Inergetics (NRTI) 10-Q 2010 Q3 Quarterly report

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended September 30, 2010

OR

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _______ to _______

Commission file number 0-3338

INERGETICS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	22-1558317
(State or other Jurisdiction of	(IRS Employer
Incorporation or Organization)	Identification No.)

205 Robin Road, Suite 222, Paramus, NJ 07652

(Address of Principal Executive Office)  (Zip Code)

(908) 604-2500

(Registrant’s telephone number including area code)

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

Yes x     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

Yes ¨ No x

As of November 16, 2010, 1,959,811,424 shares of Common Stock, $0.001 par value, 65,141 shares of Series B Convertible Preferred Stock, $1.00 par value, 64,763 shares of Series C Cumulative Preferred Stock, $1.00 par value, were outstanding.

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

INDEX

		Page
		Number
PART  1  -  FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets
	- September 30, 2010 and December 31, 2009	3
	Condensed Consolidated Statements of Operations
	- Three and nine months ended September 30, 2010 and 2009	4
	Condensed Consolidated Statements of Cash Flows
	- Nine months ended September 30, 2010 and 2009	5
	Notes to Condensed Consolidated Financial Statements	7 – 22
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3	Quantitative and Qualitative Disclosures about Market Risk	26
Item 4	Controls and Procedures	26
PART II  -  OTHER INFORMATION		27
Item 1	Legal Proceedings	27
Item 1A.	Risk Factors	28
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3	Defaults Upon Senior Securities	28
Item 4	Removed and Reserved	28
Item 5	Other Information	28
Item 6	Exhibits	29
SIGNATURES		30

2

PART I  - Item 1

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED

	September 30,			December 31,
	2010			2009
Assets
Current Assets:
Cash	$	170,465		$	2,370
Accounts receivable, net		10,818			561
Unit note subscriptions receivable		-			40,000
Inventories, net		76,262			16,117
Prepaid contract sales		-			166,667
Prepaid expenses		80,323			29,199
Total Current Assets		337,868			254,914
Property and equipment, net		-			4,440
Patents, net		6,238			6,670
Deposits		23,651			18,352
Total Assets	$	367,757		$	284,376
Liabilities and Stockholders’ (Deficit)
Current Liabilities:
Accounts payable and accrued expenses	$	2,957,924		$	2,363,820
Obligations to be settled in stock		2,447,326			3,193,071
Put Warrant liabilities		-			50,000
Prepayments		31,000			-
Short-term debt, net of unamortized debt discount		2,323,543			1,904,965
Total Current Liabilities		7,759,793			7,511,856
Long-term debt, net of unamortized debt discount		2,941,880			3,933,335
Total Liabilities		10,701,673			11,445,191
Stockholders’ Deficit
Preferred stock, par value $1:
Convertible Series B, 65,141 shares issued and outstanding		130,282			130,282
Cumulative Series C, 64,763 shares issued and outstanding		64,763			64,763
Convertible Series D, 0 shares issued and outstanding		-			-
Convertible Series E, 0 and 27,658 shares issued and outstanding		-			27,658
Convertible Series F, 0 and 4,602 shares issued and outstanding		-			4,602
Common stock, par value $0.001; authorized 2,000,000,000 shares; issued and outstanding 1,904,803,925 and 399,928,831 shares as of September 30, 2010 and December 31, 2009, respectively		1,713,100			399,929
Additional paid-in capital		61,533,593			55,571,375
Accumulated Deficit		(73,775,654	)		(67,359,424	)
Total Stockholders’ (Deficit)		(10,333,916	)		(11,160,815	)
Total Liabilities and Stockholders’ (Deficit)	$	367,757		$	284,376

The accompanying notes are an integral part of the condensed consolidated financial statements.

3

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

For the Three and Nine Months Ended September 30, 2010 and 2009

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Total Revenues	$	9,453		$	910,463		$	133,362		$	1,347,878
Cost of Goods Sold		5,372			615,816			78,803			818,198
		4,081			294,647			54,559			529,680
Research and development cost		8,395			12,025			23,761			29,156
Selling, general and administrative expenses		749,190			776,671			2,464,317			2,335,599
Total operating expenses		757,585			788,696			2,488,078			2,364,755
Loss from Operations		(753,504	)		(494,049	)		(2,433,519	)		(1,835,075	)
Other Income (Expense)
Gain incurred in connection with debt restructuring, net		24,429			-			380,529			-
Miscellaneous income (expense)		21,687			-			64,839			-
Amortization of debt discount		(58,724	)		-			(298,308	)		-
Interest and financing cost, net		(182,482	)		(526,019	)		(4,129,771	)		(2,336,475	)
Total Other Income (Expense)		(195,090	)		(526,019	)		(3,982,711	)		(2,336,475	)
Loss before Provision for Income taxes		(948,594	)		(1,020,068	)		(6,416,230	)		(4,171,550	)
Provision for Income Taxes		-			-			-			-
Net Loss	$	(948,594	)	$	(1,020,068	)	$	(6,416,230	)	$	(4,171,550	)
Net Loss per Common Share Basic and Diluted	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.01	)
Weighted Average Number of Common Shares Outstanding		1,896,259,695			325,109,113			1,159,783,268			283,301,316

The accompanying notes are an integral part of the condensed consolidated financial statements.

4

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine Months Ended September 30,
	2010			2009
Cash Flows from Operating Activities
Net Loss	$	(6,416,230	)	$	(4,171,550	)
Adjustments to Reconcile Net Loss to
Net Cash used by Operations
Depreciation and amortization		1,172			1,542
Adjustment to Inventory Reserve		(48,385	)		-
Amortization of Debt Discount		298,308			-
Loss on disposal of equipment		3,700			-
Securities issued for professional services		136,068			7,500
Equity securities for professional services		487,833
Equity securities issued for interest and financing expense		3,322,677			1,573,513
Extinguishment of debt		(380,529	)		-
Liabilities for stock to be issued		(183,350	)		(27,621	)
Amortization of deferred compensation		-			295,000
Changes in Assets and Liabilities
Accounts receivable		(10,257	)		(441,707	)
Inventories		(11,760	)		16,353
Prepaid contract sales		166,667			-
Prepaid expenses		153,876			283,090
Deposits		(5,299	)		-
Prepayments		31,000			(74,965	)
Accounts payable and accrued expenses		594,104			1,297,168
Net Cash Used by Operating Activities		(1,860,405	)		(1,241,677	)
Net Cash Used by Investing Activities		-			-
Cash Flows from Financing Activities
Proceeds from loans and notes payable		2,107,500			1,281,500
Repayment of loans and notes payable		(119,000	)		(175,421	)
Unit Note Subscriptions receivable		40,000			-
Issuance of common stock		-			75,000
Net Cash Provided by Financing Activities		2,028,500			1,181,079
Net Increase (Decrease) in Cash		168,095			(60,598	)
Cash at beginning of period		2,370			121,009
Cash at end of period	$	170,465		$	60,411
Supplemental Disclosure of Cash Flow information:
Cash paid during the period for:
Interest Expense	$	10,250		$	6,273
Income Taxes	$	-		$	-

5

		For the Nine Months Ended September 30,
		2010		2009
Schedule of non-cash investing and financing activities:
	Stock issued in conjunction with Notes Payable
	“Debt Discount” 142,485,000 shares	$	2,308,091	$	-
	Shares issued for conversion of convertible debt, 171,272,3621; 900,0002	$	1,707,125	$	8,100
	For accrued interest, 6,000,000 shares were issued	$	-	$	180,000
	For late payment penalties, 20,921,142 shares were issued	$	-	$	330,253
	For prior periods’ late payment penalties, 2,884,000 shares were issued	$	-	$	82,520
	For prior periods’ stock subscriptions, 1,919,150 shares were issued	$	-	$	191,915
	For loan origination fees, 1,500,000	$	-	$	30,000
	For prior periods’ loan origination fees, 2,000,000 shares were issued	$	-	$	30,000
	For prior periods’ consulting, 750,000 shares were issued	$	-	$	73,000
	For royalties settlement, 750,000	$	-	$	7,500
	For services, 4,370,000	$	-	$	181,500

1 Shares issued in the nine months ended September 30, 2010

2 Shares issued in the nine months ended September 30, 2009

The accompanying notes are an integral part of the condensed consolidated financial statements.

