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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the fiscal year ended June 30, 2010
 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: 000-30489
 LIFEVANTAGE CORPORATION
  Colorado
    
    90-0224471(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)11545 W. Bernardo Court, Suite 301San Diego, California
    
    92127(Address of principal executive offices)
    
    (Zip Code)
 (858) 312-8000
 None
 
 o þ
 o þ
 þ o
 o o
 o
  Large accelerated filer o
    
    Accelerated filer
o
    
    Non-accelerated filer o(Do not check if a smaller reporting
company)
    
    Smaller reporting company
þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
    
    
    Limited operating history and lack of significant revenues from operations;
    
    Our ability to successfully expand our operations and manage our future growth;
    
    Difficulty in managing growth and expansion;
    
    Dilutive effects of any potential need to raise additional capital;
    
    The deterioration of global economic conditions and the decline of consumer confidence and
spending;
    
    We reported material weaknesses in our internal control over financial reporting, and if we
are unable to improve our internal control over financial reporting, our financial results
may not be accurately reported;
    
    Environmental liabilities stemming from past operations and property ownership;
    
    Significant dependence upon a single product;
    
    Competition in the dietary supplement market;
    
    The potential failure or unintended negative consequences of our network marketing sales
channel;
    
    Our ability to retain independent distributors or to hire new independent distributors on
an ongoing basis;
    
    The potential for government or third party actions against us resulting from independent
distributor activities that violate applicable laws or regulations;
    
    The potential for third party and governmental actions involving our network marketing
sales channel;
    
    Our ability to protect our intellectual property rights and the value of our product;
    
    Our ability to continue to innovate and provide products that are useful to consumers;
    
    The effect of current and future government regulations of the network marketing and
dietary supplement industries on our business;
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
    
    The effect of unfavorable publicity on our business;
    
    The potential for product liability claims against us;
    
    Our dependence on third party manufacturers to manufacture our product;
    
    The ability to obtain raw material for our product;
    
    Our common stock is currently classified as a penny stock;
    
    Our stock price may experience future volatility;
    
    The illiquidity of our common stock;
    
    Substantial sales of shares of our common stock;
    
    Other factors not specifically described above, including the other risks, uncertainties,
and contingencies described under Description of Business, Risk Factors and Managements
Discussion and Analysis of Financial Condition and Results of Operation in Items 1 and 7 of
this report.When considering these forward-looking statements, you should keep in mind the cautionary
statements in this report and the documents incorporated by reference. We have no obligation
and do not undertake to update or revise any such forward-looking statements to reflect events
or circumstances after the date of this report.
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##### 



TABLE OF CONTENTS
 PagePART IItem 1. Business
    
    
    5Item 1A. Risk Factors
    
    
    21Item 1B. Unresolved Staff Comments
    
    
    28Item 2. Properties
    
    
    28Item 3. Legal Proceedings
    
    
    29Item 4. (Removed and Reserved)
    
    
    29PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    29Item 6. Selected Financial Data
    
    
    30Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 7A Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 8 Financial Statements and Supplementary Data
    
    
    36Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    36Item 9A Controls and Procedures
    
    
    36Item 9B Other Information
    
    
    38PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    38Item 11. Executive Compensation
    
    
    38Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    38Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    38Item 14. Principal Accountant Fees and Services
    
    
    38PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    39SignaturesEX-10.14EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2
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PART I
 
 ITEM 1   BUSINESS
 Overview
  ® ®
 General
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Market
  Nutritional Business Journal, Direct-to-Consumer Selling in the Nutrition Industry
Report
 
