              )
              $
              (0.05
              )
              $
              (0.04
              )
              $
              (0.02
              )Diluted
                  income (loss) per share
              
              $
              (0.00
              )
              $
              (0.05
              )
              $
              (0.04
              )
              $
              (0.02
              )




*See
        accompanying summary of accounting policies and notes to unaudited consolidated
        financial statements.*


4




**Imagenetix,
        Inc.**
 **Consolidated
          Statements of Cash Flows**


(Unaudited)




Six
                Months Ended September 30,2006
            
            2005Operating
                activities:Net
                income (loss)
            
            $
            (409,283
            )
            $
            (186,666
            )Adjustments
                to reconcile net incometo
                cash provided by (used in) operating activities:Amortization
                and depreciation
            
            
            18,142
            
            
            13,724Provision
                for doubtful accounts , net
            
            
            20,000
            
            
            2,930Provision
                for inventory obsolescence
            
            
            15,313
            
            
            112,927Non
                cash expense related to warrants and stock options
            
            
            -
            
            
            760,346Stock
                issued for services
            
            
            -
            
            
            87,750Changes
                in assets and liabilities:(Increase)
                decrease in accounts receivable
            
            
            (223,802
            )
            
            394,029(Increase)
                decrease in inventory
            
            
            (179,877
            )
            
            (400,841
            )(Increase)
                decrease in other assets
            
            
            83,991
            
            
            (603,040
            )(Increase)
                decrease in deferred taxes
            
            
            (74,200
            )
            
            (52,600
            )Increase
                (decrease) in accounts payable
            
            
            (128,064
            )
            
            535,312Increase
                (decrease) in accrued liabilities
            
            
            2,196
            
            
            1,868Increase
                (decrease) in customer deposits
            
            
            45,110
            
            
            (59,691
            )Increase
                (decrease) in income taxes payable
            
            
            87,903
            
            
            (437,784
            )Net
                cash provided by (used in) operating activities
            
            
            (742,571
            )
            
            168,264Investing
                activities:Leasehold
                improvements
            
            
            (11,290
            )
            
            -Trademarks,
                patents and infomercial
            
            
            -
            
            
            (109,654
            )Net
                cash used in investing activities
            
            
            (11,290
            )
            
            (109,654
            )Financing
                activities:Payments
                on notes payable to related party
            
            
            -
            
            
            (175,000
            )Payments
                on patent license financed
            
            
            (14,314
            )
            
            -Proceeds
                from exercise of stock options and warrants
            
            
            -
            
            
            253,944Net
                cash provided by (used in) financing activities
            
            
            (14,314
            )
            
            78,944Net
                increase (decrease) in cash
            
            
            (768,175
            )
            
            137,554Cash,
                beginning of period
            
            
            1,808,016
            
            
            2,031,486Cash,
                end of period
            
            $
            1,039,841
            
            $
            2,169,040Supplemental
                Disclosure of Cash Flow Information:Cash
                paid during the period for:Interest
            
            $
            3,687
            
            $
            17,532Income
                taxes
            
            $
            -
            
            $
            740,908Non
                Cash Investing and Financing Activities:Non-cash
                dividend issued to certain warrant holders
            
            $
            31,406
            
            $
            4,698,819


*See
        accompanying summary of accounting policies and notes to unaudited consolidated
        financial statements.*




5




**IMAGENETIX,
      INC.**


**Notes
      to the Unaudited 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-QSB and do not include all of the
      information and footnotes required by accounting principles generally accepted
      in the United States of America. These statements should be read in conjunction
      with our audited consolidated financial statements and notes thereto included
      in
      Form 10-KSB for the year ended March 31, 2006.





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





**Earnings
      Per Share**





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





**Stock
      Options**





Prior
      to
      April 1, 2006, the Company applied Accounting Principles Board ("APB") Opinion
      25, "Accounting for Stock Issued to Employees," and related Interpretations
      in
      accounting for all stock option plans. Under APB Opinion 25, compensation cost
      was recognized for stock options granted to employees when the option price
      was
      less than the market price of the underlying common stock on the date of grant.





Effective
      April 1, 2006, the Company adopted the fair value recognition provisions of
      FASB Statement No. 123(R), “Share-Based Payment” ** (SFAS
      123R) *,* using
      the modified-prospective-transition method. Under that transition method,
      compensation cost recognized in 2006 includes compensation cost for all
      share-based payments granted subsequent to March 31, 2006, based on the
      grant-date fair value estimated in accordance with the provisions of SFAS
      123(R).  Through
      March 31, 2006, SFAS No. 123, "Accounting for Stock-Based Compensation," and
      SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
      Disclosure," required the Company to provide pro forma information regarding
      net
      income as if compensation cost for the Company's stock option plans had been
      determined in accordance with the fair value based method prescribed in SFAS
      No.
      123. To provide the required pro forma information, the Company estimated the
      fair value of each stock option at the grant date by using the Black-Sholes
      option-pricing model. SFAS No. 148 also provides for alternative methods of
      transition for a voluntary change to the fair value based method of accounting
      for stock-based employee compensation.




6


**IMAGENETIX,
        INC.**
 **Notes
        to the Unaudited Consolidated Financial Statements
        (Continued)**


Under
      the
      accounting provisions of SFAS No. 123, as of September 30, 2005, the Company’s
      net earnings (loss) per share would have been decreased or increased by the
      pro
      forma amounts indicated below:


Three
                  months ended
              
              Six
                  months endedSeptember
                  30, 2005
              
              September
                  30, 2005Net
                  income (loss), as reported
              
              $
              (490,677
              )
              $
              (186,666
              )Stock-based
                  employee compensation,net
                  of tax effects, included in reported net loss
              
              
              217,200
              
              
              217,200Stock-based
                  employee compensation,net
                  of tax effects
              
              
              (322,935
              )
              
              (322,935
              )Proforma
                  net income (loss)
              
              $
              (596,412
              )
              $
              (292,401
              )Net
                  income (loss) per share:Basic-
                  as reported
              
              $
              (0.05
              )
              $
              (0.02
              )Basic-
                  proforma
              
              $
              (0.06
              )
              $
              (0.03
              )Diluted-
                  as reported
              
              $
              (0.05
              )
              $
              (0.02
              )Diluted-
                  proforma
              
              $
              (0.06
              )
              $
              (0.03
              )




The
      Company applies SFAS No. 123 in valuing options granted to consultants and
      estimates the fair value of such options using the Black-Sholes option-pricing
      model. The fair value is recorded as consulting expense as services are
      provided. Options granted to consultants for which vesting is contingent based
      on future performance are measured at their then current fair value at each
      period end, until vested.





