**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
  **FORM
        10-QSB/A**
  **Amendment
        No. 1**
  (Mark
        One)
  x**** Quarterly
        Report Under Section 13 Or 15(d) Of The Securities Exchange Act Of
        1934
  For
        quarterly period ended **December
        31, 2005**
  o**** Transition
        Report Under Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
  For
        the
        transition period from _____ to _____
  **COMMISSION
        FILE NUMBER** **033-24138-D**
  **IMAGENETIX,
        INC.**
 (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
        o**
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). **Yes**  **o**  **No** **x**
  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 June 28, 2006
  Transitional
        Small Business Disclosure Format (Check one): Yes o  **No** **x**
  
  **Imagenetix,
        Inc.**
 **INDEX**
 
 **Page**PART
                  I.
              FINANCIAL
                  INFORMATIONItem
                  1.
              Financial
                  Statements:
              3Consolidated
                  Balance Sheets as of December 31, 2005 (unaudited)
                and
                  March 31, 2005
              3Consolidated
                  Statements of Operation for the three and nine months
                ended
                  December 31, 2005 and 2004 (unaudited)
              4Consolidated
                  Statements of Cash Flows for the nine
                months
                  ended December 31, 2005 and 2004 (unaudited)
              5Notes
                  to Unaudited Consolidated Financial Statements
              6Item
                  2.
              Management’s
                  Discussion and Analysis or Plan of Operation
              16Item
                  3.
              Controls
                  and Procedures
              25PART
                  II.
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              25Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              25Item
                  3.
              Defaults
                  upon Senior Securities
              *Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              *Item
                  5.
              Other
                  Information
              *Item
                  6.
              Exhibits
              25SIGNATURES
 
 *  No
        information provided due to inapplicability of the item.
  2
  **PART
        I - FINANCIAL INFORMATION**
  **Item
        1. Financial Statements**
  **Imagenetix,
        Inc.**
 **Consolidated
        Balance Sheets**
 
 **December
                  31,**
                **2005**
              ****
              **March
                  31,**
                **2005****(Unaudited)****(Restated)**ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              2,196,200
              
              $
              2,031,486Accounts
                  receivable, net
              
              
              1,000,830
              
              
              2,064,089Inventory
              
              
              1,358,091
              
              
              1,382,495Prepaid
                  expenses
              
              
              551,793
              
              
              26,700Income
                  tax receivable
              
              
              68,382
              
              
              -Deferred
                  tax asset
              
              
              84,400
              
              
              41,700Total
                  current assets
              
              
              5,259,696
              
              
              5,546,470Property
                  and equipment, net
              
              
              26,313
              
              
              42,987Other
                  assets
              
              
              642,694
              
              
              183,054$
              5,928,703
              
              $
              5,772,511LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  liabilities:Accounts
                  payable
              
              $
              402,797
              
              $
              841,801Accrued
                  liabilities
              
              
              34,322
              
              
              20,245Customer
                  deposits
              
              
              66,185
              
              
              75,391Income
                  tax payable
              
              
              -
              
              
              437,784Line
                  of credit with related party
              
              
              -
              
              
              225,000Total
                  current liabilities
              
              
              503,304
              
              
              1,600,221Stockholders'
                  equity:Preferred
                  stock, $.001 par value; 5,000,000 sharesauthorized:
                  none outstanding
              
              
              -
              
              
              -Common
                  stock, $.001 par value; 50,000,000 sharesauthorized:
                  10,687,344 and 10,404,652 issued andoutstanding
                  at December 31 and March 31, 2005, respectively
              
              
              10,688
              
              
              10,405Capital
                  in excess of par value
              
              
              10,308,372
              
              
              4,267,707Accumulated
                  deficit
              
              
              (4,893,661
              )
              
              (105,822
              )Total
                  stockholders' equity
              
              
              5,425,399
              
              
              4,172,290$
              5,928,703
              
              $
              5,772,511
  *See
          accompanying summary of accounting policies and notes to unaudited consolidated
          financial statements.*
 3
  **Imagenetix,
        Inc.**
 **Consolidated
        Statements of Operation**
 (Unaudited)
 
 **Three
                  Months Ended**
                **December
                  31,**
              ****
              **Nine
                  Months Ended**
                **December
                  31,****2005**
              ****
              **2004**
              ****
              **2005**
              ****
              **2004****(Restated)**
              
              
              
              **(Restated)**Net
                  sales
              
              $
              1,742,979
              
              $
              2,739,743
              
              $
              6,629,019
              
              $
              4,960,052Cost
                  of sales
              
              
              834,412
              
              
              1,602,427
              
              
              3,403,148
              
              
              2,785,822Gross
                  profit
              
              
              908,567
              
              
              1,137,316
              
              
              3,225,871
              
              
              2,174,230Operating
                  expenses:General
                  and administrative
              
              
              438,076
              
              
              301,788
              
              
              2,246,156
              
              
              649,110Payroll
                  expense
              
              
              171,543
              
              
              147,895
              
              
              512,419
              
              
              351,494Consulting
                  expense
              
              
              234,066
              
              
              88,917
              
              
              703,265
              
              
              242,537Operating
                  expenses
              
              
              843,685
              
              
              538,600
              
              
              3,461,840
              
              
              1,243,141Operating
                  (loss) income
              
              
              64,882
              
              
              598,716
              
              
              (235,969
              )
              
              931,089Other
                  (expense) income:Other
                  income
              
              
              7,964
              
              
              1
              
              
              25,981
              
              
              3Interest
                  expense
              
              
              -
              
              
              (7,284
              )
              
              (17,532
              )
              
              (21,241
              )Other
                  income (expense)
              
              
              7,964
              
              
              (7,283
              )
              
              8,449
              
              
              (21,238
              )(Loss)
                  income before income taxes
              
              
              72,846
              
              
              591,433
              
              
              (227,520
              )
              
              909,851Provision
                  for (benefits from) taxes
              
              
              (24,800
              )
              
              244,583
              
              
              (138,500
              )
              
              212,128Net
                  income (loss)
              
              $
              97,646
              
              $
              346,850
              
              $
              (89,020
              )
              $
              697,723Basic
                  income (loss) per share
              
              $
              0.01
              
              $
              0.04
              
              $
              (0.01
              )
              $
              0.08Diluted
                  income (loss) per share
              
              $
              0.01
              
              $
              0.04
              
              $
              (0.01
              )
              $
              0.07
  *See
        accompanying summary of accounting policies and notes to unaudited consolidated
        financial statements.*
  4
 **Imagenetix,
          Inc.**
 **Consolidated
          Statements of Cash Flows**
 (Unaudited)
 
 **Nine
                    Months Ended**
                  **December
                    31,****2005**
                
                **2004****(Restated)****Operating
                    activities:**Net
                    (loss) income
                
                **$**
                **(89,020**
                **)**
                $
                697,723Adjustments
                    to reconcile net (loss) incometo
                    cash provided by operating activities:Amortization
                    and depreciation
                
                
                **40,854**
                
                
                28,928Provision
                    for doubtful accounts, net
                
                
                **12,930**
                
                
                47,764Provision
                    for inventory obsolescence
                
                
                **78,225**
                
                
                20,303Non
                    cash expense related to warrants and stock options
                
                
                **975,687**
                
                
                -Stock
                    issued for services
                
                
                **87,750**
                
                
                -Change
                    in deferred taxes
                
                
                **(306,400**
                **)**
                
                (133,630
                )Changes
                    in assets and liabilities:(Increase)
                    decrease in accounts receivable
                