6

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

On March 15, 2010 the Company changed its name to Inergetics, Inc. Inergetics, Inc. (the Company or "Inergetics"), formerly Millennium Biotechnologies Group, Inc., is a holding company for its subsidiary Millennium Biotechnologies, Inc. ("Millennium").

Millennium was incorporated in the State of Delaware on November 9, 2000 and is located in New Jersey. Millennium is a research based bio-nutraceutical corporation involved in the field of nutritional science. Millennium’s principal source of revenue is from sales of its nutraceutical supplements, Resurgex Select® and Resurgex Essential™ and Resurgex Essential Plus™ which serve as a nutritional support for immuno-compromised individuals undergoing medical treatment for chronic debilitating diseases.

The Company acquired Millennium on July 27, 2001, when it completed a merger with Millennium. In the merger, new Convertible Preferred Series D stock was issued in exchange for all the outstanding stock of Millennium. Such preferred shares were convertible into approximately 96% of the outstanding common stock of the Company at the time of issuance. Under the terms of the Agreement and Plan of Reorganization, a new wholly-owned Inergetics subsidiary merged into Millennium. For accounting purposes, the merger was treated as an acquisition of Inergetics by Millennium, and a re-capitalization of Millennium. The financial statements are those of the Company and its wholly-owned subsidiary Millennium on a consolidated basis.

The accompanying unaudited condensed consolidated financial statements include the accounts of Inergetics, Inc. and its subsidiary. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. It is suggested that these condensed consolidated financial statements be read in conjunction with the December 31, 2009 audited financial statements and the accompanying notes thereto filed with the Securities and Exchange Commission on Form 10-K.

Going Concern

The Company’s future success is dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing. Management believes they can raise the appropriate funds needed to support their business plan and develop an operating company which is cash flow positive.

The Company incurred substantial net losses for the nine months ended September 30, 2010 and 2009 and has accumulated a deficit of approximately $74 million at September 30, 2010. The Company has not been able to generate sufficient cash from operating activities to fund its ongoing operations. There is no guarantee that the Company will be able to generate enough revenue and/or raise capital to support its operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should the Company be unable to continue as a going concern.

Principles of Consolidation

The Company’s operations presently consist almost exclusively of the operations of Millennium. The condensed consolidated financial statements include the accounts of the Company and its subsidiary. All significant inter-company transactions and balances have been eliminated.

In the opinion of the Company’s management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, 2010, the results of operations for the nine months ended September 30, 2010 and 2009, and the cash flows for the nine months ended September 30, 2010 and 2009, have been included.

7

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

Use of Estimates

The preparation of the financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation, which includes amortization of assets under capital leases, is calculated using the straight-line method over the estimated useful lives of the assets: leasehold improvements are amortized over the shorter of the estimated useful lives of the underlying lease term. Repairs and maintenance expenditures which do not extend the useful lives of related assets are expensed as incurred.

Patents

Patents are capitalized and amortized over 240 months. Amortization expense was $432 and $432 for the nine months ended September 30, 2010 and 2009, respectively.

Evaluation of Long-Lived Assets

Long-lived assets are assessed for recoverability on an ongoing basis. Their carrying value would be reduced by the excess, if any, of the long-lived asset over management’s estimate of the anticipated undiscounted future net cash flows of the related long-lived asset.

Revenue Recognition

Revenue is recognized at the date of shipment to customers provided that the resulting receivable is deemed probable of collection.

Advertising Costs

Advertising costs are charged to operations when incurred. Advertising expense was $4,354 and $0 for the nine months ended September 30, 2010 and 2009, respectively.

Stock-Based Awards

Stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). Compensation expense is recognized based on the estimated grant date fair value method using the Black-Scholes valuation model. The Company did not issue any stock options during the year ended December 31, 2009 and the period ended September 30, 2010.

8

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

Income Taxes

The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expenses are expected to be settled in the Company’s income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the nine months ended September 30, 2010.

Loss Per Common Share

Net loss per share, in accordance with the provisions of ASC 260, “Earnings Per Share” is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding during the period. Common Stock equivalents have not been included in this computation since the effect would be anti-dilutive. During a loss period, the effect of the potential exercise of stock options, warrants, convertible preferred stock and convertible debt are not considered in the diluted income (loss) per share calculation since the effect would be anti-dilutive. The results of operations were a net loss for the three and nine months ended September 30, 2010 and 2009, therefore the basic and diluted weighted average common shares outstanding were the same.

Fair Value of Financial Instruments

For financial instruments including cash, prepaid expenses and other current assets, short-term debt, accounts payable and accrued expenses, it was assumed that the carrying values approximated fair value because of their short-term maturities. The fair value of long-term debt issued during the debt restructuring in November 2009 approximates the carrying value on the balance sheet and includes a discount for the value of preferred stock issued in connection with this debt.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

2. CONCENTRATIONS OF BUSINESS AND CREDIT RISK

The Company maintains cash balances in several financial institutions which are insured by the Federal Deposit Insurance Corporation up to certain federal limitations.

The Company provides credit in the normal course of business to customers located throughout the U. S. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.

9

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. INVENTORIES

Inventories consist of work-in-process and finished goods for the Company’s SURGEX®, RESURGEX ESSENTIAL® and RESURGEX ESSENTIAL PLUS® product lines. Cost-of-goods sold are calculated using the average costing method. Inventories consist of the following:

	September 30,			December 31,
	2010			2009
Work in Process	$	17,144		$	23,589
Finished Goods		41,085			44,706
Packaging		25,112			3,286
		83,341			71,581
Less: Reserve for losses		(7,079	)		(55,464	)
Total	$	76,262		$	16,117

4. PROPERTY AND EQUIPMENT

Property and equipment at cost, less accumulated depreciation, consists of the following:

	September 30,			December 31,
	2010			2009
Furniture	$	46,127			$	46,127
Equipment		-				22,445
Leasehold improvements		-				69,157
Subtotal		46,127				137,729
Less accumulated depreciation		(46,127	)			(133,289	)
Total	$	-			$	4,440

Depreciation expense charged to operations was $740 and $1,110 for the nine months ended September 30, 2010 and 2009, respectively.