**2.**  **RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
      123R, which requires companies to recognize in the statement of operations
      all
      share-based payments to employees, including grants of employee stock options,
      based on their fair values. Accounting for share-based compensation transactions
      using the intrinsic method supplemented by pro forma disclosures will no longer
      be permissible. The new statement is effective for public entities no later
      than
      the beginning of the first fiscal year beginning after June 15, 2005. The
      Company adopted the new statement on April 1, 2006. The adoption of this new
      statement did not affect the Company's results of operations or net income
      per
      share, but may have a significant future effect as the Company will be required
      to expense the fair value of all share-based payments.





In
      May
      2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections",
      a replacement of Accounting Principles Board Opinion No. 20, "Accounting
      Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
      Statements" ("SFAS 154"). SFAS 154 changes the requirements for the accounting
      for, and reporting of, a change in accounting principle. Previously, voluntary
      changes in accounting principles were generally required to be recognized by
      way
      of a cumulative effect adjustment within net income during the period of the
      change. SFAS 154 requires retrospective application to prior periods' financial
      statements, unless it is impracticable to determine either the period-specific
      effects or the cumulative effect of the change. SFAS 154 is effective for
      accounting changes made in fiscal years beginning after December 15, 2005;
      however, the statement does not change the transition provisions of any existing
      accounting pronouncements. The Company does not believe adoption of SFAS 154
      will have a material effect on its financial position, cash flows or results
      of
      operations.





7


**IMAGENETIX,
        INC.**
 **Notes
        to the Unaudited Consolidated Financial Statements
        (Continued)**




**3.**  **ACCOUNTS
      RECEIVABLE**





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


September
                  30,
              
              March
                  31,2006
              
              2006Accounts
                  receivable - trade
              
              $
              1,086,399
              
              $
              861,198Allowance
                  for doubtful accounts
              
              
              (70,000
              )
              
              (50,000
              )Accounts
                  receivable, net
              
              $
              1,016,399
              
              $
              811,198




**4.**  **INVENTORY**





Inventory
      consists of the following:


September
                  30,
              
              March
                  31,2006
              
              2006Raw
                  materials
              
              $
              1,705,537
              
              $
              1,554,417Finished
                  products
              
              
              262,794
              
              
              168,228Boxes,
                  labels, tubes & bottles
              
              
              149,482
              
              
              215,2912,117,813
              
              
              1,937,936Reserve
                  for obsolescence
              
              
              (211,781
              )
              
              (196,468
              )$
              1,906,032
              
              $
              1,741,468


**5.**  **PROPERTY
      AND EQUIPMENT**





The
      following is a summary of equipment, at cost, less accumulated
      depreciation:


September
                  30,
              
              March
                  31,2006
              
              2006Office
                  equipment
              
              $
              40,922
              
              $
              40,922Lease-hold
                  improvements
              
              
              98,998
              
              
              87,708Leased
                  equipment
              
              
              12,341
              
              
              12,341152,261
              
              
              140,971Less
                  accumulated depreciation
              
              
              52,813
              
              
              43,397$
              99,448
              
              $
              97,574





Depreciation
      expense for the six months ended September 30, 2006 and 2005 was $9,416 and
      $11,604, respectively.





8


**IMAGENETIX,
        INC.**
 **Notes
        to the Unaudited Consolidated Financial Statements
        (Continued)**




**6.**  **OTHER
      ASSETS**





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


September
                  30,
              
              March
                  31,2006
              
              2006Trademarks
              
              $
              13,032
              
              $
              13,032Promotional
              
              
              6,250
              
              
              18,750Patent
              
              
              161,353
              
              
              161,353Deferred
                  tax asset
              
              
              345,900
              
              
              330,200526,535
              
              
              523,335Less
                  accumulated amortization
              
              
              28,760
              
              
              20,034$
              497,775
              
              $
              503,301


For
      the
      six months ended September 30, 2006 and 2005 amortization expense was $8,726
      and
      $2,120, respectively.





**7.**  **LICENSES
      PAYABLE**





In
      May
      2005, the Company entered into an agreement with EHP Products, Inc. acquiring
      a
      non-exclusive world-wide license to make, use and sell products relating to
      Cetyl Myristoleate covered under U.S. Patent No. 5,569,676. The agreement
      provides for payments of $3,000 per month from May 2005 through April 2009,
      at
      which time EHP Products, Inc. has agreed to convey ownership in the product
      to
      the Company.





As
      of
      September 30, 2006 and March 31, 2006 the following obligations were outstanding
      related to this license:


September
                  30,
              
              March
                  31,2006
              
              2006Patent
                  License and Royalty Payable
              
              $
              83,768
              
              $
              98,082Less
                  current portion
              
              
              30,397
              
              
              29,209Long
                  term license payable
              
              $
              53,371
              
              $
              68,873




**8.**  **COMMITMENTS
      AND CONTINGENCIES**





Litigation




Effective
      September 30, 2006, Imagenetix terminated its agreement with Proprietary
      Nutritionals, Inc., for marketing of its product Celadrin. TM On
      September 28, 2006, the Company received a copy of a Complaint filed by
      Proprietary Nutritionals, Inc., *Proprietary Nutritionals, Inc. V. Imagenetix, Inc., Thomas Hall and Frank
      Sajovic* ,
      No.
      06CV2091 L POR (U.S. District Court, S.D. Cal.).   The Complaint
      alleges breach of contract by Imagenetix with respect to Imagenetix’s
      termination of the agreement, tortious interference with PNI’s business
      relations and economic advantages and quantum meruit claims.  The Company
      believes the allegations lack merit and the termination was proper under the
      terms of the agreement providing for termination upon a material breach
      including failure to meet sales goals.  Imagenetix intends to vigorously
      defend the litigation and has asserted claims on behalf of the Company against
      PNI for breach of the agreement. Management believes this action will not have
      a
      material effect on the financial position of the Company.