                
                **1,050,329**
                
                
                (333,800
                )(Increase)
                    decrease in inventory
                
                
                **(53,821**
                **)**
                
                (200,327
                )(Increase)
                    decrease in other assets
                
                
                **(644,847**
                **)**
                
                (89,700
                )Increase
                    (decrease) in accounts payable
                
                
                **(470,606**
                **)**
                
                90,444Increase
                    (decrease) in accrued liabilities
                
                
                **45,678**
                
                
                (31,487
                )Increase
                    (decrease) in customer deposits
                
                
                **(9,206**
                **)**
                
                (46,609
                )Increase
                    (decrease) in income taxes payable
                
                
                **(437,784**
                **)**
                
                345,757Net
                    cash provided by operating activities
                
                
                **279,769**
                
                
                395,366**Investing
                    activities:**Property
                    and equipment
                
                
                **(21,000**
                **)**
                
                -Trademarks,
                    patents and infomercial
                
                
                **(147,747**
                **)**
                
                (74,760
                )Net
                    cash used in investing activities
                
                
                **(168,747**
                **)**
                
                (74,760
                )**Financing
                    activities:**Payments
                    on notes payable to related party
                
                
                **(225,000**
                **)**
                
                -Proceeds
                    from exercise of stock options and warrants
                
                
                **278,692**
                
                
                -Net
                    cash provided by financing activities
                
                
                **53,692**
                
                
                -**Net
                    increase in cash**
                
                
                **164,714**
                
                
                320,606**Cash**,
                    beginning of period
                
                
                **2,031,486**
                
                
                454,377**Cash,**end of period
                
                **$**
                **2,196,200**
                
                $
                774,983**Supplemental
                    Disclosure of Cash Flow Information:**Cash
                    paid during the period for:Interest
                
                **$**
                **17,532**
                
                $
                20,250Income
                    taxes
                
                **$**
                **734,066**
                
                $
                -**Non
                    Cash Investing and Financing Activities:**Non
                    cash dividend issued to certain warrant holders
                
                **$**
                **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, 2005.
 
 In
          the
          opinion of management, the interim consolidated financial statements reflect
          all
          adjustments of a normal recurring nature necessary for a fair statement
          of the
          results for interim periods. Operating results for the three and nine month
          periods are not necessarily indicative of the results that may be expected
          for
          the year ending March 31, 2006.
 
 **Restatement**
 
 Subsequent
          to the filing of our Form 10QSB for the quarter ended December 31, 2005,
          we
          determined that the extension of the expiration date on warrants to certain
          shareholders should have been accounted for as a dividend to the warrant
          holders
          rather than as an expense. In addition, we changed the valuation date on
          the
          extension of the expiration date on certain stock options. The effect of
          the
          restatement is as follows:
 
 Statement
          of Operations for the nine months ended December 31, 2005
 
 **As
                    Reported**
                ****
                **As
                    Adjusted**
                ****
                **Effect
                    of Change**Revenues
                
                $
                6,629,019
                
                $
                6,629,019
                
                $
                -Expenses
                
                
                11,302,575
                
                
                6,718,039
                
                
                (4,584,536
                )Net
                    loss
                
                $
                (4,673,556
                )
                $
                (89,020
                )
                $
                4,584,536Basic
                    and diluted loss per share
                
                $
                (0.44
                )
                $
                (0.01
                )
                $
                0.43
  Balance
          Sheet as of December 31, 2005
 
 **As
                    Reported**
                ****
                **As
                    Adjusted**
                ****
                **Effect
                    of Change**Other
                    assets
                
                $
                582,694
                
                $
                642,694
                
                $
                60,000Capital
                    in excess of par value
                
                $
                10,134,089
                
                $
                10,308,372
                
                $
                174,283Accumlated
                    deficit
                
                $
                (4,779,378
                )
                $
                (4,893,661
                )
                $
                (114,283
                )
  Statement
          of Cash Flows for the nine months ended December 31, 2005
 
 **As
                    Reported**
                ****
                **As
                    Adjusted**
                ****
                **Effect
                    of Change**Net
                    loss
                
                $
                (4,673,556
                )
                $
                (89,020
                )
                $
                4,584,536Non-cash
                    expense related to warrants
                
                
                5,311,800
                
                
                975,687
                
                
                (4,336,113
                )Increase
                    (decrease) in other assests and taxes
                
                
                (750,724
                )
                
                (810,724
                )
                
                (60,000
                )Non-cash
                    dividend issued to warrant holders
                
                
                -
                
                
                4,698,819
                
                
                4,698,819
  **Reclassifications**
 
 Certain
          items included in the three and nine months ended December 31, 2004 financial
          statements have been reclassified to conform to the current period
          presentation.
  6
 
 **IMAGENETIX,
          INC.**
 **Notes
          to the Unaudited Consolidated Financial Statements
          (Continued)**
 
 **Earnings
          Per Share**
 
 We
          follow
          Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
          per
          Share." Under SFAS No. 128, basic earnings per share is calculated as earnings
          available to common stockholders divided by the weighted average number
          of
          common shares outstanding. Diluted earnings per share is calculated as
          net
          income divided by the diluted weighted average number of common shares.
          The
          diluted weighted average number of common shares is calculated using the
          treasury stock method for common stock issuable pursuant to outstanding
          stock
          options and common stock warrants. See Note 9 for discussion of commitments
          to
          issue additional shares of common stock and warrants. (See Note
          11).
 
 **Stock
          Options**
 
 The
          Company applies Accounting Principles Board ("APB") Opinion 25, "Accounting
          for
          Stock Issued to Employees," and related Interpretations in accounting for
          all
          stock option plans. Under APB Opinion 25, compensation cost has been recognized
          for stock options granted to employees when the option price is less than
          the
          market price of the underlying common stock on the date of grant.
 
 SFAS
          No.
          123, "Accounting for Stock-Based Compensation," and SFAS No. 148, "Accounting
          for Stock-Based Compensation-Transition and Disclosure," require 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 estimates the fair value of each stock option
          at the
          grant date by using the Black-Scholes option-pricing model. SFAS No. 148
          also
          provides for alternative methods of transition for a voluntary change to
          the
          fair value based method of accounting for stock-based employee compensation.
          The
          Company has elected to continue to account for stock-based compensation
          under
          APB No. 25.
 
 On
          December 31, 2005, our Board of Directors accelerated the vesting of 309,000
          unvested stock options held by our employees with exercise prices ranging
          from
          $1.39 to $1.68 per share. The options would have otherwise vested over
          various
          periods through September 2008. Our Board of Directors determined that the
          acceleration of the vesting of the stock options described above was in
          the best
          interests of the
 company
          to enhance the incentive of the affected options and to provide us with
          greater
          flexibility for future grants of share-based incentives as SFAS 123(R)
          becomes
          effective. We plan to adopt SFAS 123(R) in January 2006.
 
 The
          Company applies SFAS No. 123 in valuing options granted to consultants
          and
          estimates the fair value of such options using the Black-Scholes option-pricing
          model. The fair value is recorded as consulting expense as services are
          provided. Options granted to consultants for which vesting is
 contingent
          based on future performance are measured at their then current fair value
          at
          each period end, until vested.
 
 The
          Company estimates the fair value of each option or warrant at the issuance
          date
          by using the Black-Scholes option-pricing model with the following
          weighted-average assumptions used for the nine months ended December 31,
          2005:
          dividend yield of zero percent; expected volatility of from 90% to 94%;
          risk-free interest rates of 3.64% to 4.02%, and expected lives of from
          2.5 to 5
          years.
 