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NBJ
 Nutritional Business Journal, Direct-to-Consumer Selling in the Nutrition Industry Report
 Anticipated Industry Growth
  
    
    consumers increasingly moving toward alternative solutions for general wellness issues;
    
    the changing lifestyles of consumers;
    
    a growing elderly population;
    
    aging Baby Boomers and their better off financial status;
    
    the fact that nutritional supplements can complement or be used as an alternative
to traditional pharmaceutical treatments;
    
    recently gained credibility of nutritional supplements as a result of the Food and
Drug Administrations (FDAs) insistence on stringent product quality and testing
procedures;
    
    newly implemented federal Good Manufacturing Practices (GMP);
    
    increasing research by federal agencies;
    
    a steady stream of innovative new products that target an expanding range of increasingly specific conditions; and
    
    the increasing growth of the direct sales industry, with specific product growth
especially pronounced among products that are not available in retail stores.
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The Anti-Aging Market
  
    
    lifestyle changes effected by consumers to increase their chance of longevity;
    
    changing practices in personal grooming which have resulted in more time and money
being directed to external grooming efforts to minimize the visible effects of aging;
    
    increased demand for skin lotions, toners, wrinkle-removal creams, skin whiteners,
luxury topical skin care products, concealers and cover-ups;
    
    increasing number of younger age anti-aging consumers becoming more proactive about
their skin maintenance routine; and,
    
    the growing acceptance of vitamins and antioxidants as effective anti-aging
nutrients.
  Marketing and Direct Selling Opportunity
    
    
    the Anti-Aging market;
    
    the Baby Boomer market, interested in anti-aging through cosmetics, dietary supplements,
and supplemental business opportunities; and
    
    the market created by the current economic crisis, those seeking to supplement income or
replace lost income.
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Background
 Oxidative Stress
    -9-




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Product Overview
 Protandim®
     Antioxidant Enzyme Activity and Reducing
C-Reactive Protein Levels
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Clinical Studies
 Free Radical
Biology and Medicine, vol. 40, pp. 341-7 (2006).
 Published and Independent Preclinical Studies
  Free Radical Biology and Medicine, vol. 46, pp. 430-40 (2009).
 Protandim, a
Fundamentally New Antioxidant Approach in Chemoprevention Using Mouse Two-Stage Skin Carcinogenesis
as a Model
 Circulation, Chronic Pulmonary Artery Pressure
Elevation Is Insufficient to Explain Right Heart Failure
 The Dietary Supplement Protandim Decreases Plasma Osteopontin and Improves
Markers of Oxidative Stress in Muscular Dystrophy Mdx Mice
  LifeVantage TrueScience Anti-Aging Cream
 
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 
  
    
    Hydration/Moisturizing:LifeVantage TrueScienceAnti-Aging Cream features a
Lamellar Phase Emulsion System that forms a liquid emulsion barrier for superior
moisturizing. This is accomplished by delivering exotic fatty acids to retain the bodys
natural moisture and produce a moisturizing effect. It also features sodium
hyaluronate, a superior moisture-binding agent that can balance moisture levels at the
surface of the skin.
    
    Toning/Brightening:The turmeric extract in LifeVantage TrueScienceAnti-Aging
Cream is specially modified to remove the majority of yellow compounds without reducing
the effectiveness of its potent curcuminoids. Curcuminoids have been shown to produce
skin lightening that evens dispigmentation. Additionally, the leucojum aestivum
bulb extract slows the spread of melanocytes, which contributes to uneven skin coloring.
    
    Wrinkles/Fine Lines:The palm peptides and leucojum aestivum bulb extract in
LifeVantage TrueScienceAnti-Aging Cream have been shown to visibly reduce signs of
wrinkles and fine lines. They also promote improved skin tone and texture.
    
    Lipid Rejuvenation:LifeVantage TrueScienceAnti-Aging Cream delivers multiple
ingredients intended to mimic the naturally occurring lipid structure in the skin and
retain the bodys own moisturizing lipids.
 Our Business Strategy
 Network Marketing Model
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
    
    offering compelling and innovative products backed by science;
    
    offering rewarding and motivating distributor incentives, training, events, and loyalty / recognition programs;
    
    continuing to support clinical studies to demonstrate the effectiveness of our products; and
    
    combining traditional public relations and marketing strategies with the viral marketing power of network marketing.
 Distributor Network
      Distributor Earnings
  Distributor Motivation and Training
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Competitive Advantages
  
    
    our ability to offer our distributors a compelling business opportunity to market
and sell highly consumable products backed by science;
    
    our experienced executive and network distribution team, comprised of some of the
most sought after and high-producing independent distributors in the industry;
    
    providing a broad array of motivational, educational, and support services;
    
    third-party substantiation and celebrity and scientific endorsement for our company and products; and
    
    our ability to motivate our distributors through a performance-based compensation
plan, individual recognition, reward programs and incentives, and participation in local
and national corporate events.
  Product Portfolio
  Compensation Plan
     Distributor Regulation
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Manufacturing
    Marketing
  Sales of our Products
   -15-