9




**IMAGENETIX,
      INC.**


**Notes
      to the Unaudited Consolidated Financial Statements
      (Continued)**





**9.**  **CAPITAL
      STOCK**





Preferred
      Stock





The
      Company has authorized 5,000,000 shares of preferred stock, $.001 par value,
      with such rights, preferences and designations, and to be issued in such series
      as determined by the Board of Directors. No shares are issued and outstanding
      at
      September 30, 2006.





Common
      Stock





The
      Company has authorized 50,000,000 shares of common stock at $.001 par value.
      At
      September 30, 2006, the Company had 10,721,400 shares of common stock issued
      and
      outstanding.





During
      the six months ended September 30, 2005, the Company issued 222,944 shares
      of
      common stock for proceeds of $253,944. The shares were issued upon shareholders
      exercising warrants with exercise prices ranging from $1.00 to $2.00 per
      share.





Also,
      during the six months ended September 30, 2005, the Company issued 45,000 shares
      of common stock to three individuals in exchange for services they provided
      to
      the company. The services performed were valued based on the price of the common
      stock on the date of issuance, $1.95 per share or $87,750 in the aggregate.
      This
      amount was reflected as non-cash expense during the quarter ended September
      30,
      2005.





Stock
      Bonus Plan





During
      the year ended March 31, 2000, the Board of Directors of the Company adopted
      a
      stock bonus plan. The plan provides for the granting of awards of up to 724,500
      shares of common stock to officers, directors, consultants and employees. Awards
      under the plan will be granted as determined by the Board of Directors. At
      present, 499,500 shares have been granted under the plan.





Warrants





At
      September 30, 2006, there were outstanding warrants exercisable for up to
      4,107,100 shares of common stock with exercise prices ranging from $0.70 to
      $3.45 per share expiring in 2007 through 2010. There were no grants or exercises
      of warrants during the six months ended September 30, 2006.





At
      September 30, 2005, there were outstanding warrants exercisable for up to
      4,155,904 shares of common stock with exercise prices ranging from $0.70 to
      $3.45 per share expiring in 2007 through 2010.





During
      the six months ended September 30, 2005, the Company issued 222,944 shares
      of
      common stock for proceeds of $253,944. The shares were issued upon shareholders
      exercising warrants with exercise prices ranging from $1.00 to $2.00 per share.





In
      addition, during the six months ended September 30, 2005 and 2006, the Company
      extended the expiration date on warrants exercisable for up to 2,757,782 and
      165,375 shares of common stock to October 23, 2007. These warrants were issued
      in 2000 and 2001 as part of an equity unit sale. By the terms of the warrants,
      the Company was to use its best efforts to maintain a registration statement
      under which the holders could resell the common shares on the exercise of the
      warrants. Since the Company failed to maintain a timely registration statement,
      it decided to extend the expiration date of the warrants.




10




**IMAGENETIX,
      INC.**


**Notes
      to the Unaudited Consolidated Financial Statements
      (Continued)**





Due
      to
      this modification, the Company recorded a non-cash dividend of $4,698,819 and
      $31,406 for the six months ended September 30, 2005 and 2006. The Company
      estimated the fair value of the dividend at the original date of expiration
      by
      using the Black-Scholes pricing model with the following weighted average
      assumptions: for the six months ended September 30, 2005- dividend yield of
      zero
      percent; expected volatility of 90%; risk free interest rate of 3.64%; and
      expected lives of 25 months and for the six months ended September 30, 2006-
      dividend yield of zero percent; expected volatility of 71-72%; risk free
      interest rate of 4.56-4.87%; and expected lives of 13 to 18 months.





Warrants
      to purchase 1,133,657 shares at $1.00 per share, 720,000 shares at $2.00 per
      share and 125,000 shares at $1.75 per share are redeemable at $.01 per warrant,
      at the option of the Company, if there is an


effective
      registration of the securities and the closing bid or selling price of the
      Company’s common stock for 10 consecutive trading days is equal to three times
      the exercise price of the warrants.





Stock
      Option Plan




In
      August 2000 the Company adopted a Stock Option Plan, which is referred to
      as the "Plan," which provides for the grant of stock options intended to qualify
      as "incentive stock options" and "nonqualified stock options" (collectively
      "stock options") within the meaning of Section 422 of the United States
      Internal Revenue Code of 1986 (the "Code"). Stock options may be issued to
      any
      of our officers, directors, key employees or consultants.




Under
      the
      Plan, we have reserved 1.5 million shares underlying stock options for
      issuance, of which 1,129,000 options are outstanding as of September 30, 2006.
      The options have been granted to executive officers, employees and consultants
      at prices ranging from $.86 to $2.50 per share. The Plan is administered by
      the
      full Board of Directors, who determine which individuals shall receive stock
      options, the time period during which the stock options may be exercised, the
      number of shares of common stock that may be purchased under each stock option
      and the stock option price. There were no stock option grants or exercises
      during the six months ended September 30, 2006.




**10.**  **INCOME TAXES**





The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards No. 109. SFAS No. 109 requires the Company to provide
      a net
      deferred tax asset or liability equal to the expected future tax benefit or
      expense of temporary reporting differences between book and tax accounting
      and
      any available operating loss or tax credit carryforwards. The Company used
      up
      its previous federal and state tax loss carry-forwards and it will be able
      to
      carry back to previous years the entire amount of the income tax benefit for
      federal tax purposes and carry forward as a deferred tax asset the amount of
      the
      tax benefit for state tax purposes.





At
      September 30 and March 31, 2006, the total of all deferred tax assets was
      $498,600 and $424,400, respectively. There are no deferred tax liabilities
      for
      either period. The amount of and ultimate realization of the benefits from
      the
      deferred tax assets for income tax purposes is dependent, in part, upon the
      tax
      laws in effect, the Company’s future earnings, and other future events, the
      effects of which cannot be determined.