 Under
          the
          accounting provisions of SFAS No. 123, the Company's net earnings (loss)
          per
          share would have been decreased or increased by the pro forma amounts indicated
          below:
  7
 
 **IMAGENETIX,
          INC.**
 **Notes
          to the Unaudited Consolidated Financial Statements
          (Continued)**
 
 **Three
                    months ended**
                  **December
                    31,**
                ****
                **Nine
                    months ended**
                  **December
                    31,****2005**
                ****
                **2004**
                ****
                **2005**
                ****
                **2004**Net
                    income (loss), as reported
                
                $
                97,646
                
                $
                346,850
                
                $
                (89,020
                )
                $
                697,723Stock-based
                    employee compensation,net
                    of tax effects, included in reported net loss
                
                
                -
                
                
                -
                
                
                217,200
                
                
                -Stock-based
                    employee compensation,net
                    of tax effects
                
                
                (447,429
                )
                
                -
                
                
                (770,364
                )
                
                -Proforma
                    net income (loss)
                
                $
                (349,783
                )
                $
                346,850
                
                $
                (642,184
                )
                $
                697,723Net
                    income (loss) per share:Basic-
                    as reported
                
                $
                0.01
                
                $
                0.04
                
                $
                (0.01
                )
                $
                0.08Basic-
                    proforma
                
                $
                (0.03
                )
                $
                0.04
                
                $
                (0.06
                )
                $
                0.08Diluted-
                    as reported
                
                $
                0.00
                
                $
                0.04
                
                $
                (0.01
                )
                $
                0.07Diluted-
                    proforma
                
                $
                (0.03
                )
                $
                0.04
                
                $
                (0.06
                )
                $
                0.07
  **2.**
                **RECENT
                    ACCOUNTING PRONOUNCEMENTS**
 
 In
          November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an amendment
          of
          ARB. No. 43, Chapter 4". This Statement amends the guidance in ARB No.
          43,
          Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
          amounts
          of idle facility expense, freight, handling costs, and wasted material
          (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "...
          under
          some circumstances, items such as idle facility expense, excessive spoilage,
          double freight, and re-handling costs may be so abnormal as to require
          treatment
          as current period charges...." This Statement requires that those items
          be
          recognized as current-period charges regardless of whether they meet the
          criterion of "so abnormal." In addition, this Statement requires that allocation
          of fixed production overheads to the costs of conversion be based on the
          normal
          capacity of the production facilities. The Company will adopt this standard
          on
          January 1, 2006. Management is still evaluating the impact this standard
          will
          have on our financial statements.
 
 In
          December 2004, the FASB issued SFAS No. 123R, “Share Based Payment". This
          Statement is a revision of FASB Statement No. 123, “Accounting for Stock-Based
          Compensation”. This Statement supersedes
          APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related
          implementation guidance. This Statement establishes standards for the accounting
          for transactions in which an entity exchanges its equity instruments for
          goods
          or services. It also addresses transactions in which an entity incurs
          liabilities in exchange for goods or services that are based on the fair
          value
          of the entity's equity instruments or that may be settled by the issuance
          of
          those equity instruments. This Statement focuses primarily on accounting
          for
          transactions in which an entity obtains employee services in share-based
          payment
          transactions. This Statement does not change the accounting guidance for
          share-
 based
          payment transactions with parties other than employees provided in Statement
          123
          as originally issued and EITF Issue No. 96-18, "Accounting for Equity
          Instruments That Are Issued to Other Than Employees for Acquiring, or in
          Conjunction with Selling, Goods or Services." This Statement does not address
          the accounting for employee share ownership plans, which are subject to
          AICPA
          Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership
          Plans”. The Company will adopt this standard on January 1, 2006. Management is
          still evaluating the impact this standard will have on our financial
          statements.
 
 In
          May
          2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections"
          ("SFAS 154") which replaces Accounting Principles Board Opinions No. 20
          "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
          Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154 provides
          guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective
          application,
          or the latest practicable date, as the required method for reporting a
          change in
          accounting principle and the reporting of a correction of an error. SFAS
          154 is
          effective for accounting changes and a correction of errors made in fiscal
          years
          beginning after December 15, 2005 and is required to be adopted by the
          Company
          in the first quarter of fiscal 2007. The Company is currently evaluating
          the
          effect that the adoption of SFAS 154 will have on its consolidated results
          of
          operations and financial condition.
  8
  **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:
 **December
                      31,**
                    **2005**
                  ****
                  **March
                      31,**
                    **2005**Accounts
                      receivable - trade
                  
                  $
                  1,045,830
                  
                  $
                  2,096,159Allowance
                      for doubtful accounts
                  
                  
                  (45,000
                  )
                  
                  (32,070
                  )Accounts
                      receivable, net
                  
                  $
                  1,000,830
                  
                  $
                  2,064,089
  **4.**
                  **INVENTORY**
 
 Inventory
            consists of the following at:
  **December
                      31,**
                    **2005**
                  ****
                  **March
                      31,**
                    **2005**Raw
                      materials
                  
                  $
                  1,139,020
                  
                  $
                  1,205,175Finished
                      products
                  
                  
                  111,804
                  
                  
                  57,120Boxes,
                      labels, tubes & bottles
                  
                  
                  107,267
                  
                  
                  120,200$
                  1,358,091
                  
                  $
                  1,382,495
 
 **5.**
                  **PROPERTY
                      AND EQUIPMENT**
 
 The
            following is a summary of property and equipment, at cost, less accumulated
            depreciation:
 
 **December
                      31,**
                    **2005**
                  ****
                  **March
                      31,**
                    **2005**Office
                      equipment
                  
                  $
                  45,807
                  
                  $
                  45,807Lease-hold
                      improvements
                  
                  
                  134,598
                  
                  
                  113,598Leased
                      equipment
                  
                  
                  12,341
                  
                  
                  12,341192,746
                  
                  
                  171,746Less
                      accumulated depreciation
                  
                  
                  (166,433
                  )
                  
                  (128,759
                  )$
                  26,313
                  
                  $
                  42,987
  Depreciation
              expense for the nine months ended December 31, 2005 and 2004 was $37,674
              and
              $18,592, respectively.
  9


**IMAGENETIX,
      INC.**


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





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





The
      following is a summary of Other Assets:





**December
                31,**
              **2005**
            ****
            **March
                31,**
              **2005**Trademarks
            
            $
            13,032
            
            $
            11,736Deposit
                on infomercial
            
            
            207,815
            
            
            79,240Promotional
            
            
            25,000
            
            
            43,750Patent
            
            
            56,467
            
            
            28,468Deferred
                tax asset (Note 10)
            
            
            348,200
            
            
            24,500Globestar
            
            
            3,674
            
            
            3,674654,188
            
            
            191,368Less
                accumulated amortization
            
            
            (11,494
            )
            
            (8,314
            )$
            642,694
            
            $
            183,054


For
        the
        nine months ended December 31, 2005 and 2004 amortization expense was $3,180
        and
        $10,336, respectively.
 
 **7.**
              **LINE
                  OF CREDIT - RELATED PARTY**
 
 In
        October 2001, the Company entered into a line of credit agreement with two
        principal shareholders. The shareholders agreed to provide a line of credit
        in
        the amount of $1,000,000. The balance on the line of credit accrued interest
        at
        a rate of 12% per annum. The line of credit was for working capital needs
        and
        was secured with the Company’s assets. The line of credit agreement expired on
        September 30, 2002. The Company verbally negotiated extension of terms on
        the
        line of credit. The verbal agreement changed the terms on the line of credit
        to
        a month to month basis.
 