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Research and Development
   Competition
 Direct Antioxidants
  Oral SOD and CAT
  Network Marketing Companies
  Product Liability and Other Insurance
  Intellectual Property
   -16-




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Governmental Regulations
 FDA Regulations
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FTC Regulations
    
    
    impose cancellation/product return, inventory buy-backs and cooling-off rights for
consumers and distributors;
    
    require us or our distributors to register with governmental agencies;
    
    impose caps on the amount of commission we can pay;
    
    impose reporting requirements; and
    
    impose upon us requirements, such as requiring distributors to maintain
levels of retail sales to qualify to receive commissions, to ensure that distributors
are being compensated for sales of products and not for recruiting new distributors.
  State Regulations
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The Bioterrorism Act
  1.
    
    Mandatory registration with the FDA of all food manufacturers.2.
    
    Prior notice to regulators of inbound food shipments.3.
    
    Recordkeeping requirements, and grant of access to the FDA of applicable
records.4.
    
    Grant of detention authority to the FDA of food products in certain
circumstances.
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Potential FDA and Other Regulation
   Results of Operations
   Employees
  Available Information
 www.lifevantage.com
  -20-




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ITEM 1A   RISK FACTORS
 Because of the following risks, as well as other risks affecting our financial condition and
operating results, past financial performance should not be considered to be a reliable indicator
of future performance, and investors should not use historical trends to anticipate results or
trends in future periods. The risks described below are those we currently believe could materially
affect us. The following risk are not necessarily all of the important factors that could cause our
actual results of operations to differ materially from those expressed in the forward-looking
statements in this report.
 Risk Factors Relating to Our Company
 We have a limited operating history and lack of sufficient revenues from operations.
  We may not be successful in expanding our operations.
  If we are able to expand our operations, we may be unable to successfully manage our future growth
  We have identified material weaknesses in our internal control over financial reporting which, if
not remediated, could cause us to fail to timely and accurately report our financial results or
prevent fraud, or result in restatements of our financial statements. As a consequence,
shareholders could lose confidence in our financial reporting and our stock price could suffer.
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We may need to raise additional capital.
   Economic conditions, including the current financial crisis and declining consumer confidence and
spending, could harm our business.
  Our failure to comply with certain covenants contained in our convertible debentures due November
2011 could require us to redeem such debentures at a premium.
   We could be exposed to certain environmental liabilities due to our past operations and property
ownership.
   -22-




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Risk Factors Relating to our Business and Industry
 We primarily depend on a single product for our revenue.
  The dietary supplement market is highly competitive.
  Our network marketing sales channel may not be successful.
  The loss of key high-level distributors could negatively impact the growth of our network marketing
sales channel.
  Independent distributor activities that violate laws could result in governmental actions against
us and could otherwise harm our business.
  Network marketing is heavily regulated.
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Our business is subject to strict government regulations.
   Future laws may hinder or prohibit the production or sale of our existing products and any future
products.
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Our intellectual property rights are valuable, and any inability to protect them could reduce the
value of our products and brand.
  Other parties might claim that we infringe on their intellectual property rights.
  Unfavorable publicity could materially hurt our business.
  We are subject to the risk of investigatory and enforcement action by the FTC.
  Challenges by regulatory authorities or private parties to the form of our network marketing system
or other regulatory compliance issues could harm our business.
  Our business is susceptible to product liability claims.
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We are dependent upon third parties to manufacture our product.
  Raw material for our product may be difficult to obtain or expensive.
  Product returns may adversely affect our business.
  The loss of key personnel could negatively impact our business.
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Economic, political, and other risks associated with our international operations could adversely
affect our revenues and international growth prospects.
  