11




**IMAGENETIX,
      INC.**


**Notes
      to the Unaudited Consolidated Financial Statements
      (Continued)**





The
      temporary differences gave rise to the following deferred tax asset
      (liability):


September
                    30,
                
                March
                    31,2006
                
                2006Excess
                      of financial accountingover tax depreciation
                
                $
                200
                
                $
                6,000State
                    income tax benefits
                
                
                34,000
                
                
                (11,300
                )Allowance
                    for obsolete inventory
                
                
                84,400
                
                
                78,300Allowance
                    for bad debts
                
                
                27,900
                
                
                19,900Valuation
                    of stock options and warrants
                
                
                345,700
                
                
                324,200Vacation
                    accrual
                
                
                6,400
                
                
                7,300Net
                    deferred tax asset
                
                $
                498,600
                
                $
                424,400




The
      reconciliation of income tax from continuing operations computed at the U.S.
      federal statutory tax rate to the Company’s effective rate is as follows for the
      periods ended:




For
                  the Three Months Ended
              
              For
                  the Six Months EndedSeptember
                  30,
              
              September
                  30,2006
              
              2005
              
              2006
              
              2005Federal
                  income tax expense computed at the Federal statutory rate
              
              $
              (18,131
              )
              $
              (285,100
              )
              $
              (163,131
              )
              $
              (102,100
              )State
                  income tax expense net of Federal benefit
              
              
              (3,838
              )
              
              (50,900
              )
              
              (28,738
              )
              
              (16,600
              )Other
              
              
              175
              
              
              (12,000
              )
              
              121,354
              
              
              5,000Income
                  tax expense (benefit)
              
              $
              (21,794
              )
              $
              (348,000
              )
              $
              (70,515
              )
              $
              (113,700
              )
  12
 
  **IMAGENETIX,
            INC.**
 **Notes
            to the Unaudited Consolidated Financial Statements
            (Continued)**


The
      components of federal income tax expense from operations consisted of the
      following for the periods ended:


Three
                  Months Ended
                September
                  30,
              
              Six
                  Months Ended
                September
                  30,2006
              
              2005
              
              2006
              
              2005Current
                  income tax expense:Federal
              
              $
              (8,058
              )
              $
              (17,100
              )
              $
              (51,417
              )
              $
              188,100State
              
              
              (2,095
              )
              
              (4,900
              )
              
              (1,657
              )
              
              53,600Net
                  current tax expense
              
              $
              (10,153
              )
              $
              (22,000
              )
              $
              (53,074
              )
              $
              241,700Deferred
                  tax expense (benefit) resulted from:Excess
                  of financial accounting overtax
                  depreciation
              
              $
              375
              
              $
              (300
              )
              $
              5,775
              
              $
              (1,200
              )State
                  income tax benefits
              
              
              (125
              )
              
              -
              
              
              11,375
              
              
              -Other
              
              
              17
              
              
              (5,600
              )
              
              917
              
              
              (5,200
              )Valuation
                  of stock options and warrants
              
              
              (10,743
              )
              
              (302,800
              )
              
              (21,443
              )
              
              (302,800
              )Allowance
                  for obsolete inventory
              
              
              6,801
              
              
              (5,300
              )
              
              (6,099
              )
              
              (45,000
              )Allowance
                  for bad debts
              
              
              (7,966
              )
              
              (12,000
              )
              
              (7,966
              )
              
              (1,200
              )Net
                  deferred tax benefit
              
              $
              (11,641
              )
              $
              (326,000
              )
              $
              (17,441
              )
              $
              (355,400
              )Net
              
              $
              (21,794
              )
              $
              (348,000
              )
              $
              (70,515
              )
              $
              (113,700
              )




Deferred
      income tax expense results primarily from the reversal of temporary timing
      differences between tax and financial statement income.





13




**IMAGENETIX,
        INC.**
 **Notes
        to the Unaudited Consolidated Financial Statements
        (Continued)**


**11.**  **EARNINGS
      PER SHARE**





The
      following data shows the amounts used in computing earnings per share of common
      stock for the period presented:


For
                  the Three Months Ended
                September
                    30,
              
              For
                    the Six Months Ended
                  September
                    30,2006
              
              2005
              
              2006
              
              2005Income
                      (loss) available to common shareholders
                      (Numerator)
              
              $
              (31,446
              )
              $
              (490,677
              )
              $
              (409,283
              )
              $
              (186,666
              )Weighted
                      average number of common shares outstanding used in basic income
                      per share
                      during the period (Denominator)
              
              
              10,721,400
              
              
              10,601,412
              
              
              10,721,400
              
              
              10,530,993Weighted
                      average number of common shares outstanding used in diluted
                      income per
                      share during the period (Denominator)
              
              
              10,721,400
              
              
              10,601,412
              
              
              10,721,400
              
              
              10,530,993





At
      September 30, 2006, the Company had warrants to purchase 4,107,100 shares of
      common stock at prices ranging from $0.70 to $3.45 per share and stock options
      to purchase 1,129,000 shares of common stock at prices ranging from $0.86 to
      $2.50 that were not included in the computation of earnings per share because
      their effects are anti-dilutive due to the Company reporting losses for the
      three and six months ended September 30, 2006.





At
      September 30, 2005, the Company had warrants to purchase 50,000 shares of common
      stock at prices ranging from $2.78 to $3.45 per share that were not included
      in
      the computation of earnings per share because their effects are anti-dilutive
      due to the exercise price being higher than the average market price. For the
      three and six months ended September 30, 2005, the basic and dilutive weighted
      average number of common shares outstanding were the same because the effects
      are anti-dilutive due to the net loss for each of the periods.




14


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





THE
      FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR
      FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
      CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY
      OF
      FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "RISK FACTORS."
      SEE ALSO OUR ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED MARCH 31,
      2006.