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:

	September 30,		December 31,
	2010		2009
Accounts payable	$	1,124,508	$	1,195,637
Accrued interest		900,154		453,118
Accrued rent expense		225,158		143,469
Accrued salaries, bonuses and payroll taxes		453,923		298,895
Owed to officer		149,382		224,701
Accrued professional fees		104,799		48,000
	$	2,957,924	$	2,363,820

10

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. DEBT

Short-term debt is as follows:

	September 30,		December 31,
	2010		2009
Cash advances by two accredited investors, due on demand, non-interest bearing, converted into common shares.	$	-0-	$	4,440
Promissory note dated December 17, 2002, issued to an accredited investor, maturing September 28, 2003, bearing interest at the rate of 10% per annum, now due on demand. The holder of the note is entitled to convert all or a portion of the principal and interest at any time after the maturity date into shares of common stock at a price equal to $.10/share of the principal if the principal and interest is not fully repaid on or before the maturity date.		25,000		25,000
Convertible Promissory Note to an accredited investor dated May 20, 2003, maturing May 20, 2004, now due on demand, bearing interest at a rate 8% per annum payable in restricted shares of common stock.		30,000		30,000
Convertible promissory note originally due December 31, 2003, bearing interest at 12% per year payable in restricted common stock, now due on demand. The note is convertible at the option of the holder into restricted common stock at the rate of $0.20 per share.		50,000		50,000
Two demand loans extended by two investors in March 2004 and January 2005, bearing no interest and due on demand.		25,000		25,000
Twelve promissory notes issued to twelve accredited investors in May 2006, originally maturing in June 2006, now due on demand. The notes carried interest at the rate of 10% per year and are convertible into common shares at the rate of $0.25 /share. In November 2009 eight notes and accrued interest were converted into 893.12 shares of Series E Convertible Preferred Stock. The Series E Convertible Preferred Stock was converted into common shares on March 15, 2010.		105,000		105,000
Seven promissory notes issued to six accredited investors between July and September 2006, originally maturing at various dates between September 15, 2006 and January 31 2007, all of which are now due on demand. The notes carried interest at the rate of 10% per year until maturity and thereafter are subject to a rate of 14% per year, and are convertible into common shares at the rate of $0.25 /share. In November 2009 one note and accrued interest was converted into 805.61 shares of Series E Convertible Preferred Stock. The Series E Convertible Preferred Stock was converted into common shares on March 15, 2010. The other five notes remain open.		165,000		140,000

11

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DEBT (Continued)

Three promissory notes issued to three accredited investors in September 2006, maturing at various dates between November 30, 2006 and January 31, 2007, now due on demand. The notes carried interest at the rate of 10% per year until maturity and thereafter are subject to a rate of 14% per year, and are convertible into common shares at the rate of $0.25 /share.	63,000	63,000
Five promissory notes issued to five accredited investors in October 2006, maturing on January 31, 2007, now due on demand. The notes carried interest at the rate of 10% per year until maturity and thereafter are subject to a rate of 14% per year, and are convertible into common shares at the rate of $0.25 /share. One note for $15,000 has been repaid in August 2009. In November 2009 two notes and accrued interest were converted into 1,007 shares of Series E Convertible Preferred Stock. The Series E Convertible Preferred Stock was converted into common shares on March 15, 2010. The other two notes remain open.	60,000	60,462
Two promissory notes issued to two accredited investors in January 2007, maturing on March 31, 2007, now due on demand. The notes carried interest at the rate of 10% per year until maturity and thereafter are subject to a rate of 14% per year, and are convertible into common shares at rates between $0.15 and $0.25 /share. In November 2009 one note and accrued interest was converted into 1,007 shares of Series E Convertible Preferred Stock. The Series E Convertible Preferred Stock was converted into common shares on March 15, 2010. The other note remains open.	75,000	75,000
Six promissory notes issued to five accredited investors in May and June 2007, maturing between September 30, 2007 and October 31, 2007, now due on demand. The notes carried interest at the rate of 10% per year until maturity and thereafter are subject to a rate of 12% per year. One note calls for the interest payable in common stock, calculated at $0.10 per share. All notes are convertible into common shares at the rate of $0.10 /share. In November 2009 three notes and accrued interest were converted into shares of Series E Convertible Preferred Stock. The Series E Convertible Preferred Stock was converted into common shares on March 15, 2010. The other three notes remain open.	82,000	82,000
Revolving non-interest bearing loan by an accredited investor. The loan was converted into common shares in April 2010.	-0-	38,000
Five promissory notes issued to an accredited investor in July 2007, due on demand. The notes carry interest at the rate of 10% per year. One note was converted into common shares in June 2010.	50,000	100,000

12

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DEBT (Continued)

In August 2007 the Company and a creditor agreed to convert $605,578 in outstanding payables into a note, repayable six months after demand for repayment has been issued. In November 2009, the creditor and the Company entered into an agreement whereby the principal amount of the note was reduced to $126,000, of which $26,000 was repaid in December 2009. This note is now in default and is due on demand.	100,000	100,000
Promissory note issued to an accredited investor in September 2007, originally due on September 18, 2008, now due on demand. The note carries interest at the rate of 18% per year which rate, upon default would increase to 24% per year. This note is now in default.	50,000	50,000
Promissory note, originally in the amount of $2,710,563 issued to a service provider, due on July 31, 2008. The note carried interest at the rate of 10% per year compounded monthly. In November 2009, the creditor and the Company entered into an agreement whereby, against payment of $110,000 in cash, the principal amount of the note was reduced to $400,000. A second installment was due but not paid in March 2010. The Company is currently negotiating an equity conversion with the service provider in order to satisfy the balance of this note. Note is currently due on demand.	400,000	400,000
Convertible notes for $375,000 and promissory note for $300,000 issued to two accredited investors in April 2008, the first due on demand and the second originally due on March 31, 2009. In November 2009 the second note and accrued interest were converted into Units consisting of a new note and shares of Series F Convertible Preferred Stock (see below). The first note and accrued interest was converted into common stock on April 20, 2010.	-0-	375,000
Two promissory notes issued to two accredited investors in February 2009 for $30,000 and $15,000, maturing on May 12, 2009 and May 4, 2009, respectively. The face amounts of notes include a discount of $5,000 and $2,500, granted as interest. In November 2009 one note and accrued interest was folded into Units consisting of a new note and shares of Series F Convertible Preferred Stock (see below). Each share of Series F Convertible Preferred stock was converted into 120,000 common shares on April 20, 2010. The other note remains open, due on demand.	15,000	15,000
Three promissory notes issued in September 2009 to three investors, totaling $90,000. The notes are due on October 17, 2009 and carry interest at 10% per year. A portion ($15,000) had been converted into shares of Series F Convertible Preferred Stock. Each share of Series F Convertible Preferred stock was converted into 120,000 common shares on April 20, 2010. The remaining balance is due on demand as of June 30, 2010.	75,000	75,000

13

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DEBT (Continued)

Short-term loans advanced by an officer and a service provider, carrying no interest and due on demand. The loan was converted into common shares in 2010.		-0-		17,063
Promissory note issued in October 2009, with interest paid as a lump sum amount of $1,250, due on demand. The note was repaid in April 2010.		-0-		25,000
Promissory note issued in December 2009, carrying interest at 12% per year, due on January 23, 2010. The note was repaid in February 2010.		-0-		50,000
Purchase order financing note issued in May 2010, carrying interest at 24% per year and due on demand		100,000		-0-
Promissory note issued in March 2009, carrying interest at 15% per year		33,000		-0-
Promissory note issued in July 2009, carrying interest at 36% per year		16,600		-0-
Promissory note issued in September 2010, carrying interest at 7% per year.		61,930		-0-
Short Term Portion of Long Term Debt		742,013		-0-
Total Short Term Debt	$	2,323,543	$	1,904,965

Long-term debt is as follows:

	September 30, 2010			December 31, 2009
Seventeen promissory notes, issued in November and December 2009 as part of a Unit offering, each “Unit” consisting of a 30 month promissory note for $100,000, carrying interest at 12% per year, and 100 shares of Series F Convertible Preferred Stock, whereby every “F” share was converted into 120,000 common shares on April 20, 2010. The notes and interest accrued thereon are repayable in five quarterly installments beginning 18 months after issue. Approximately 4 promissory notes converted into common stock at a price of $0.02 per common share in June 2010.	$	1,037,000		$	1,472,050
Less unamortized discount for stock issued with notes		(364,860	)		(758,503	)
Six promissory notes, issued in the first quarter 2010 as part of a Unit offering, each “Unit” consisting of a 30 month promissory note for $100,000, carrying interest at 12% per year, and 100 shares of Series F Convertible Preferred Stock, whereby every “F” share was converted into 120,000 common shares on April 20, 2010. The notes and interest accrued thereon are repayable in five quarterly installments beginning 18 months after issue. Approximately 5 promissory notes converted into common stock at a price of $0.02 per common share in June 2010.	$	50,000			-0-
Less unamortized discount for stock issued with notes		(19,483	)		-0-