    
    political and economic instability of foreign markets;
    
    foreign governments restrictive trade policies;
    
    inconsistent product regulation or sudden policy changes by foreign agencies or
governments;
    
    the imposition of, or increase in, duties, taxes, government royalties, or non-tariff
trade barriers;
    
    difficulty in collecting international accounts receivable and potentially longer
payment cycles;
    
    increased costs in maintaining international marketing efforts;
    
    problems entering international markets with different cultural bases and consumer
preferences; and
    
    fluctuations in foreign currency exchange rates.
  Risks Related to Ownership of Our Common Stock
 Our common stock is currently classified as penny stock.
  If we need additional financing in the future and are required to issue securities that are priced
at less than the conversion price of our convertible debentures or the exercise price of warrants,
it will result in additional dilution.
  If the holders of our outstanding convertible debentures, warrants and options convert and exercise
their securities into common stock, we will issue up to 74,967,425 shares, which will materially dilute
the voting power of our currently outstanding common stock and could cause our stock price to
decline.
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The market price of our securities could be adversely affected by sales of restricted securities.
  Our stock price may experience future volatility.
  Our common stock has historically been illiquid.
  Substantial sales of shares may impact the market price of our common stock .
  We have never paid dividends on our capital stock, and we do not anticipate paying any cash
dividends in the foreseeable future.
  
 ITEM 1B   UNRESOLVED STAFF COMMENTS
  
 ITEM 2   PROPERTIES
 Corporate Offices
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Warehouse Facilities
  
 ITEM 3   LEGAL PROCEEDINGS
  
 ITEM 4   (REMOVED AND RESERVED)
  
 PART II
 
 ITEM 5   MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
 Market Information and Holders
   2010
    
    2009High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    0.71
    
    
    $
    0.33
    
    
    $
    0.23
    
    
    $
    0.13Second Quarter
    
    $
    0.44
    
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.07Third Quarter
    
    $
    0.47
    
    
    $
    0.26
    
    
    $
    0.78
    
    
    $
    0.16Fourth Quarter
    
    $
    0.80
    
    
    $
    0.38
    
    
    $
    0.94
    
    
    $
    0.45
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Dividends
  Securities Authorized for Issuance under Equity Compensation Plans
 (c) Number of securities(b) Weighted-
    
     
    remaining available for(a) Number of
    
     
    average exercise
    
     
    future issuance undersecurities to be issued
    
     
    price of
    
     
    equity compensationupon exercise of
    
     
    outstanding
    
     
    plans (excludingoutstanding options,
    
     
    options, warrants
    
     
    securities reflected inPlan Category
    
    warrants and rights
     
    
    and rights
    
     
    column (a))Equity
compensation plans
approved by
security holders
    
    
    8,535,731
    
    
    $
    0.50
    
    
    
    304,269
  Unregistered Sales of Securities
     
 ITEM 6   SELECTED FINANCIAL DATA
  
 ITEM 7   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 You should read the following discussion and analysis in connection with our financial statements
and related notes beginning on page F-1 following Part III of this report.
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Overview
   Our Products
 
    Results of Operations
    -31-




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Comparison of Years Ended June 30, 2010 and 2009
 Sales.
 Gross Margin.
 Operating Expenses.
 Sales and Marketing.
 General and Administrative.
 Research and Development.
 Depreciation and Amortization.
 Net Other Expense.
 Net Loss.
 Liquidity and Capital Resources
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Off-Balance Sheet Arrangements
  Critical Accounting Policies
  -33-




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Allowances for Product Returns
   Inventory Valuation
  Revenue Recognition
  Derivative Instruments
   Intangible Assets  Patent Costs
  -34-




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Stock-Based Compensation
  Research and Development Costs
  Commitments and Obligations
 Payments due by periodLess thanContractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 yearsConvertible Debt Obligations (subject to conversion to
common stock)
    
    
    5,570,280
    
    
    
    925,000
    
    
    
    4,645,280
    
    
    
    Operating Lease Obligations
    
    
    730,221
    
    
    
    316,318
    
    
    
    305,809
    
    
    
    108,094Revolving
line of Credit
    
    
    433,985
    
    
    
    433,985
    
    
    
    
    
    
    
    Total
    
    
    6,734,486
    
    
    
    1,675,303
    
    
    
    4,951,089
    
    
    
    108,094
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Recently Issued Accounting Standards
  Standards Implemented
    Improving Disclosures about Fair Value Measurements.
 