**Overview**




We
      develop, formulate and market on a private label basis over-the-counter,
      natural-based nutritional supplements and skin care products. Our products
      are
      proprietary, often supported by scientific studies which we request and are
      offered through multiple channels of distribution, including direct marketing
      companies, also known as network marketing or multi-level marketing companies,
      and chain store retailers. Our primary product is Celadrin® which we offer as a
      part of product formulation which we sell under our own brand name, Inflame
      Away. We also offer Celadrin® as an ingredient which wholesale customers may use
      in their own products.





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





We
      have
      developed and sold over 60 products and formulations to businesses and
      organizations that market these products through multiple channels of
      distribution, including direct marketing companies, mass marketing companies,
      medical, health and nutritional professionals, medical newsletters and direct
      response radio and television. We have also begun to offer Celadrin® products to
      mass market retailers under our own brand name, Inflame Away.





Management's
      discussion and analysis or plan of operation is based upon the Company's
      financial statements. These statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America. These
      principles require management to make certain estimates, judgments and
      assumptions that affect the reported amounts of assets, liabilities, revenues
      and expenses, and related disclosure of contingent assets and liabilities.
      On an
      on-going basis, we evaluate our estimates based on historical experience and
      various other assumptions that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions .





**Critical
      Accounting Policies and Estimates**





We
      have
      identified four accounting principles that we believe are key to an
      understanding of our financial statements. These important accounting policies
      require management's most difficult, subjective judgments .





*1.*  *Accounts receivable.*




Accounts
      receivable are carried at the expected net realizable value. The allowance
      for
      doubtful accounts is based on management’s assessment of the collectibility of
      specific customer accounts and the aging of the accounts receivable. If there
      were a deterioration of a major customer’s creditworthiness, or actual defaults
      were higher than historical experience, our estimates of the recoverability
      of
      amounts due to us could be overstated, which could have a negative impact on
      operations.





*2.
      Inventory*




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




15





*3.
      Revenue Recognition*




Revenue
      is recognized when the product is shipped. The Company evaluates whether an
      allowance for estimated returns is required based on historical returns. The
      Company has not had significant returns and, accordingly, has not established
      an
      estimated allowance for returns at September 30, 2006.





*4.
      Income Taxes*




The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards No. 109, “Accounting for Income Taxes.” This statement
      requires an asset and liability approach for accounting for income
      taxes.





**Results
      of Operations**





*Six
      Months Ended September 30, 2006 Compared to Six Months Ended September 30,
      2005*


Six
                  Months Ended
              
              Increase9/30/06
              
              9/30/05
              
              (Decrease)
              
              %Statements
                  of Operations:Net
                  sales
              
              $
              2,264,586
              
              $
              4,886,040
              
              $
              (2,621,454
              )
              
              -53.7
              %Cost
                  of goods sold
              
              
              1,173,670
              
              
              2,607,343
              
              
              (1,433,673
              )
              
              -55.0
              %%
                  of net sales
              
              
              52
              %
              
              53
              %
              
              -2
              %
              
              -2.9
              %Gross
                  profit
              
              
              1,090,916
              
              
              2,278,697
              
              
              (1,187,781
              )
              
              -52.1
              %%
                  of net sales
              
              
              48
              %
              
              47
              %
              
              2
              %
              
              3.3
              %Operating
                  expensesGeneral
                  and administrative
              
              
              550,898
              
              
              1,660,273
              
              
              (1,109,375
              )
              
              -66.8
              %Payroll
                  expense
              
              
              365,725
              
              
              450,076
              
              
              (84,351
              )
              
              -18.7
              %Consulting
                  expense
              
              
              667,393
              
              
              469,199
              
              
              198,194
              
              
              42.2
              %Total
                  operating expenses
              
              
              1,584,016
              
              
              2,579,548
              
              
              (995,532
              )
              
              -38.6
              %Interest
                  expense
              
              
              (3,687
              )
              
              (17,532
              )
              
              (13,845
              )
              
              -79.0
              %Other
                  income
              
              
              16,989
              
              
              18,017
              
              
              (1,028
              )
              
              NMProvision
                  for (benefit from) taxes
              
              
              (70,515
              )
              
              (113,700
              )
              
              (43,185
              )
              
              -38.0
              %Net
                  income (loss)
              
              
              (409,283
              )
              
              (186,666
              )
              
              (222,617
              )
              
              119.3
              %Net
                  income (loss) per share basic
              
              
              (0.04
              )
              
              (0.02
              )
              
              (0.02
              )
              
              100.0
              %Net
                  income (loss) per share diluted
              
              
              (0.04
              )
              
              (0.02
              )
              
              (0.02
              )
              
              100.0
              %


Net
      Sales




Net
      sales
      for the six months ended September 30, 2006 decreased $2,621,454, 53.7%, to
      $2,264,586 compared to $4,886,040 for the six months ended September 30, 2005.
      The primary reason for the sales decrease was that, during the six months ended
      September 30, 2005, sales to a single distributor of Celadrin â as an
      ingredient and sales of our bulk topical cream product containing
      Celadrin â did not
      repeat during the six months ended September 30, 2006. During the last six
      months, we started to address this reduction in sales by embarking on a direct
      mass market strategy with our own product, Inflame Away, that will be identified
      to Celadrin â as its
      marquee ingredient. The strategy consists of a nationwide launch supported
      by a
      commensurate advertising campaign. Although we anticipate our third fiscal
      quarter, which will end December 31, 2006, to continue to reflect the slow
      down
      in distributor sales, we do anticipate, if the new marketing program begins
      to
      successfully penetrate the market, that the Inflame Away product launch will
      result in improved sales during the last quarter of our current fiscal year
      or
      the beginning of our next fiscal year.




Cost
      of Goods Sold




Cost
      of
      goods sold as a percentage of net sales remained stable at 47-48% for each
      of
      the reporting periods.. We anticipate the cost of goods sold as a percentage
      of
      net sales will decrease proportionately to the increase in sales of Inflame
      Away
      to the mass markets.