 The
        line
        of credit was paid off during the quarter ended December 31, 2005. During
        the
        nine months ended December 31, 2005 and 2004 the Company recorded interest
        expense of approximately $16,300 and $20,200, respectively, in connection
        with
        the line.
 
 **8.**
              **COMMITMENTS
                  AND CONTINGENCIES**
 
 Contingencies
 
 The
        Company is involved in litigation from time to time in the normal course
        of
        business. Management believes there are no such claims, which would have
        a
        material effect on the financial position of the Company.
 
 In
        October 2005 the Company entered into a new 5,426 square foot commercial
        lease
        to relocate its San Diego headquarters and operations. This lease commenced
        January 1, 2006 for a term of seven years with monthly payments ranging from
        $10,309 to $12,673.
  10
 
 **IMAGENETIX,
        INC.**
 **Notes
        to the Unaudited Consolidated Financial Statements
        (Continued)**
 
 Other
        agreements
 
 The
        Company routinely enters into contracts and agreements with suppliers,
        manufacturers, consultants, product marketing, and sales representatives
        in the
        normal course of doing business. These agreements can be either short or
        long
        term and are normally limited to specific products and marketing opportunities.
 
 In
        June
        2004, the Company entered into a marketing and promotion agreement which
        contained certain milestones which, if met, require the Company to issue
        warrants exercisable for up to 125,000 shares of
 common
        stock with an exercise price equal to 150% of the market price on the date
        the
        milestone is met. The Company issued a warrant exercisable for up to 50,000
        shares of common stock during the year ended March 31, 2005 and a warrant
        exercisable for up to 25,000 shares of common stock during the nine months
        ended
        December 31, 2005, as the result of three of the milestones being met. The
        warrants were valued using the Black-Scholes pricing model and resulted in
        additional expense of approximately $57,000 during the year ended March 31,
        2005
        and $39,000 during the nine months ended December 31, 2005. The Company
        estimates the fair value of each warrant at the issuance date by using the
        Black-Scholes option-pricing model with the following weighted-average
        assumptions used for the nine months ended December 31, 2005: dividend yield
        of
        zero percent; expected volatility of 90% to 94%, risk-free interest rates
        of
        3.64% to 4.02%; and expected lives of 5 years.
 
 **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
        December 31, 2005.
 
 Common
        Stock
 
 The
        Company has authorized 50,000,000 shares of common stock at $.001 par value.
        At
        December 31, 2005, the Company had 10,687,344 shares of common stock issued
        and
        outstanding.
 
 During
        the nine months ended December 31, 2005, the Company issued 237,692 shares
        of
        common stock for proceeds of $278,692. The shares were issued upon shareholders
        exercising warrants with exercise prices ranging from $1.00 to $2.00 per
        share.
 
 Also,
        during the nine months ended December 31, 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 nine months ended December
        31, 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. To
        date,
        499,500 shares have been granted under the plan.
 
 11
 
 **IMAGENETIX,
        INC.**
 **Notes
        to the Unaudited Consolidated Financial Statements
        (Continued)**
 
 Warrants
 
 At
        December 31, 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 nine months ended
        December 31, 2005, the Company issued 237,692 shares of common stock for
        proceeds of $278,692. The shares were issued upon shareholders exercising
        warrants with exercise prices ranging from $1.00 to $2.00 per share.
 
 In
        addition, during the nine months ended December 31, 2005, the Company extended
        the expiration date on warrants exercisable for up to 2,757,782 shares of
        common
        stock to October 23, 2007. These warrants were issued in 2000 and 2001 as
        part
        of an equity unit sale. By the terms of the warrants, the Company was to
        use its
        best efforts to maintain a registration statement under which the holders
        could
        resell the common
        shares on the exercise of the warrants. Since the Company failed to maintain
        a
        timely registration statement, it decided to extend the expiration date of
        the
        warrants. Due to this modification, the Company recorded a non-cash dividend
        of
        $4,698,819 for the nine months ended December 31, 2005. The Company estimated
        the fair value of the dividend at the modification date by using the
        Black-Scholes pricing model with the following weighted average assumptions:
        dividend yield of zero percent; expected volatility of 90%; risk free interest
        rate of 3.64%; and expected lives of 25 months.
 
 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 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 1,009,000 options are outstanding as of December 31, 2005.
        The options have been granted to directors, executive officers, employees
        and
        consultants at prices ranging from $.86 to $2.35 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. During the nine months ended
        December 31, 2005, the Company granted options to purchase up to 349,000
        shares
        of common stock with exercise prices ranging from $1.95 to $2.35 per share
        which
        are subject to vesting schedules and will expire five years from the date
        of
        grant. Also, during the nine months ended December 31, 2005, the Company
        extended the expiration date on stock options exercisable for up to 360,000
        shares of common stock to October 23, 2007. Due to the modification of the
        terms
        of the stock option agreements, during the nine months ended December 31,
        2005,
        the Company recorded non-cash expenses of $432,634 related to stock options
        issued to consultants and $217,200 related to stock options issued to employees.
  12
  **IMAGENETIX,
          INC.**
 **Notes
          to the Unaudited Consolidated Financial Statements
          (Continued)**
 **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 has no federal or state net operating loss
            carryovers
            at December 31, 2005.
  At
          December 31 and March 31, 2005, the total of all deferred tax assets was
          $432,600 and $66,200, 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.
 
 The
          temporary differences gave rise to the following deferred tax
          asset:
 
 **December
                    31,**
                  **2005**
                ****
                **March
                    31,**
                  **2005**Excess
                    of financial accountingover
                    tax depreciation
                
                $
                34,700
                
                $
                24,500Valuation
                    of warrants and stock options
                
                
                313,500
                
                
                -Allowance
                    for obsolete inventory
                
                
                60,100
                
                
                29,000Allowance
                    for bad debts
                
                
                17,900
                
                
                12,700Other
                
                
                6,400
                
                
                -Net
                    deferred tax asset
                
                $
                432,600
                
                $
                66,200
 
 The
          reconciliation of income tax from continuing operations computed at the
          U.S.
          federal statutory tax rate to the Company’s effective rate is as follows for the
          periods ended:
  **For
                    the Nine Months Ended**
                  **December
                    31,****2005**
                ****
                **2004**Federal
                    income tax expense computed at the Federal statutory rate
                
                $
                (77,400
                )
                $
                305,489State
                    income tax expense net of Federal benefit
                
                
                (11,800
                )
                
                40,269Change
                    in valuation allowance
                
                
                -
                
                
                (169,159
                )Other
                
                
                (49,300
                )
                
                35,529Income
                    tax (benefit) expense
                
                $
                (138,500
                )
                $
                212,128
  The
          components of federal income tax expense from continuing operations consisted
          of
          the following for the periods ended:
 
 13
 
 **IMAGENETIX,
          INC.**
 **Notes
          to the Unaudited Consolidated Financial Statements
          (Continued)**
 
 **Nine
                    Months Ended December 31,****2005**
                ****
                **2004**Current
                    income tax expense:Federal
                
                $
                195,900
                
                $
                305,489State
                
                
                32,000
                
                
                40,269Net
                    current tax expense
                
                
                227,900
                
                
                345,758Deferred
                    tax expense (benefit) resulted from:Excess
                    of financial accounting overtax
                    depreciation
                
                
                (10,300
                )
                
                21,976Valuation
                    of warrants and stock options
                
                
                (313,500
                )Other
                
                
                (6,400
                )
                
                -Net
                    operating loss
                
                
                -
                
                
                42,583Valuation
                    allowance
                
                
                -
                
                
                (169,159
                )Allowance
                    for obsolete inventory
                
                
                (31,100
                )
                
                (8,569
                )Allowance
                    for bad debts
                
                
                (5,100
                )
                
                (20,461
                )Net
                    deferred tax benefit
                
                
                (366,400
                )
                
                (133,630
                )Net
                
                $
                (138,500
                )
                $
                212,128
 
 Deferred
          income tax expense results primarily from the reversal of temporary timing
          differences between tax and financial statement income.
 