14

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DEBT (Continued)

Seven promissory notes, issued in the second quarter 2010 as part of a Unit offering, each “Unit” consisting of a 30 month promissory note for $100,000 carrying interest at 12% per year, and 100 shares of Series F Convertible Preferred Stock, whereby every “F” share was converted into 120,000 common shares on April 20, 2010. The notes and interest accrued thereon are payable in five quarterly installments beginning 18 months after issue. Approximately 4 promissory notes converted into common stock at a price of $0.02 per common share in June 2010.		292,760		-0-
Less unamortized discount for stock issued with notes		(107,073)		-0-
Twenty-five promissory notes, issued in November and December 2009 as part of a series of debt restructuring transactions whereby existing promissory notes, most of which were past due or payable on demand, and interest accrued thereon were exchanged into Units at the rate of 1 :1 between old note principal plus accrued interest to Unit price, at a price of $100,000 per Unit. Each Unit consisted of a 30 month promissory note for $100,000, carrying interest at 12% per year and 100 shares of Series F Convertible Preferred Stock, whereby every “F” share was converted into 120,000 common shares on April 20, 2010. The notes and interest accrued thereon are repayable in five quarterly installments beginning 18 months after issue. Notes in the aggregate principal amount of $2,918,972 and accrued interest totaling $300,816 held by twelve investors were exchanged into 32 Units in November and December 2009. Approximately 13 Units converted into common stock at a price of $0.02 per common share in June 2010.		1,970,549		3,219,788
Four promissory notes, issued in August 2010. The Notes bear interest at 15% per annum and installment payments of principal and interest are payable as follows: 25% of the original principal amount and all accrued interest shall be paid on or before October 10, 2010, and thereafter, 15% of the original principal and interest shall be paid on or before January 10th, April 10th , July 10th and October 10th of each year until the maturity date of January 10, 2012.		825,000		-0-
Short Term Portion of Long Term Debt		(742,013)		-0-
Total Long Term Debt	$	2,941,880	$	3,933,335

Private Placement of Units and Debt Restructure

On November 10, 2009, the Company along with its wholly-owned subsidiary, Millennium Biotechnologies, Inc. (the “Subsidiary”), raised $1,382,050 from the sale of 14 units (the “Units”). In December 2009 an additional $90,000 was raised from the sale of 3 Units, and during the first quarter in 2010 additional $585,000 was raised from the sale of 6 Units. During the second quarter in 2010 an additional $697,500 was raised from the sale of 6 Units. Each Unit consists of a Senior Secured 12% thirty month $100,000 Note (a “Unit Note”) and 100 shares of the Company’s Series

15

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DEBT, Continued

F convertible preferred stock (the “Series F Preferred”). The proceeds were allocated between the senior secured notes and the Series F preferred stock based on their relative fair values.

In November 2009 the Company also converted a total of approximately $3,220,000 of outstanding debt into an aggregate of 32.2 Units. In the second quarter the Company also converted approximately $98,000 of outstanding debt into an aggregate of 1 Unit. The issuance of these securities was part of the Company’s restructuring plan, and the securities were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. As a result of this transaction, the Company has recognized a loss on debt extinguishment based on the fair value of the incremental Series F Preferred shares on a converted basis to common shares totaling approximately $3.9 million in 2009. Debt holders converted $2,621,789 of principal debt plus accrued interest into common stock at a price of $0.02 per share, resulting in a gain on debt extinguishment of $380,529 in 2010.

The Unit Notes have a term of 30 months and bear interest at the rate of 12% per annum. Installments of principal and interest will commence on the first business day of the calendar quarter following 18 months from issuance and quarterly thereafter on the first business day of each calendar quarter in fixed payments in the amount of $25,372 each until the maturity date, on which date any remaining principal and interest shall be due and payable in full. The Unit Notes are guaranteed by the Subsidiary and secured by a first lien and security interest in all of the assets of the Company and the Subsidiary.

Tripoint Global Equities LLC acted as the placement agent and received fees equal to 10% of the gross proceeds from the sale of Units. It also received shares of Series E Preferred Stock (“discussed below”) that convert into an amount of the Company’s common stock equal to 10% of the number of shares of the Company’s common stock issuable upon conversion of the Series F Preferred Stock.

On November 10, 2009, as part of the debt restructuring plan the Company also exchanged $4,352,120 of its debt into an aggregate of approximately 22,014.96 shares of the Company’s Series E Preferred stock (the “Series E Preferred”), which will convert into 220,149,600 common shares, and extinguished debt to three creditors as discussed below. The Company recorded a gain of approximately $5.9 million in 2009 as a result of these transactions based on the difference between fair value of the equity given and the carrying value of the notes.

Each share of Series E Preferred was automatically converted into 10,000 shares of the Company’s common stock on March 15, 2010 when the certificate of incorporation to increase the authorized shares of common stock was filed. The amendment to the certificate of incorporation was approved by a majority vote of stockholders at a Special Meeting of Stockholders held on March 12, 2010. The increase in authorized common shares from 400,000,000 to 2,000,000,000 triggered the conversion of the Series E Preferred into common stock.

In August, 2010, the Company issued Secured Promissory Notes due 2012 (the “Notes”) to Pershing LLC, custodian FBO Leon Frenkel IRA, Kenneth R. Sadowsky Revocable Trust and Seahorse Enterprises LLC in the aggregate principal amount of $825,000.

16

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DEBT, Continued

The Notes bear interest at 15% per annum, and installment payments of principal and interest are payable as follows: 25% of the original principal amount and all accrued interest shall be paid on or before October 10, 2010, and thereafter, 15% of the original principal amount and all accrued interest shall be paid on or before January 10th, April 10th, July 10th and October 10th of each year until the maturity date of January 10, 2012, at which time any remaining principal amount and accrued interest is due and payable. The Company may prepay all or any portion of the Notes. The Notes are guaranteed by the Company’s wholly owned subsidiary, Millennium Biotechnologies, Inc. (the “Guarantor”). A default under the Notes can be declared by Ken Sadowsky, Leon Frenkel and Seahorse Enterprises LLC, as representatives of the holders of the Notes, only upon vote or written instruction of the holders of the Notes representing a majority in dollar amount of the outstanding principal balance of all outstanding Notes.

The Company together with Ken Sadowsky, Leon Frenkel and Seahorse Enterprises LLC (the “Collateral Agents”) entered into a security agreement (the “Security Agreement”). Pursuant to the Security Agreement and subject to the Intercreditor Agreement (discussed below), the Company’s and the Guarantor’s obligations under the Notes are secured by a first lien and security interest in substantially all of the assets of the Company and the Guarantor (the “Collateral”), other than the “Permitted Liens” as defined in the Security Agreement. The Company and the Collateral Agents may amend, modify, waive or supplement provisions of the Security Agreement upon the written consent of the holders of the Notes representing the majority in dollar amount of the outstanding principal balance of all outstanding Notes.

The Company previously issued Unit Notes (the “Unit Notes”) in the aggregate principal amount of $5,972,098 of which Unit Notes in the aggregate principal amount of $3,253,419 remain outstanding. The Collateral Agents and the collateral agents for the Unit Notes (the “Unit Note Collateral Agents”) entered into an intercreditor agreement (the “Intercreditor Agreement”) pursuant to which the security interest in the Collateral is shared pari passu by the Collateral Agents, for its benefit and the benefit of the holders of the Notes, with the Unit Note Collateral Agents, for its benefit and the benefit of the holders of the Unit Notes.