16




General
      and Administrative




General
      and administrative expenses decreased by $1,109,375, a 66.8% decrease, to
      $550,898 for the six months ended September 30, 2006 from $1,660,273 for the
      six
      monts ended September 30, 2005. The primary reasons for the decrease were during
      the six months ended September 30, 2005, approximately $442,000 in commissions
      associated with a media campaign to brand Celadrin â ,
      approximately $282,000 charged to marketing expenses related to the issuance
      of
      stock and warrants to several individuals who are marketing Celadrin â ,
      and
      approximately $433,000 non-cash expense as a result of changing the terms on
      stock options were not repeated in the six months ended September 30, 2006.
      We
      anticipate future general and administrative expense to increase as we incur
      additional costs as a result of our introduction of the Inflame Away
      product.




Payroll
      Expense




Payroll
      expense decreased to $365,725 for the six months ended September 30, 2006,
      a
      decrease of 18.7% or $84,351, compared to $450,076 for the six months ended
      September 30, 2005. This decrease was a result of approximately $109,000
      non-cash expense as a result of changing the terms on stock options during
      the
      six months ended September 30, 2005 was not repeated during the current six
      months offset by an increase in payroll during the current six months. We
      anticipate an increase in future payroll expense as a result of our introduction
      of the Inflame Away product.




Consulting
      Expenses




Consulting
      expenses increased to $667,393 for the six months ended September 30, 2006,
      an
      increase of 42.2% or $198,194, compared to $469,199 for the six months ended
      September 30, 2005. This increase was a result of approximately $182,000 related
      to preparing for the introduction of Inflame Away. We anticipate additional
      increases in consulting expenses as a result of our introduction of the Inflame
      Away product.




Provision
      for Income Taxes




As
      a
      result of the loss for the six months ended September 30, 2006, an income tax
      benefit of $70,515 was recognized during the current six months compared to
      $113,700 of tax benefit being recognized during the six months ended September
      30, 2005.




*Three
      Months Ended September 30, 2006 Compared to Three Months Ended September 30,
      2005*


Three
                  Months Ended
              
              Increase9/30/06
              
              9/30/05
              
              (Decrease)
              
              %Statements
                  of Operations:Net
                  sales
              
              $
              1,333,016
              
              $
              2,016,295
              
              $
              (683,279
              )
              
              -33.9
              %Cost
                  of goods sold
              
              
              669,870
              
              
              1,152,244
              
              
              (482,374
              )
              
              -41.9
              %%
                  of net sales
              
              
              50
              %
              
              57
              %
              
              -7
              %
              
              -12.1
              %Gross
                  profit
              
              
              663,146
              
              
              864,051
              
              
              (200,905
              )
              
              -23.3
              %%
                  of net sales
              
              
              50
              %
              
              43
              %
              
              7
              %
              
              16.1
              %Operating
                  expensesGeneral
                  and administrative
              
              
              172,627
              
              
              1,227,156
              
              
              (1,054,529
              )
              
              -85.9
              %Payroll
                  expense
              
              
              205,242
              
              
              272,344
              
              
              (67,102
              )
              
              -24.6
              %Consulting
                  expense
              
              
              343,844
              
              
              207,782
              
              
              136,062
              
              
              65.5
              %Total
                  operating expenses
              
              
              721,713
              
              
              1,707,282
              
              
              (985,569
              )
              
              -57.7
              %Interest
                  expense
              
              
              (1,772
              )
              
              (4,551
              )
              
              (2,779
              )
              
              -61.1
              %Other
                  income
              
              
              7,099
              
              
              9,105
              
              
              (2,006
              )
              
              NMProvision
                  for (benefit from) taxes
              
              
              (21,794
              )
              
              (348,000
              )
              
              (326,206
              )
              
              -93.7
              %Net
                  income (loss)
              
              
              (31,446
              )
              
              (490,677
              )
              
              459,231
              
              
              -93.6
              %Net
                  income (loss) per share basic
              
              
              -
              
              
              (0.05
              )
              
              0.05
              
              
              -100.0
              %Net
                  income (loss) per share diluted
              
              
              -
              
              
              (0.05
              )
              
              0.05
              
              
              -100.0
              %




17




Net
      Sales




Net
      sales
      for the quarter ended September 30, 2006 decreased $683,279, 33.9%, to
      $1,333,016 compared to $2,016,295 for the quarter ended September 30, 2005.
      The
      primary reason for the sales decrease was that, during the quarter ended
      September 30, 2005, sales to a single distributor of Celadrin â as an
      ingredient and sales of our bulk topical cream product containing
      Celadrin â did not
      repeat during the quarter ended September 30, 2006. During the last six months,
      we started to address this reduction in sales by embarking on a direct mass
      market strategy with our own product, Inflame Away, that will be identified
      to
      Celadrin â as its
      marquee ingredient. The strategy consists of a nationwide launch supported
      by a
      commensurate advertising campaign. Although we anticipate our third fiscal
      quarter, which will end December 31, 2006, to continue to reflect the slow
      down
      in distributor sales, we do anticipate, if the new marketing program begins
      to
      successfully penetrate the market, that the Inflame Away product launch will
      result in improved sales during the last quarter of our current fiscal year
      or
      the beginning of our next fiscal year.




Cost
      of Goods Sold




Cost
      of
      goods sold as a percentage of net sales decreased from 57% for the quarter
      ended
      September 30, 2005 to 50% for the quarter ended September 30, 2006. This
      decrease was primarily due to the lower cost of goods sold associated with
      ingredient sales compared to private label finished goods. We anticipate the
      cost of goods sold as a percentage of net sales will decrease proportionately
      to
      the increase in sales of Inflame Away to the mass markets.




General
      and Administrative




General
      and administrative expenses decreased by $1,054,529, an 85.9% decrease, to
      $172,627 for the quarter ended September 30, 2006 from $1,227,156 for the
      quarter ended September 30, 2005. The primary reasons for the decrease were
      during the quarter ended September 30, 2005, approximately $249,000 in
      commissions associated with a media campaign to brand Celadrin â ,
      approximately $268,000 charged to marketing expenses related to the issuance
      of
      stock and warrants to several individuals who are marketing Celadrin â ,
      and
      approximately $433,000 non-cash expense as a result of changing the terms on
      stock options were not repeated in the quarter ended September 30, 2006. We
      anticipate future general and administrative expense to increase as we incur
      additional costs as a result of our introduction of the Inflame Away
      product.