 **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**
                    **December
                      31,**
                  ****
                  **For
                      the Nine Months Ended**
                    **December
                      31,****2005**
                  ****
                  **2004**
                  ****
                  **2005**
                  ****
                  **2004**Income
                      (loss) available to commonshareholders
                      (Numerator)
                  
                  $
                  98,000
                  
                  $
                  347,000
                  
                  $
                  (89,000
                  )
                  $
                  698,000Weighted
                      average number of commonshares
                      outstanding used in basic income(loss)
                      per share during the period(Denominator)
                  
                  
                  10,678,710
                  
                  
                  8,722,152
                  
                  
                  10,580,411
                  
                  
                  8,722,152Weighted
                      average number of common(loss)
                      per share during the periodshares
                      outstanding used in basic income(Denominator)
                  
                  
                  13,024,036
                  
                  
                  9,176,243
                  
                  
                  12,654,449
                  
                  
                  10,044,982
  
 14
 
 **IMAGENETIX,
        INC.**
 **Notes
        to the Unaudited Consolidated Financial Statements
        (Continued)**
 
 For
        the
        nine months ended December 31, 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 nine months ended December 31, 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.
 
 At
        December 31, 2004, the Company had options to purchase 300,000 shares of
        common
        stock at a price of $2.00 per share and warrants to purchase 750,000 shares
        of
        common stock at $2.00 per share that were not included in the computation
        of
        earnings per share because their effects were anti-dilutive due to the exercise
        price being higher than the average market price.
 
 **12.**  **RELATED
        PARTY TRANSACTIONS**
 
 **Line
        of credit**
 
 See
        note
        7.
 
 **13.**  **CONCENTRATIONS**
 
 Sales
 
 During
        the nine months ended December 31, 2005, the Company had four significant
        customers which accounted for 25%, 14%, 12%, and 12% of sales.
 
 During
        the nine months ended December 31, 2004, the Company had four significant
        customers which accounted for 23%, 15%, 15% and 14% of sales.
 
 Accounts
        Receivable
 
 At
        December 31, 2005, the Company had four customers which accounted for 28%,
        16%,
        12%, and 12% of the Company’s accounts receivable balances.
 
 Supplier
 
 The
        Company also has a single source and exclusive supplier arrangement with
        the
        supplier of a specific raw material, which is used as part of products which
        account for approximately 80% of the Company’s sales. The interruption of raw
        materials provided by this supplier or the loss of a significant customer
        would
        adversely affect the Company’s business and financial condition.
 
 15
  **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,
        2005.
  **Overview**
  We
        develop, formulate and market on a private label basis over-the-counter,
        natural-based nutritional supplements and skin care products. Our products
        are
        proprietary, often supported by scientific studies which we request and are
        offered through multiple channels of distribution, including direct marketing
        companies, also known as network marketing or multi-level marketing companies,
        and chain store retailers. Our primary product is Celadrin® which we have
        historically offered as a part of product formulations which we sold on a
        private label basis to our customers. Recently, however, we have begun offering
        Celadrin® as an ingredient which our customers may use in their own products.
 
 A
        key
        part of our marketing strategy is our ability to provide to customers that
        distribute our products a "turnkey" approach to the marketing and distribution
        of our products. This turnkey approach provides our customers with all the
        services necessary to market our products, including developing specific
        product
        formulations, providing supporting scientific studies regarding the
        effectiveness of the product and arranging for the manufacture and marketing
        of
        the product.
 
 We
        have
        developed and sold over 60 products and formulations to businesses and
        organizations that market these products through multiple channels of
        distribution, including direct marketing companies, mass marketing companies,
        medical, health and nutritional professionals, medical newsletters and direct
        response radio and television. We have also begun to offer Celadrin® products
        through customers that in turn offer their products containing Celadrin® to mass
        market retailers.
 
 Management's
        discussion and analysis of results of operations and financial condition
        are
        based upon the Company's financial statements. These statements have been
        prepared in accordance with accounting principles generally accepted in the
        United States of America. These principles require management to make certain
        estimates, judgments and assumptions that affect the reported amounts of
        assets,
        liabilities, revenues and expenses, and related disclosure of contingent
        assets
        and liabilities. On an on-going basis, we evaluate our estimates based on
        historical experience and various other assumptions that are believed to
        be
        reasonable under the circumstances, the results of which form the basis for
        making judgments about the carrying values of assets and liabilities that
        are
        not readily apparent from other sources. Actual results may differ from these
        estimates under different assumptions or conditions .
 
 **Critical
        Accounting Policies and Estimates**
 
 We
        have
        identified 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.
  16
  *2.
          Inventory*
 Inventory
          is carried at the lower of cost or market. Cost is determined by the first-in
          first-out method. At each period end, management adjusts the inventory
          allowance
          based on estimates. These estimates take into account spoilage, yields,
          obsolescence and overstocked inventory amounts.
 
 *3.
          Revenue Recognition*
 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 December 31, 2005.
 
 *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.
 
 *5.
          Stock Options and Warrants*
 The
          Company applies Accounting Principles Board ("APB") Opinion 25, "Accounting
          for
          Stock Issued to Employees," and related Interpretations in accounting for
          all
          stock option plans. Under APB Opinion 25, compensation cost has been recognized
          for stock options granted to employees when the option price is less than
          the
          market price of the underlying common stock on the date of grant.
 
 SFAS
          No.
          123, "Accounting for Stock-Based Compensation," and SFAS No. 148, "Accounting
          for Stock-Based Compensation-Transition and Disclosure," require 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 estimates the fair value of each stock option
          at the
          grant date by using the Black-Scholes option-pricing model. SFAS No. 148
          also
          provides for alternative methods of transition for a voluntary change to
          the
          fair value based method of accounting for stock-based employee compensation.
          The
          Company has elected to continue to account for stock-based compensation
          under
          APB No. 25.
 
 The
          Company applies SFAS No. 123 in valuing options granted to consultants
          and
          estimates the fair value of such options using the Black-Scholes option-pricing
          model. The fair value is recorded as consulting expense as services are
          provided. Options granted to consultants for which vesting is contingent
          based
          on future performance are measured at their then current fair value at
          each
          period end, until vested.
 17
  **Results
        of Operations**
  *Three
        Months Ended December 31, 2005 Compared to Three Months Ended December 31,
        2004*
  **Selected
        Financial Information**
 
 **Three
                  Months Ended****12/31/05**
              ****
              **12/31/04**
              ****
              **Increase****(Decrease)%**
              ****
              **%**Statements
                  of Operations:Net
                  sales
              
              $
              1,743,000
              
              $
              2,740,000
              
              $
              (997,000
              )
              
              -36
              %Cost
                  of goods sold
              
              
              834,000
              
              
              1,603,000
              
              
              (769,000
              )
              
              -48
              %%
                  of net sales
              
              
              48
              %
              
              59
              %
              
              -11
              %
              
              -18
              %Gross
                  profit
              
              
              909,000
              
              
              1,137,000
              
              
              (228,000
              )
              
              -20
              %%
                  of net sales
              
              
              52
              %
              
              41
              %
              
              11
              %
              
              26
              %Operating
                  expensesGeneral
                  and administrative
              