Ken Sadowsky, Leon Frenkel and Seahorse Enterprises LLC are also the representatives of the holders of the Unit Notes and are the Unit Note Collateral Agents. Ken Sadowsky is a director of the Company. Leon Frenkel is the largest beneficial owner of the Company’s Common Stock and is the beneficial owner of a majority of the outstanding Unit Notes. Ken Sadowsky and Seahorse Enterprises LLC also are holders of outstanding Unit Notes.

7. OPERATING LEASE COMMITMENTS

The Company leases certain office space and equipment under operating leases.

In October 2001 the Company entered into a lease for 4,558 square feet of office space located in basking Ridge, New Jersey. In October 2007 the Company extended its lease commitment for an additional 5 years commencing in December 2007, with an annual right to renew or cancel. The terms of the lease provide for a rental fee of $10,635 per month, plus an allocated portion of certain operating expenses. The lease is personally guaranteed by the Company’s former Chairman of the Board of Directors and former Chief Executive Officer Jerry E. Swon. In December 2007 the Company sublet a portion of the premises to a sub-tenant (“Sub-tenant 1”). Under the terms of the sub-lease, as amended, Sub-tenant 1 pays a rent of $4,000 per month. Sub-tenant 1 ended its sublease on August 2009 and a second sub-tenant (“Sub-tenant 2”) took over the sublease. Sub-tenant 2 subleased the space for $7,000 per month from August 2009 to present. In December 2009, the Company relocated its operations to a new facility in Paramus, New Jersey, and entered into a three-year lease for 1,724 square feet of office space, at a monthly rent of $2,299 plus $251 for utilities. To reduce the carrying cost of the Basking Ridge, NJ lease, the Company negotiated an informal agreement with a third sub-tenant (“Sub-tenant 3”) who will occupy these facilities in April 2010, along with the above Sub-tenant 2, paying approximately $6,440 per month.

17

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

OPERATING LEASE COMMITMENTS, Continued

The following is a schedule of future minimum rental payments (exclusive of allocated expenses) required under operating leases that have initial or non-cancelable lease terms in excess of one year as of December 31, 2009:

Year Ending December 31,
2010		116,250
2011		171,000
2012		38,000
Total minimum payments required	$	325,250

Net rent expense for the Company under operating leases for the nine months ended September 30, 2010 and 2009 was $87,395 and $66,447, respectively.

8.  RELATED PARTY TRANSACTIONS

Pursuant to an amended and restated employment agreement, Mark C. Mirken is employed as the President and Chief Executive Officer of the Company and Millennium.  The Agreement terminates on November 1, 2014; provided, Mr. Mirken has the right to extend the term of employment for two additional years.  Pursuant to the Agreement, Mr. Mirken currently receives a base annual salary of $306,000 per year.  In addition, during the term of the Agreement, in the event that annual gross revenues exceed $15 million, Mr. Mirken is entitled to receive an annual bonus equal to .5% of the gross revenues.  Such bonus increases to 1.0% if the gross margin percentage is 30%, 1.75% if it is 35% and 2.5% if it is 45%. Mr. Mirken also received Performance Shares (see below).  Mr. Mirken also receives a $2,000 per month automobile reimbursement and standard benefits available to other executive officers.

The Agreement terminates upon Mr. Mirken’s death and may be terminated at the option of the Company as a result of Mr. Mirken’s disability or for “cause” as defined in the Agreement.  Mr. Mirken has the right to terminate the Agreement for “good reason” as defined in the Agreement.  In the event that the Agreement is terminated due to Mr. Mirken’s death or disability, he is entitled to receive his annual salary for a period equal to the lessor of (i) three months from the date of death or disability or (ii) the balance of the Term; and all other accrued but unpaid compensation and benefits.  If the Agreement is terminated by the Company for “cause”, Mr. Mirken is not entitled to receive any compensation other than accrued but unpaid compensation and benefits.  In the event Mr. Mirken terminates the Agreement for “good reason”, the Company shall pay to Mr. Mirken his annual salary through the date of the end of the contract term; bonuses that have accrued and are unpaid as of the date of termination; and any Options which have been granted to Mr. Mirken as of the date of the termination.  The Agreement also provides for Mr. Mirken is subject to confidentiality, non-solicitation and non-compete covenants for a period of one year following his termination, provided such termination is not by the Company without (“cause”) or by Mr. Mirken for good reason.

On July 1, 2010, the Board of directors of Company appointed Michael James, a current director, as Chief Financial Officer of the Company.  Effective July 1, 2010, the Company and Millennium Biotechnologies, Inc., its wholly-owned operating subsidiary (“MBI”), entered into an employment agreement with Mr. James (the “Agreement”) pursuant to which, Mr. James is employed by MBI and the Company as Chief Financial Officer.

18

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RELATED PARTY TRANSACTIONS, Continued

The Agreement continues until May 31, 2015, but can be extended for up to an additional two years by Mr. James, upon 180 days prior notice.  Mr. James’s base annual salary is $200,000 per year and he is entitled to bonuses at the discretion of the Board.  However, Mr. James has agreed that, until such time as the Company has sufficient cash to

pay his Base Salary, payment of such Base Salary shall be deferred.  He also is entitled to standard benefits, including any insurance provided to MBI executives.

The Agreement may be terminated by MBI for “cause” or for “disability” as those terms are defined in the Agreement.  If Mr. James is terminated for cause, he is entitled to his base salary, bonus and any vested options granted to him, all that have accrued and are unpaid through the date of termination.  If Mr. James is terminated for disability, he is entitled to his base salary for the shorter of three months or the balance of the term of the Agreement, all other compensation and benefits that are accrued and unpaid through the date of disability and all vested options which have been granted to him.  The Agreement also can be terminated by Mr. James for “good reason.” “Good reason” includes (a) a sale of all or substantially all of the equity or assets of MBI, (b) a merger or consolidation of MBI with any other entity in which the shareholders of MBI own less than 51% of the stock of the controlling or surviving entity following such merger or consolidation; (c) with the exception of the completed debt restructuring plan,  a “change-in-control” of MBI (as defined in the Agreement); (d) MBI's materially breaching of its covenants or undertakings under the Agreement (if not cured within 15 days after notice to MBI thereof); (e) a reduction in the nature or scope of Mr. James's titles, authorities, powers, duties, or responsibilities under the Agreement; or (f) his removal as a member of the Board of Directors of the Company or MBI, unless such removal

occurs after his termination for “cause.”  In the event Mr. James terminates the Agreement for good cause or MBI terminates his employment without cause, Mr. James shall be entitled to (i) his base salary through the date of the end of the Agreement term (or the end of the extension period, if applicable), (ii) any bonus that is accrued and unpaid as of the date of termination; and (iii) any options which have been granted to him as of the date of termination.

The Agreement contains non-compete and non-employee solicitation provisions that apply during the term of the Agreement and, if Mr. James is terminated for cause or disability, or Mr. James terminates the Agreement without good cause, an additional year after such termination.  It also contains a provision prohibiting disclosure of confidential information, except in certain limited and defined circumstances.