Payroll
      Expense




Payroll
      expense decreased to $205,242 for the quarter ended September 30, 2006, a
      decrease of 24.6% or $67,102, compared to $272,344 for the quarter ended
      September 30, 2005. This decrease was a result of approximately $109,000
      non-cash expense as a result of changing the terms on stock options during
      the
      quarter ended September 30, 2005 was not repeated during the current quarter
      offset by an increase in payroll during the current quarter.. We anticipate
      an
      increase in future payroll expense as a result of our introduction of the
      Inflame Away product.




Consulting
      Expenses




Consulting
      expenses increased to $343,844 for the quarter ended September 30, 2006, an
      increase of 65.5% or $136,062, compared to $207,782 for the quarter ended
      September 30, 2005. This increase was a result of approximately $112,000 related
      to preparing for the introduction of Inflame Away. We anticipate additional
      increases in consulting expenses as a result of our introduction of the Inflame
      Away product.




Provision
      for Income Taxes




As
      a
      result of the loss for the quarter ended September 30, 2006, an income tax
      benefit of $21,794 was recognized during the current quarter compared to
      $348,000 of tax benefit being recognized during the quarter ended September
      30,
      2005.




18




**Capital
      Resources**




Working
        Capital
  September
                  30, 2006
              
              March
                  31, 2006
              
              Increase (Decrease)Current
                  assets
              
              $
              4,792,496
              
              $
              5,293,199
              
              $
              (500,703
              )Current
                  liabilities
              
              
              790,534
              
              
              870,104
              
              
              (79,570
              )Working
                  capital
              
              $
              4,001,962
              
              $
              4,423,095
              
              $
              (421,133
              )Long-term
                  debt
              
              $
              53,371
              
              $
              68,873
              
              $
              (15,502
              )Stockholders'
                  equity
              
              $
              4,545,814
              
              $
              4,955,097
              
              $
              (409,283
              )
  Statements
          of Cash Flows Select Information
 Six
                  Months Ended September 30,
              
              Increase2006
              
              2005
              
              (Decrease)Net
                  cash provided by (used in):Operating
                  activities
              
              
              
              
              $
              (742,571
              )
              $
              168,264
              
              $
              (910,835
              )Investing
                  activities
              
              
              
              
              $
              (11,290
              )
              $
              (109,654
              )
              $
              98,364Financing
                  activities
              
              
              
              
              $
              (14,314
              )
              $
              78,944
              
              $
              (93,258
              )
  Balance
                  Sheet Select InformationSeptember
                  30, 2006
              
              March
                  31, 2006
              
              Increase
                  (Decrease)Cash
                  and cash equivalients
              
              $
              1,039,841
              
              $
              1,808,016
              
              $
              (768,175
              )Accounts
                  receivable, net
              
              $
              1,016,399
              
              $
              811,198
              
              $
              205,201Inventory,
                  net
              
              $
              1,906,032
              
              $
              1,741,468
              
              $
              164,564Accounts
                  payable and accrued expenses
              
              $
              666,542
              
              $
              792,410
              
              $
              (125,868
              )




**Liquidity**




We
      have
      historically financed our operations internally and through debt and equity
      financings. At September 30, 2006, we had cash holdings of $1,039,841, a
      decrease of $768,175 compared to March 31, 2006. Our net working capital
      position at September 30, 2006, was $4,001,962 compared to $4,423,095 as of
      March 31, 2006. We have a single source and exclusive supplier arrangement
      with
      our Celadrin â supplier. We use Celadrin â in
      approximately 80% of our products representing approximately 87% of our sales
      for the year ended March 31, 2006. The interruption of raw material from this
      supplier would adversely affect our business and financial condition. Although
      our client base is growing, the loss of any of our four largest customers would
      have a material adverse effect on our revenue and earnings. We are embarking
      on
      a direct mass market strategy with our own product, Inflame Away. A significant
      portion of our working capital may be needed to implement this strategy. We
      believe that our cash position is sufficient to implement the mass market
      strategy and fund our operating activities for at least the next 12 months.





**New
      Accounting Pronouncements**





In
      December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
      123R, which requires companies to recognize in the statement of operations
      all
      share-based payments to employees, including grants of employee stock options,
      based on their fair values. Accounting for share-based compensation transactions
      using the intrinsic method supplemented by pro forma disclosures will no longer
      be permissible. The new statement is effective for public entities no later
      than
      the beginning of the first fiscal year beginning after June 15, 2005. The
      Company adopted the new statement on April 1, 2006. The adoption of this new
      statement did not affect the Company's results of operations or net income
      per
      share, but may have a significant future effect as the Company will be required
      to expense the fair value of all share-based payments.




19





In
      May
      2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections",
      a replacement of Accounting Principles Board Opinion No. 20, "Accounting
      Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
      Statements" ("SFAS 154"). SFAS 154 changes the requirements for the accounting
      for, and reporting of, a change in accounting principle. Previously, voluntary
      changes in accounting principles were generally required to be recognized by
      way
      of a cumulative effect adjustment within net income during the period of the
      change. SFAS 154 requires retrospective application to prior periods' financial
      statements, unless it is impracticable to determine either the period-specific
      effects or the cumulative effect of the change. SFAS 154 is effective for
      accounting changes made in fiscal years beginning after December 15, 2005;
      however, the statement does not change the transition provisions of any existing
      accounting pronouncements. The Company does not believe adoption of SFAS 154
      will have a material effect on its financial position, cash flows or results
      of
      operations.




**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.





**We
      Are Currently Involved In A Legal Dispute Which Could Impact Our Future Results
      Of Operations And Working Capital**





We
      are
      being sued by a previous distributor of Celadrin®. We believe that the
      distributor’s claim lacks merit, a claim which we dispute and which we intend to
      defend vigorously. Should we not prevail in this dispute, the amount payable
      to
      the distributor could affect our business and operations. In addition, if we
      are
      required to litigate this matter, or otherwise settle the matter outside of
      court, the cost of resolving this matter may impact our future reported results
      of operations and consume a significant amount of cash.