              
              438,000
              
              
              302,000
              
              
              136,000
              
              
              45
              %Payroll
                  expense
              
              
              172,000
              
              
              148,000
              
              
              24,000
              
              
              16
              %Consulting
                  expense
              
              
              234,000
              
              
              89,000
              
              
              145,000
              
              
              163
              %Total
                  operating expenses
              
              
              844,000
              
              
              539,000
              
              
              305,000
              
              
              57
              %Interest
                  expense
              
              
              -
              
              
              (7,000
              )
              
              (7,000
              )
              
              NMOther
                  income
              
              
              8,000
              
              
              -
              
              
              8,000
              
              
              NMProvision
                  for (benefit from) taxes
              
              
              (25,000
              )
              
              244,000
              
              
              269,000
              
              
              NMNet
                  (loss) income
              
              
              98,000
              
              
              347,000
              
              
              (249,000
              )
              
              -72
              %Net
                  (loss) income per share basic
              
              
              0.01
              
              
              0.04
              
              
              (0.03
              )
              
              -75
              %Net
                  (loss) income per share diluted
              
              
              0.01
              
              
              0.04
              
              
              (0.03
              )
              
              -75
              %
  Net
        Sales
 Net
          sales
          for the quarter ended December 31, 2005 decreased $997,000, 36%, to $1,743,000
          compared to $2,740,000 for the quarter ended December 31, 2004. The primary
          reason for the sales decrease was a reduction in the sales of
          Celadrin â as an
          ingredient. We began selling Celadrin â as an
          ingredient into the mass market starting in October 2004, and since, products
          containing Celadrin â have
          been placed in over 10,000 stores throughout the country, including Wal-Mart,
          Albertsons, and GNC Health Stores. One significant customer’s inventory during
          the current quarter was sufficient that repeat orders were down compared
          to the
          corresponding quarter of the previous fiscal year. We are unable to determine
          if
          this trend will continue.
  Cost
          of Goods Sold
  Cost
          of
          goods sold as a percentage of net sales decreased from 59% for the quarter
          ended
          December 31, 2004 to 48% for the quarter ended December 31, 2005. This
          decrease
          was primarily due to decreased expenses charged to cost of goods sold associated
          with the ingredient sales. As mentioned above, we began selling
          Celadrin â as an
          ingredient into the mass market during October 2004. We anticipate the
          cost of
          goods sold will increase as the sale of Celadrin â returns
          to previous levels.
  General
          and Administrative
  General
          and administrative expenses increased by $136,000, a 45% increase, to $438,000
          for the quarter ended December 31, 2005 from $302,000 for the quarter ended
          December 31, 2004. The primary reasons for the increase were approximately
          $39,000 increase in commissions associated with a media campaign to brand
          Celadrin â ,
          approximately $44,000 charged to research and development for continued
          clinical
          testing of our products, approximately $27,000 non cash expense related
          to the
          amortization of optons issued to a consultant, and $22,000 increase in
          facilities expenses related to a change in our corporate headquarters.
          We
          anticipate future general and administrative expense to increase as we
          prepare
          for the launch of two new product lines.


18




Payroll
      Expense




Payroll
      expense increased to $172,000 for the quarter ended December 31, 2005, an
      increase of 16% or $24,000, compared to $148,000 for the quarter ended December
      31, 2004. This increase was a result additional personnel hired to support
      the
      increased selling and clinical research activities. We anticipate future payroll
      expense to increae as we prepare for the launch of two new product lines.




Consulting
      Expenses




Consulting
      expenses increased to $234,000 for the quarter ended December 31, 2005, an
      increase of 163% or $145,000, compared to $89,000 for the quarter ended December
      31, 2004. This increase was a result of approximately $103,000 related to
      product presentations, public relations and investor relations and approximately
      $25,000 related to increased accounting expenses. We anticipate additional
      increases in consulting expenses as we continue with clinical testing and
      developing new markets.




Provision
      for Income Taxes




As
      a
      result of the loss for the quarter ended December 31, 2005, income tax benefits
      of $25,000 were recognized during the current quarter compared to $244,000
      of
      tax expense being recognized during the quarter ended December 31, 2004. Since
      we have used up our federal and state tax loss carry-forwards, we anticipate
      income tax expense to increase in the future relative to income before
      taxes.





*Nine
      months ended December 31, 2005 Compared to Nine months ended December 31,
      2004*




**Selected
      Financial Information**


**Nine
                  Months Ended****12/31/05**
              ****
              **12/31/04**
              ****
              **Increase****(Decrease)%**
              ****
              **%**Statements
                  of Operations:Net
                  sales
              
              $
              6,629,000
              
              $
              4,960,000
              
              $
              1,669,000
              
              
              34
              %Cost
                  of goods sold
              
              
              3,403,000
              
              
              2,786,000
              
              
              617,000
              
              
              22
              %%
                  of net sales
              
              
              51
              %
              
              56
              %
              
              -5
              %
              
              -9
              %Gross
                  profit
              
              
              3,226,000
              
              
              2,174,000
              
              
              1,052,000
              
              
              48
              %%
                  of net sales
              
              
              49
              %
              
              44
              %
              
              5
              %
              
              11
              %Operating
                  expensesGeneral
                  and administrative
              
              
              2,246,000
              
              
              649,000
              
              
              1,597,000
              
              
              246
              %Payroll
                  expense
              
              
              513,000
              
              
              351,000
              
              
              162,000
              
              
              46
              %Consulting
                  expense
              
              
              703,000
              
              
              243,000
              
              
              460,000
              
              
              189
              %Total
                  operating expenses
              
              
              3,462,000
              
              
              1,243,000
              
              
              2,219,000
              
              
              179
              %Interest
                  expense
              
              
              (18,000
              )
              
              (21,000
              )
              
              (3,000
              )
              
              -14
              %Other
                  income
              
              
              26,000
              
              
              -
              
              
              26,000
              
              
              NMProvision
                  for (benefit from) taxes
              
              
              (139,000
              )
              
              212,000
              
              
              351,000
              
              
              NMNet
                  (loss) income
              
              
              (89,000
              )
              
              698,000
              
              
              (787,000
              )
              
              NMNet
                  (loss) income per share basic
              
              
              (0.01
              )
              
              0.08
              
              
              (0.09
              )
              
              NMNet
                  (loss) income per share diluted
              
              
              (0.01
              )
              
              0.07
              
              
              (0.08
              )
              