Pursuant to an amended and restated employment agreement, Carl Germano is employed as the Chief Science Officer of Millennium.  The Agreement terminates on November 1, 2014; provided, Mr. Germano has the right to extend the term of employment for two additional years.  Pursuant to the Agreement, Mr. Germano currently receives a base annual salary of $150,000 per year which increases to $200,000 per year in the event (a) the Company's annual revenues exceed $15,000,000; (b) the Company enters into a licensing agreement with an unrelated third party where the minimum upfront licensing fee is no less than $3,000,000; or (c) the Company achieves two quarters of positive cash flow.  In addition, during the term of the Agreement, Mr. Germano is entitled to receive an annual bonus at the discretion of the Company.  Mr. Germano also received 114.1667 E Preferred (which subsequently converted into 1,441,667 shares of Common Stock) and Performance Shares (see below).   Mr. Germano also receives a $2,000 per month automobile reimbursement and standard benefits available to other executive officers.

The Agreement terminates upon Mr. Germano’s death and may be terminated at the option of the Company as a result of Mr. Germano’s disability or for “cause” as defined in the Agreement.  Mr. Germano has the right to terminate the Agreement for “good reason” as defined in the Agreement.  In the event that the Agreement is terminated due to Mr. Germano’s death or disability, he is entitled to receive his annual salary for a period equal to the lessor of (i) three months from the date of death or disability or (ii) the balance of the Term; and all other accrued but unpaid compensation and benefits.  If the Agreement is terminated by the Company for “cause”, Mr. Germano is not entitled to receive any compensation other than accrued but unpaid compensation and benefits.  In the event Mr. Germano terminates the Agreement for “good reason”, the Company shall pay to Mr. Germano his annual salary through the date of the end of the contract term; bonuses that have accrued and are unpaid as of the date of termination; and any Options which have been granted to Mr. Germano as of the date of the termination.  The Agreement also provides for Mr. Germano is subject to confidentiality, non-solicitation and non-compete covenants for a period of one year following his termination, provided such termination is not by the Company without cause or by Mr. Germano for good reason.

19

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RELATED PARTY TRANSACTIONS, Continued

In May 2009, the current holders of an aggregate of $884,968 principal amount of senior debt secured by the assets of the Company (“Senior Secured Notes”) threatened to foreclose on the Senior Secured Notes as a result of the Company’s default under the terms of the Senior Secured Notes.  The perfected first lien and security interest securing the Senior Secured Notes were superior to all other liens, claims, judgments and other security interests in the Company.   In May, 2009, a group of three investors, including Ken Sadowsky, a director of the Company, Leon Frenkel and Seahorse Enterprises (collectively, the “Creditor Investors”), purchased all of the Senior Secured Notes. By purchasing the Notes, the Creditor Investors relieved the Company of the difficulties associated with the previous holders of the Senior Secured Notes and the threat of immediate foreclosure.  Also, the Creditor Investors provided an additional $924,000 in financing to the Company, enabling the Company to fund the manufacturing and production of products to fulfill outstanding key customer purchase orders.   In November 2009, the Creditor Investors converted all of the above debt into 32.2 Units in the Private Placement.

As part of the debt restructuring discussed in November 2009, we granted management an aggregate of 15,500 shares of E Preferred (the “Performance Shares”), which represented such number of E Preferred that are convertible into common stock equal to 10% of the fully diluted common shares following December 15, 2009, the final closing date (the “Final Closing Date”) of the Private Placement.  Pursuant to these management grants, Mark C. Mirken received 12,150 shares of E Preferred, Frank Guarino received 1,500 shares of E Preferred and Carl Germano received 1,500 shares of E Preferred.  All of the foregoing shares of E Preferred automatically converted into shares of Common Stock on March 15, 2010 at the rate of 10,000 shares of Common Stock for each share of E Preferred.  In the event that the gross revenue of our subsidiary, Millennium Biotechnologies, Inc., for the 12 month period immediately following the Final Closing Date (the “Target Period”) is less than $15 million (the “Target Revenue”), the number of Performance Shares shall be reduced by 10% for each $1 million under the Target Revenue and such number of reduced Performance Shares shall be issue to the purchasers of the Units in the Private Placement based upon the percentage of Units purchased by each such purchaser.  The Target Period was to commence when we and/or our subsidiary had received at least $1,000,000 in working capital from any sources including from the net proceeds of the Private Placement.  The right to so reduce and reallocate any portion of the Performance Shares is dependent on the Target Period commencing within 60 days of the Final Closing Date.  Notwithstanding any of the foregoing, the Performance Shares would not be reduced by more than 50% of the total Performance Shares issued.  The $1,000,000 in working capital was not raised within the 60 days of the Final Closing Date therefore the Performance Shares were not reduced.

20

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9.  COMMITMENTS

Effective May 4, 2010, the Company executed a Broker Sales and Distribution Agreement (“Agreement”) with Windmill Health Products, LLC (Windmill) whereas Inergetics, Inc. has conditionally granted Windmill the exclusive rights to sell the Company’s “Surgex kit” and “Surgex RTD” (Ready to Drink) products to all agreed upon Classes of Trade and within agreed upon Territories.

Windmill must achieve specific minimum sales goals of $5 Million, $8 Million and $10 Million during the first three years of the Agreement, respectively. Failure to do so gives the Company the option to terminate the agreement.

Classes of Trade include: Direct Media, Direct Mail, Food, Drug, Mass Market, GNC, Vitamin World, Vitamin Shoppe, Domestic and International Sports Nutrition Distributors and International customers upon approval of the Company.

Territories include: USA, North America and International markets approved by the Company.

Windmill will serve as a broker for sales and distribution for the agreed upon products in exchange for a commission of 10% on all Inergetics’ product sales. All sales prices shall be determined solely by the Company.

10.  CONTINGENCIES

Creative Healthcare Solutions, LLC vs. Millennium Biotechnologies Inc, Ct. of Common Pleas of Delaware County Ohio, Case No. 07 CV H 11 1420).  Millennium was not satisfied with the service rendered by Creative Healthcare Solutions, LLC in 2005 which were associated with the development of Resurgex Select collateral materials developed in December of 2005.  Millennium subsequently was forced to destroy and dispose of over 80% of the materials provided by Creative Healthcare Solutions due to the poor quality of the materials.  Millennium has been unsuccessful in resolving the dispute and subsequently Creative Healthcare Solutions, LLC has filed legal action for demand of payment in the amount of $63,718 for services rendered.  Millennium continues to negotiate a settlement through counsel with regards to this legal proceeding.

Ronald Burgert vs. Millennium Biotechnologies, Inc., et al. filed on the 9th day of October 2008 in District Court of Dallas County, Dallas, Texas.  Mr. Burgert has filed a claim in the amount of $25,000 based on a note dated May 18, 2006.  As of March 26, 2008 the balance due on the note, including unpaid principal and interest, was $31,635.  On December 1, 2008, the 14th Judicial District, Dallas County, Dallas, Texas issued a default judgment against Millennium Biotechnologies, Inc. in the amount of $31,636 plus interest and unpaid attorney’s fees.

Robert Half International vs. Millennium Biotechnologies, Inc. filed on September 30, 2009 in the Superior Court of New Jersey, Law Division, Middlesex County.  Robert Half International claims a total of $18,507 plus costs and fees based upon Millennium Biotechnologies, Inc.’s failure to pay the plaintiff the fees associated with the full time hiring of an employee.

21

INERGETICS, INC. AND SUBSIDIARY

(f/k/a Millennium Biotechnologies Group, Inc.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONTINGENCIES (Continued)

Growthink Inc. vs. Millennium Biotechnologies, Inc. filed on June 15, 2009 in the Superior Court of New Jersey, Law Division, Somerset-Special Civil Part, Case #DC-004225-09.  Growthink Inc. claims a total of $7,941 plus cost and attorney fees based upon Millennium Biotechnologies, Inc.’s failure to pay the plaintiff for the reasonable value of goods sold and delivered and/or services rendered by the plaintiff to the defendant.  On April 5, 2010, there was a levy on Millennium’s bank account in the amount of $1,032.  On June 15, 2010, there was a levy on Millennium’s bank account in the amount of $282.