**There
      Is Only One Supplier for Celadrin®. If We Are Unable to Purchase Celadrin® from
      This Supplier, Our Business Would Be Harmed.**





There
      is
      only one supplier for Celadrin®, which we use in approximately 67% of our
      products and which represented approximately 84% of our sales for the year
      ended
      March 31, 2006. We rely upon Celadrin® to expand our product lines and revenue
      in the future. If our Celadrin® supplier goes out of business or elects for any
      reason not to supply us with Celadrin®, we would have to find another Celadrin®
supplier or suffer a significant reduction in our revenue.




**We
      Rely upon a Limited Number of Customers the Loss of Which Would Reduce Our
      Revenue and Any Earnings.**





Our
      four
      largest customers accounted for 22%, 16%, 13% and 11% of our sales for the
      year
      ended March 31, 2006. The loss of any of these customers would significantly
      reduce our revenue and adversely affect our cash flow and earnings, if any.





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





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




20





**Product
      Liability Claims Against Us Could Be Costly.**





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





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





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





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





We
      are
      subject to laws and regulations which cover:




·
              theformulation, manufacturing, packaging, labeling, distribution,
                  importation, sale and storage ofour
                  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.





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





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





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





We
      have
      10,721,400 common shares outstanding, all of which are freely tradeable or
      saleable under Rule 144. We also have outstanding common stock warrants and
      stock options exercisable into up to 5,236,100 shares of common stock which
      could become free trading if exercised. If our stockholders sell substantial
      amounts of our common stock, the market price of our common stock could
      decrease.





21




**There
      is a Limited but Potentially Volatile Trading Market in Our Common Stock, Which
      May Adversely Affect Our Stock Price.**





Our
      common stock trades on the Electronic Bulletin Board. The Bulletin Board tends
      to be highly illiquid, in part because there is no national quotation system
      by
      which potential investors can track the market price of shares except through
      information received or generated by a limited number of broker-dealers that
      make a market in particular stocks. There is a greater chance of market
      volatility for securities that trade on the Bulletin Board as opposed to a
      national exchange or quotation system. This volatility may be caused by a
      variety of factors, including:





·  
The lack of
      readily available price quotations;





·The
      absence of consistent
      administrative supervision of "bid" and "ask" quotations;





· Lower
      trading volume; and





· Market
      conditions.





There
      could be wide fluctuations in the market price of our common stock. These
      fluctuations may have an extremely negative effect on the market price of our
      securities and may prevent an investor from obtaining a market price equal
      to
      his purchase price when he attempts to sell our securities in the open market.
      In these situations, the investor may be required to either sell our securities
      at a market price which is lower than his purchase price, or to hold our
      securities for a longer period of time than he planned.





**Because
      Our Common Stock May Be Classified as "Penny Stock," Trading in it Could Be
      Limited, and Our Stock Price Could Decline.**





In
      the
      future, our common stock may fall under the definition of "penny stock" if
      our
      net tangible assets decline below $2,500,000. In such event, trading in our
      common stock would be limited because broker-dealers will be required to provide
      their customers with disclosure documents prior to allowing them to participate
      in transactions involving our common stock. These disclosure requirements are
      burdensome to broker-dealers and may discourage them from allowing their
      customers to participate in transactions involving our common stock.





"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, determinethat
                transactions in penny stocks are suitable for such customer and deliver
                a
                written statement tosuch
                customer setting forth the basis for this determination.




**ITEM
      3.     CONTROLS AND PROCEDURES.**




(a)
            Evaluation
                of disclosure controls and procedures. Our Chief Executive Officer
                and
                Principal Financial Officer, after evaluating the effectiveness of
                our
                "disclosure controls and procedures" (as defined in the Securities
                Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end
                of the
                period covered by this Quarterly Report on Form 10-QSB (the "Evaluation
                Date"), have concluded that as of the Evaluation Date, our disclosure
                controls and procedures are effective to provide reasonable assurance
                that
                information we are required to disclose in reports that we file or
                submit
                under the Exchange Act is recorded, processed, summarized and reported
                within the time periods specified in the Securities and Exchange
                Commission rules and forms, and that such information is accumulated
                and
                communicated to our management, including our Chief Executive Officer
                and
                Principal Financial Officer, as appropriate, to allow timely decisions
                regarding required disclosure.




22




(b)
            Changes
                in internal control over financial reporting. There were no significant
                changes in our internal control over financial reporting during our
                most
                recent fiscal quarter that materially affected, or were reasonably
                likely
                to materially affect, our internal control over financial
                reporting.




**PART
      II.**  **OTHER
      INFORMATION**




**ITEM
      1.**  **LEGAL
      PROCEEDINGS.**




Effective
      September 30, 2006, Imagenetix terminated its agreement with Proprietary
      Nutritionals, Inc., for marketing of its product Celadrin. TM On
      September 28, 2006, the Company received a copy of a Complaint filed by
      Proprietary Nutritionals, Inc., *Proprietary Nutritionals, Inc. V. Imagenetix, Inc., Thomas Hall and Frank
      Sajovic* ,
      No.
      06CV2091 L POR (U.S. District Court, S.D. Cal.).   The Complaint
      alleges breach of contract by Imagenetix with respect to Imagenetix’s
      termination of the agreement, tortious interference with PNI’s business
      relations and economic advantages and quantum meruit claims.  The Company
      believes the allegations lack merit and the termination was proper under the
      terms of the agreement providing for termination upon a material breach
      including failure to meet sales goals.  Imagenetix intends to vigorously
      defend the litigation and has asserted claims on behalf of the Company against
      PNI for breach of the agreement. Management believes this action will not have
      a
      material effect on the financial position of the Company.




**ITEM
      6.**  **EXHIBITS.**




**Exhibit
                No.**
            
            **Title**31.1
            
            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





23




**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 corporationDate:
              November 7, 2006
            By:
            /s/
              WILLIAM P. SPENCERWilliam
                P. Spencer
              Chief
                Executive Officer(Principal
                Executive Officer and duly authorized
              to
                sign on behalf of the Registrant)