              NM
  Net
        Sales
  Net
        sales
        for the nine months ended December 31, 2005 increased $1,669,000, 34%, to
        $6,629,000 compared to $4,960,000 for the nine months ended December 31,
        2004.
        The primary reasons for the sales increase was that we sold Celadrin â as an
        ingredient to a new client and sales of our topical cream product containing
        Celadrin â to
        existing clients increased. We began selling Celadrin â as an
        ingredient into the mass market starting in October 2004, and since, products
        containing Celadrin â have
        been placed in over 10,000 stores throughout the country, including Wal-Mart,
        Albertsons, and GNC Health Stores.
  19
  Cost
        of Goods Sold
  Cost
        of
        goods sold as a percentage of net sales was 51% for the nine months ended
        December 31, 2005 compared to 56% for the nine months ended December 31,
        2004.
        As mentioned above, we began selling Celadrin â as an
        ingredient into the mass market during October 2004. We anticipate future
        cost
        of goods sold will reflect the increased costs associated with ingredient
        sales.
  General
        and Administrative
  General
        and administrative expenses increased by $1,597,000, a 246% increase, to
        $2,246,000 for the nine months ended December 31, 2005 from $649,000 for
        the
        nine months ended December 31, 2004. The primary reasons for the increase
        were
        approximately $787,000 related to the modification of the terms of stock
        options, approximately $481,000 increase in commissions associated with a
        media
        campaign to brand Celadrin â ,
        approximately $94,000 charged to marketing expenses, $49,000 increase to
        bad
        debts before recoveries, $50,000 increase in travel costs associated with
        clinical research, and $36,000 increase in the costs of delivery services.
        We
        anticipate a reduction in future general and administrative expense as a
        result
        of a decrease in future commission expense discussed above.
  Payroll
        Expense
  Payroll
        expense increased to $513,000 for the nine months ended December 31, 2005,
        an
        increase of 46% or $162,000, compared to $351,000 for the nine months ended
        December 31, 2004. This increase was a result of additional personnel hired
        to
        support the increased selling and clinical research activities. We anticipate
        future increases to payroll expense to be slow down.
  Consulting
        Expenses
  Consulting
        expenses increased to $703,000 for the nine months ended December 31, 2005,
        an
        increase of 189% or $460,000, compared to $243,000 for the nine months ended
        December 31, 2004. This increase was a result of an approximate $116,000
        increase in clinical research and selling activities, an approximate $165,000
        increase in accounting expenses inclusive of the costs of changing to a new
        auditing firm, and an approximate $44,000 increase in litigation expenses.
        We
        anticipate additional increases as we continue with clinical testing and
        approaching new markets.
  Provision
        for Income Taxes
  As
        a
        result of the loss during the nine months ended December 31, 2005, the Company
        reflected an income tax benefit of $139,000 compared to income tax expense
        of
        $212,000 for the nine months ended December 31, 2004. Since we have used
        up our
        federal and state tax loss carry-forwards, we anticipate income tax expense
        to
        increase in the future relative to income before taxes.
  20




**Capital
      Resources**




Working
      Capital





**12/31/05**
            ****
            **3/31/05**
            ****
            **Increase**
              **(Decrease)**Current
                assets
            
            $
            5,260,000
            
            $
            5,546,000
            
            $
            (286,000
            )Current
                liabilities
            
            
            503,000
            
            
            1,600,000
            
            
            1,097,000Working
                capital
            
            $
            4,757,000
            
            $
            3,946,000
            
            $
            811,000Long-term
                debt
            
            $
            -
            
            $
            -
            
            $
            -Stockholders'
                equity
            
            $
            5,425,000
            
            $
            4,172,000
            
            $
            1,253,000





Statements
      of Cash Flows Select Information





**Nine
                Months Ended**
            ****
            **Increase****12/31/05**
            ****
            **12/31/04**
            ****
            **(Decrease)**Net
                cash provided by (used in):Operating
                activities
            
            $
            280,000
            
            $
            395,000
            
            $
            (115,000
            )Investing
                activities
            
            $
            (169,000
            )
            $
            (75,000
            )
            $
            (94,000
            )Financing
                activities
            
            $
            54,000
            
            $
            -
            
            $
            54,000




Balance
      Sheet Select Information





**12/31/05**
            ****
            **3/31/05**
            ****
            **Increase**
              **(Decrease)**Cash
                and cash equivalients
            
            $
            2,196,000
            
            $
            2,031,000
            
            $
            165,000Accounts
                receivable
            
            $
            1,001,000
            
            $
            2,064,000
            
            $
            (1,063,000
            )Inventory
            
            $
            1,358,000
            
            $
            1,382,000
            
            $
            (24,000
            )Accounts
                payable and accrued expenses
            
            $
            437,000
            
            $
            862,000
            
            $
            (425,000
            )


**Liquidity**
  We
        have
        historically financed our operations internally and through debt and equity
        financings. At December 31, 2005, we had cash holdings of $2,196,000, an
        increase of $165,000 compared to March 31, 2005. Our net working capital
        position at December 31, 2005, was $4,757,000 compared to $3,946,000 as of
        March
        31, 2005. 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.
        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 believe that our cash position is sufficient to
        fund
        our operating activities for at least the next 12 months.
 
 **New
        Accounting Pronouncements**
 
 In
        November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an amendment
        of
        ARB. No. 43, Chapter 4". This Statement amends the guidance in ARB No. 43,
        Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
        of idle facility expense, freight, handling costs, and wasted material
        (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "...
        under
        some circumstances, items such as idle facility expense, excessive spoilage,
        double freight, and re-handling costs may be so abnormal as to require treatment
        as current period charges...." This Statement requires that those items be
        recognized as current-period charges regardless of whether they meet the
        criterion of "so abnormal." In addition, this Statement requires that allocation
        of fixed production overheads to the costs of conversion be based on the
        normal
        capacity of the production facilities. The Company will adopt this standard
        on
        April 1, 2006. Management is still evaluating the impact this standard will
        have
        on our financial statements.
 
 21


In
        December 2004, the FASB issued SFAS No. 123R, “Share Based Payment". This
        Statement is a revision of FASB Statement No. 123, “Accounting for Stock-Based
        Compensation”. This Statement supersedes APB Opinion No. 25, “Accounting for
        Stock Issued to Employees”, and its related implementation guidance. This
        Statement establishes standards for the accounting for transactions in which
        an
        entity exchanges its equity instruments for goods or services. It also addresses
        transactions in which an entity incurs liabilities in exchange for goods
        or
        services that are based on the fair value of the entity's equity instruments
        or
        that may be settled by the issuance of those equity instruments. This Statement
        focuses primarily on accounting for transactions in which an entity obtains
        employee services in share-based payment transactions. This Statement does
        not
        change the accounting guidance for share-based payment transactions with
        parties
        other than employees provided in Statement 123 as originally issued and EITF
        Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
        Than Employees for Acquiring, or in Conjunction with Selling, Goods or
        Services." This Statement does not address the accounting for employee share
        ownership plans, which are subject to AICPA Statement of Position 93-6,
“Employers’ Accounting for Employee Stock Ownership Plans”. The Company will
        adopt this standard on January 1, 2006. Management is still evaluating the
        impact this standard will have on our financial statements.
 
 In
        May
        2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections"
        ("SFAS 154") which replaces Accounting Principles Board Opinions No. 20
        "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
        Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154 provides
        guidance on the accounting for and reporting of accounting changes and error
        corrections. It establishes retrospective application, or the latest practicable
        date, as the required method for reporting a change in accounting principle
        and
        the reporting of a correction of an error. SFAS 154 is effective for accounting
        changes and a correction of errors made in fiscal years beginning after December
        15, 2005 and is required to be adopted by the Company in the first quarter
        of
        fiscal 2007. The Company is currently evaluating the effect that the adoption
        of
        SFAS 154 will have on its consolidated results of operations and financial
        condition.
  **Risk
        Factors**
  You
        should consider the following discussion of risks as well as other information
        regarding our common stock. The risks and uncertainties described below are
        not
        the only ones. Additional risks and uncertainties not presently known to
        us or
        that we currently deem immaterial also may impair our business operations.
        If
        any of the following risks actually occur, our business could be harmed.
 
 **There
        Is Only One Supplier for Celadrin®. If We Are Unable to Purchase Celadrin® from
        This Supplier, Our Business Would Be Harmed.**
 
 There
        is
        only one supplier for Celadrin®, which we use in approximately 80% of our
        products and which represented approximately 87% of our sales for the nine
        months ended December 31, 2005. 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 25%, 14%, 12% and 12% of our sales for the
        nine
        months ended December 31, 2005. The loss of any of these customers would
        significantly reduce our revenue and adversely affect our cash flow and
        earnings, if any.
 