All contingencies have been accrued as a liability on the Company’s balance sheet as of September 30, 2010.

11.  CONCENTRATIONS

Total revenue for the nine month period ended September 30, 2010 was $133,362.  $89,599 or 67% of the total revenue was derived from one customer Ferring Pharmaceutical, Inc. which is the Canadian division of Ferring, Inc. international pharmaceutical company based in Sweden.  Ferring Inc. grosses approximately one billion dollars per year in annual revenue.

22

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Pursuant To "Safe Harbor" Provisions Of Section 21e Of The Securities Exchange Act Of 1934

Except for historical information, the Company's reports to the Securities and Exchange Commission on Form 10-K and Form 10-Q and periodic press releases, as well as other public documents and statements, contain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the statements. These risks and uncertainties include general economic and business conditions, development and market acceptance of the Company's products, current dependence on the willingness of investors to continue to fund operations of the Company and other risks and uncertainties identified in the risk factors discussed below and in the Company's other reports to the Securities and Exchange Commission, periodic press releases, or other public documents or statements.

Readers are cautioned not to place undue reliance on forward-looking statements. The Company undertakes no obligation to republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events.

Results of Operations for the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009:

Total revenues generated from the sales of Resurgex Essential™, Resurgex Essential Plus™, and Resurgex Select® for the quarter ended September 30, 2010 totaled $9,453, a decrease of 99% from the quarter ended September 30, 2009 which totaled $910,463.  The primary reason for the significant decrease was due to lack of sales to our Greek distributor for the quarter ended September 30, 2010.

At this stage in the Company’s development, revenues are not yet sufficient to cover ongoing operating expenses.

Gross profits for the quarter ended September 30, 2010 amounted to $4,081 for a 43% gross margin. Gross profits decreased $290,566 or 99% for the quarter ended September 30, 2010 compared to $294,647 for the quarter ended September 30, 2009.  The decrease in gross profits is a result of 99% lower revenue due to economic conditions in the country of Greece.

After deducting research and development costs of $8,395 and selling, general and administrative expenses of $749,190, the Company realized an operating loss of $753,504 for the quarter ended September 30, 2010.  Operating losses of $753,504 increased $259,455 or 53% as compared to the third quarter of 2009 operating loss of $494,049.  Non-operating expenses totaled $195,090 for the quarter ended September 30, 2010 an decrease of 63% or $330,929 as compared to $526,019 for the quarter ended September 30, 2009.  The decrease in non-operating expenses of $330,929 was primarily due to an decrease of $343,537 in interest and financing expense which occurred as a result of the debt restructuring which occurred in November 2009 and the conversion of the Unit Notes in June 2010.  In September 2010, the Company recognized a gain on the extinguishment of debt net of debt discount in the amount of $24,429.

The net result for the quarter ended September 30, 2010 was a loss of $948,594 or $0.00 per share, compared to a loss of $1,020,068 or $0.00 per share for the third quarter of 2009.  The net loss for the third quarter of 2010 decreased by $71,474 or 7% as compared to the third quarter of 2009, primarily due to reduction in financing costs.  Management will continue to make an effort to lower operating expenses and increase revenue.  The Company will continue to invest in further expanding its operations and a comprehensive marketing campaign with the goal of accelerating the education of potential clients and promoting the name and products of the Company. Given the fact that most of the operating expenses are fixed or have quasi-fixed character management expects them to significantly decrease as a percentage of revenues as revenues increase.

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Results of Operations for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009:

Total revenues generated from the sales of Resurgex Essential™, Resurgex Essential Plus™, and Resurgex Select® for the nine months ended September 30, 2010 totaled $133,362, a decrease of 90% from the nine months ended September 30, 2009 which totaled $1,347,878.  The primary reason for the significant decrease was due to lack of sales to our Greek distributor for the nine months ended September 30, 2010.

The Company’s revenues are not yet sufficient to cover ongoing operating expenses.

Gross profits for the nine months ended September 30, 2010 amounted to $54,559 for a 41% gross margin. Gross profits decreased $475,121 or 90% for the nine months ended September 30, 2010 compared to $529,680 for the nine months ended September 30, 2009.  The decrease in gross profits is a result of 90% lower revenue.

After deducting research and development costs of $23,761 and selling, general and administrative expenses of $2,464,317, which included $476,722 in non-cash outlays in the form of restricted stock and warrants issued for professional fees and compensation, the Company realized an operating loss of $2,433,519 for the nine months ended September 30, 2010.  Operating losses of $2,433,519 increased $598,444 or 33% as compared to the nine months ended September 30, 2009 which totaled an operating loss of $1,835,075.  Non-operating expenses totaled $3,982,711 for the nine months ended September 30, 2010 an increase of 70% or $1,646,236 as compared to $2,336,475 for the nine months ended September 30, 2009.  The increase in non-operating expenses of $1,646,236 was primarily due to an increase of $1,793,296 in interest and financing expense which occurred as a result of the debt restructuring which occurred in November 2009 and the conversion of the Unit Notes in June 2010. In the nine months ended September 30, 2010, the Company recognized a gain on the extinguishment of debt net of debt discount in the amount of $380,529.  Debt holders converted $2,047,083 of principal debt plus accrued interest into common stock at a price of $0.02 per share.

The net result for the nine months ended September 30, 2010 was a loss of $6,416,230 or $0.01 per share, compared to a loss of $4,171,550 or $0.01 per share for the nine months ended September 30, 2009.  The net loss for the nine months ended September 30, 2010 increased by $2,244,680 or 54% as compared to the nine months ended September 30, 2009 primarily due to the lack of sales and interest and financing costs.    Management will continue to make an effort to lower operating expenses and increase revenue.  The Company will continue to invest in further expanding its operations and a comprehensive marketing campaign with the goal of accelerating the education of potential clients and promoting the name and products of the Company. Given the fact that most of the operating expenses are fixed or have quasi-fixed character management expects them to significantly decrease as a percentage of revenues as revenues increase.

Disclosure About Off-Balance Sheet Arrangements

We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.

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Critical Accounting Policies

Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included in this report.

Liquidity and Capital Resources

The Company’s future success is dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing.  Management believes they can raise the appropriate funds needed to support their business plan and develop an operating, cash flow positive company.  The Company has been operating with negative cash flows for the past 10 years.

The Company incurred substantial net losses for the nine months ended September 30, 2010 and the year ended December 31, 2009 and has accumulated a deficit of $73,775,654 at September 30, 2010. The Company has not been able to generate sufficient cash from operating activities to fund its ongoing operations. There is no guarantee that the Company will be able to generate enough revenue and/or raise capital to support its operations.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  The Company has never reported Net Income.

The consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should the Company be unable to continue as a going concern.

The Company’s business operations generally have been financed by debt investments through promissory notes with accredited investors.  During the nine months of 2010, the Company obtained new equity capital from the issuance of promissory notes that supplied the majority of the funds that were needed to finance operations during the reporting period. Such new borrowings resulted in the receipt by the Company of $2,107,500.  While these funds sufficed to compensate for the negative cash flow from operations they were not sufficient to build up a liquidity reserve.  As a result, the Company’s financial position at the end of the reporting period showed a working capital deficit of $7,421,925.  During the first nine months of 2010 the Company obtained new financing sufficient to fund ongoing working capital requirements.  We need to continue to raise funds to cover working capital requirements until we are able to raise revenues to a point of positive cash flow.

Debt Transaction

In June 2009, the Company received a letter (the “Letter”) from the Creditor Investors proposing a restructuring plan, inter alia, providing for debtholders of the Company to convert their debt into Common Stock of the Company at a conversion rate of $.035 per share (the “Conversion Rate”).  After careful review and analysis of the restructuring plan, the Company believed that the restructuring plan was in the best interest of the Company’s stockholders and it endorsed the restructuring plan and suggested that each of its debtholders convert their debt to equity as described in the Letter.  The Letter advised the Company that if debtholders did not convert to Common Stock as described above, the Creditor Investors would initiate foreclosure proceedings on July 15, 2009.  The Creditor Investors never initiated foreclosure proceedings.

Between June 2009 and June 2010, the Company contacted most of its debtholders offering them E Preferred Stock in exchange for their debt.  E Preferred Stock was offered rather than Common Stock because the Company did not have a sufficient number of shares of Common Stock authorized but unissued for the anticipated Debt Transaction.  E Preferred Stock was automatically convertible into Common Stock at the rate of one share of E Preferred Stock for 10,000 shares of Common Stock if and when the Company amended its certificate of incorporation to sufficiently increase its authorized shares to, inter alia, provide for a sufficient amount of Common Stock for the Debt Transaction at the Conversion Rate.  The certificate of incorporation was so amended on March 12, 2010, at which time all outstanding shares of E Preferred converted into Common Stock at the Conversion Ratio.  A total of 22 debt holders converted an aggregate of $4,352,120 of debt pursuant to the Debt Transaction between June 2009 and June 30, 2010.

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Private Placement

Between October and November 2009, the Company, along with its wholly-owned subsidiary, Millennium Biotechnologies, Inc. (the “Subsidiary”), raised $1,382,050 from the sale of 13.8205 units (the “Units”), each Unit consisting of a Senior Secured 12% thirty month $100,000 Note and 100 shares of the Company’s Series F Preferred Stock in the Private Placement.  It also converted a total of approximately $3,220,000 of outstanding debt into an aggregate of 32.2 Units.  These debtholders consisted of the Creditor Investors and nine other debtholders who held certain purchase order financing notes and/or subordinated notes.

After the initial closing of the Private Placement, the Company continued to offer Units on the same terms as those in the Private Placement pursuant to a second (continuation) private offering that terminated on June 30, 2010.  In December 2009 the Company raised an additional $90,000 from the sale of 0.90 Units under the continuation offering.  Through June 30, 2010, the Company raised an additional $1,280,260 form the sale of 12.80 Units under the continued offering.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

Item 4. Control and Procedures

Evaluation of disclosure controls and procedures

Management of the Company has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weakness and significant deficiencies in our internal control over financial reporting described below, our disclosure controls and procedures were not effective, as of the September 30, 2010, to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that the information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on the evaluation, our management concluded that, as of September 30, 2010, our internal control over financial reporting was not effective.

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A significant deficiency is a deficiency, or combination of deficiencies in internal control over financial reporting, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected by the entity’s internal control. A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Management identified the following material weakness and significant deficiencies in its assessment of the effectiveness of internal control over financial reporting as of September 30, 2010:

· Material weakness: The Company did not maintain effective controls over certain aspects of the financial reporting process because we lacked a sufficient complement of personnel with a level of accounting expertise and an adequate supervisory review structure that is commensurate with the Company’s financial reporting requirements.

· Significant deficiencies:

o Inadequate segregation of duties

o Untimely account reconciliations

Nevertheless, based on a number of factors, including the performance of additional procedures performed by management designed to ensure the reliability of our financial reporting, our Chief Executive Officer and Chief Financial Officer believe that the consolidated financial statements included with this periodic report fairly present, in all material respects, our financial position, results of operations, and cash flows as of the dates, and for the periods, presented, in conformity with United States Generally Accepted Accounting Principals.

Changes in Internal Control over Financial Reporting 

Management of the Company has evaluated, with the participation of the Chief Executive Officer of the Company, any change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q. There was no change in the Company's internal control over financial reporting identified in that evaluation that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting, other than what has been reported above.

PART  II  -  OTHER INFORMATION

Item 1  Legal Proceedings

Creative Healthcare Solutions, LLC vs. Millennium Biotechnologies Inc, Ct. of Common Pleas of Delaware County Ohio, Case No. 07 CV H 11 1420).  Millennium was not satisfied with the service rendered by Creative Healthcare Solutions, LLC in 2005 which were associated with the development of Resurgex Select collateral materials developed in December of 2005.  Millennium subsequently was forced to destroy and dispose of over 80% of the materials provided by Creative Healthcare Solutions due to the poor quality of the materials.  Millennium has been unsuccessful in resolving the dispute and subsequently Creative Healthcare Solutions, LLC has filed legal action for demand of payment in the amount of $63,718 for services rendered.  Millennium continues to negotiate a settlement through counsel with regards to this legal proceeding.

Ronald Burgert vs. Millennium Biotechnologies, Inc., et al. filed on the 9th day of October 2008 in District Court of Dallas County, Dallas, Texas.  Mr. Burgert has filed a claim in the amount of $25,000 based on a note dated May 18, 2006.  As of March 26, 2008 the balance due on the note, including unpaid principal and interest, was $31,635.  On December 1, 2008, the 14th Judicial District, Dallas County, Dallas, Texas issued a default judgment against Millennium Biotechnologies, Inc. in the amount of $31,636 plus interest and unpaid attorney’s fees.

Robert Half International vs. Millennium Biotechnologies, Inc. filed on September 30, 2009 in the Superior Court of New Jersey, Law Division, Middlesex County.  Robert Half International claims a total of $18,507 plus costs and fees based upon the Millennium Biotechnologies, Inc.’s failure to pay the plaintiff the fees associated with the full time hiring of an employee.

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Growthink Inc. vs. Millennium Biotechnologies, Inc. filed on June 15, 2009 in the Superior Court of New Jersey, Law Division, Somerset-Special Civil Part, Case #DC-004225-09.  Growthink Inc. claims a total of $7,941.04 plus cost and attorney fees based upon Millennium Biotechnologies, Inc. failure to pay the plaintiff for the reasonable value of goods sold and delivered and/or services rendered by the plaintiff to the defendant.  On April 5, 2010, there was a levy on Millennium’s bank account in the amount of $1,031.50.  On June 15, 2010, there was a levy on Millennium’s bank account in the amount of $282.

Item 1A  Risk Factors

Not Applicable

Item 2  Unregistered Sales of Equity Securities and Use of Proceeds

(a) Issuance of unregistered securities

We have issued unregistered equity securities during the nine moths ended September 30, 2010.  We have entered into agreements that call for the issuance of the following securities:

(i)   12.80 units, each unit comprised of a promissory note for $100,000 and 100 shares of Series F Preferred Stock, convertible at the rate of 120,000 common shares for every one share of F-stock, to four individuals, one of which is a director of the Company and one corporate investor, resulting in the receipt by the Company of $1,280,260. These funds were used for working capital and general corporate services.

(ii)  1,000 shares of Series E Preferred Stock, convertible at the rate of 10,000 common shares for every one share of E-stock, and 10,000,000 common shares, to four consultants for business and financial advisory services.

(b)  Not Applicable

(c)   Not Applicable

Item 3  Defaults Upon Senior Securities

See Note 6 to the Consolidated Financial Statements in Part I above.

Item 4  Removed and Reserved

Item 5  Other Information

- None

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Item 6  a)  Exhibits

31.1	Certification of Mark C. Mirken, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Michael C. James, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Mark C. Mirken, Chief Executive Officer, pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2	Certification of Michael C. James, Chief Financial Officer, pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	INERGETICS, INC.
Date:   November 22, 2010	By:	/s/  Michael C. James
		Michael C. James
		Chief Financial Officer
		Chief Accounting Officer

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