 22
 
 **We
        Rely upon Other Outside Suppliers to Produce Our Products Which Could Delay
        Our
        Product Deliveries.**
 
 All
        of
        our products are produced by outside manufacturers who process ingredients
        provided to them by our suppliers and with whom we have contracts. Our profit
        margins and our ability to deliver products on a timely basis are dependent
        upon
        these manufacturers and suppliers. Should any of these manufacturers or
        suppliers fail to provide us with product, we would be required to obtain
        new
        manufacturers and suppliers, which would be costly and time consuming and
        could
        delay our product deliveries.
 
 **Product
        Liability Claims Against Us Could Be Costly.**
 
 Some
        of
        our nutritional supplements contain newly-introduced ingredients or combinations
        of ingredients, and we have little long-term health information about
        individuals consuming those ingredients. If any of these products were thought
        or proved to be harmful, we could be subject to litigation. Although we carry
        product liability insurance in the face amount of $1,000,000 per occurrence
        and
        $2,000,000 in the aggregate and require our suppliers and manufacturers to
        include us as insured parties on their product liability insurance policies,
        our
        coverage may not be adequate to protect us from potential product liability
        claims and costs of defense.
 
 **We
        Are Subject to Intense Competition from Other Nutritional Supplement Marketers
        Which Could Reduce Our Revenue and Profit Margins.**
 
 Competition
        in the nutritional supplement market is intense. We compete with numerous
        companies that have longer operating histories, more products and greater
        name
        recognition and financial resources than we do. In order to compete, we could
        be
        forced to lower our product prices, which would reduce our revenue and profit
        margins.
 
 **We
        Are Highly Regulated, Which Increases Our Costs of Doing Business.**
 
 We
        are
        subject to laws and regulations which cover:
  ·
              theformulation, manufacturing, packaging, labeling, distribution,
                  importation, sale and storage of our products;
  ·
              the
                  health and safety of food and drugs;
  ·
              trade
                  practice and direct selling laws; and  ·
              product
                  claims and advertising by us; or for which we may be held
                  responsible.
 
 Compliance
        with these laws and regulations is time consuming and expensive. Moreover,
        new
        regulations could be adopted that would severely restrict the products we
        sell
        or our ability to continue our business.
 
 **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.**
 
 As
        of
        December 31, 2005, we have 10,687,344 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 5,270,156 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.
 
 23
 
 **There
        is a Limited but Potentially Volatile Trading Market in Our Common Stock,
        Which
        May Adversely Affect Our Stock Price.**
 
 Our
        common stock trades on the Electronic Bulletin Board. The Bulletin Board
        tends
        to be highly illiquid, in part because there is no national quotation system
        by
        which potential investors can track the market price of shares except through
        information received or generated by a limited number of broker-dealers that
        make a market in particular stocks. There is a greater chance of market
        volatility for securities that trade on the Bulletin Board as opposed to
        a
        national exchange or quotation system. This volatility may be caused by a
        variety of factors, including:
  ·
              The
                  lack of readily available price quotations;
  ·
              The absence of consistent administrative
                  supervision of "bid" and "ask" quotations;
  ·
              Lower
                  trading volume; and  ·
              Market
                  conditions.
 
 There
        could be wide fluctuations in the market price of our common stock. These
        fluctuations may have an extremely negative effect on the market price of
        our
        securities and may prevent you from obtaining a market price equal to your
        purchase price when you attempt to sell our securities in the open market.
        In
        these situations, you may be required to either sell our securities at a
        market
        price which is lower than your purchase price, or to hold our securities
        for a
        longer period of time than you planned.
 
 **Because
        Our Common Stock May Be Classified as "Penny Stock," Trading in it Could
        Be
        Limited, and Our Stock Price Could Decline.**
 
 In
        the
        future, our common stock may fall under the definition of "penny stock" if
        our
        net tangible assets decline below $2,500,000. In such event, trading in our
        common stock would be limited because broker-dealers will be required to
        provide
        their customers with disclosure documents prior to allowing them to participate
        in transactions involving our common stock. These disclosure requirements
        are
        burdensome to broker-dealers and may discourage them from allowing their
        customers to participate in transactions involving our common stock.
 
 "Penny
        stocks" are equity securities with a market price below $5.00 per share,
        other
        than a security that is registered on a national exchange or included for
        quotation on the NASDAQ system, unless, as in our case, the issuer has net
        tangible assets of more than $2,000,000 and has been in continuous operation
        for
        greater than three years. Issuers who have been in operation for less than
        three
        years must have net tangible assets of at least $5,000,000.
 
 Rules
        promulgated by the Securities and Exchange Commission under Section 15(g)
        of the
        Exchange Act require broker-dealers engaging in transactions in penny stocks,
        to
        first provide to their customers a series of disclosures and documents,
        including:
  ·
              A
                  standardized risk disclosure document identifying the risks inherent
                  in
                  investment in penny stocks;  ·
              All
                  compensation received by the broker-dealer in connection with the
                  transaction;
  ·
              Current
                  quotation prices and other relevant market data; and
  ·
              Monthly
                  account statements reflecting the fair market value of the securities.
                  In
                  addition, these rules
                  require that a broker-dealer obtain financial and other information
                  from a
                  customer, determinethat
                  transactions in penny stocks are suitable for such customer and
                  deliver a
                  written statement tosuch
                  customer setting forth the basis for this
                  determination.
  24


**ITEM
        3.     CONTROLS AND PROCEDURES.**
  (a)
        Under
        the supervision and with the participation of our management, including our
        principal executive officer and principal financial officer, we conducted
        an
        evaluation of the design and operation of our disclosure controls
 and
        procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c)
        promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
        Act"), within 90 days of the filing date of this report. Based on that
        evaluation, our principal executive officer and our principal financial officer
        concluded that the design and operation of our disclosure controls and
        procedures were effective in timely alerting them to material information
        required to be included in the Company's periodic reports filed with the
        SEC
        under the Securities Exchange Act of 1934, as amended. The design of any
        system
        of controls is based in part upon certain assumptions about the likelihood
        of
        future events, and there can be no assurance that any design will succeed
        in
 achieving
        its stated goals under all potential future conditions, regardless of how
        remote.
 
 (b)
        During the nine months ended December 31, 2005, we recruited a chief financial
        officer who has begun establishing, designing and implementing systems and
        procedures over our internal control over financial reporting as well as
        added
        internal control expertise which includes:
 
 ·
            Preparation
                of periodic income tax provisions; 
 ·
            Review
                and recording of equity transactions, including warrant and option
                valuations; 
 ·
            Certain
                end of period financial reconciliations;
                and 
 ·
            Financial
                statement preparation and disclosures.  **PART
        II.**  **OTHER
        INFORMATION**
  **ITEM
        1.     LEGAL PROCEEDINGS.**
  In
        June
        2005, we filed a lawsuit in the Superior Court of the State of California-
        County of San Diego, case number GIC8448564, against ABCO Laboratories, Inc.,
        a
        vendor of ours. We are requesting the court to award damages for a breach
        of a
        written contractors agreement, breach of implied warranty of merchantability
        ,
        intentional interference with a contractual relationship and unfair
        competition.
  **ITEM
        2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE
        OF PROCEEDS.**
  None.
  **ITEM
        6.**  **EXHIBITS.**
  (a)
            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
 25




**SIGNATURES**




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





IMAGENETIX,
      INC.


a
      Nevada
      corporation




Date:
              June 28, 2006
            By:
            /s/ WILLIAM
              P. SPENCERWilliam
              P. SpencerChief
              Executive Officer(Principal Executive and duly authorizedto sign on behalf of the
              Registrant)