 ITEM 7A   QUANTITATIVE AND QUALITATIVE DISCLOURES ABOUT MARKET RISK
  
 ITEM 8   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A   CONTROLS AND PROCEDURES
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Managements Report on Internal Control Over Financial Reporting
  1.
    
    pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our assets;2.
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that our receipts and
expenditures are being made only in accordance with the authorization of our management and
directors; and3.
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the
financial statements.
  Internal ControlIntegrated Framework
 Identified Material Weaknesses
  1.
    
    Sufficient personnel with an appropriate level of accounting knowledge, experience and
training in the selection and application of technical accounting principles in accordance
with GAAP to support our financial accounting and reporting functions;2.
    
    Adequate oversight of certain accounting functions and did not maintain adequate
documentation of management review and approval of accounting transactions and financial
reporting processes;3.
    
    Formal policies governing certain accounting transactions and financial reporting
processes; and4.
    
    A whistleblower hotline.
  Managements Remediation Initiatives
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1.
    
    Hire staff with experience managing and working in the corporate accounting department
of a publicly traded company;2.
    
    Implement appropriate management oversight and approval activities;3.
    
    Establish comprehensive formal general accounting policies and procedures and require
employees to sign off such policies and procedures as documentation of their understanding
of and compliance with company policies; and4.
    
    Establish a whistleblower hotline and communicate it to appropriate Company
stakeholders.
  Conclusion
   Changes in Internal Control over Financial Reporting
  
 ITEM 9B   OTHER INFORMATION
  
 PART III
  
 ITEM 10   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11   EXECUTIVE COMPENSATION
  
 ITEM 12   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 13   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14   PRINCIPAL ACCOUNTANT FEES AND SERVICES
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PART IV
 
 ITEM 15   EXHIBITS, FINANCIAL STATEMENT SCHEDULES
  Financial Statements
  Exhibits
  -39-




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SIGNATURES
  LifeVantage Corporation.
a Colorado corporationBy:
    /s/ David W. BrownDavid W. BrownIts:
    Chief Executive OfficerDate:
    September 15, 2010  Signature
    
    Date
    
    Title/s/ David W. Brown

David W. Brown
    
    September 15, 2010
    
    Chief Executive Officer; Director
(Principal Executive Officer)/s/ Carrie E. Carlander

Carrie E. Carlander
    
    September 15, 2010
    
    Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)/s/ Garry Mauro

Garry Mauro
    
    September 15, 2010
    
    Chairman of the Board/s/ James D. Crapo

James D. Crapo
    
    September 15, 2010
    
    Chairman of the Audit Committee/s/ Joe M. McCord

Joe M. McCord
    
    September 15, 2010
    
    Director/s/ Richard D. Jones

Richard D. Jones
    
    September 15, 2010
    
    Director/s/ Doug Robinson

Doug Robinson
    
    September 15, 2010
    
    Director/s/ C. Mike Lu

C. Mike Lu
    
    September 15, 2010
    
    Director/s/ Kay Stout Manovich

Kay Stout Manovich
    
    September 15, 2010
    
    Director
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ExhibitNo.
    
    Document Description
    
    Incorporation by Reference3.1
    
    Amended and Restated Articles of
Incorporation.
    
    Filed as an exhibit to
LifeVantage Corporations
Annual Report on Form
10-KSB (file No.
000-30489), filed on
September 28, 2006, and
incorporated herein by
reference.3.2
    
    Amended and Restated Bylaws.
    
    Filed as an exhibit to
LifeVantage Corporations
Annual Report on Form
10-KSB (file No.
000-30489), filed on
September 28, 2006, and
incorporated herein by
reference.4.1
    
    Form of Warrant.
    
    Filed as an exhibit to
LifeVantage Corporations
Registration Statement on
Form SB-2 (File No.
333-148119), filed
December 17, 2007, and
incorporated herein by
reference.4.2
    
    Form of Convertible Debenture.
    
    Filed as an exhibit to
LifeVantage Corporations
Registration Statement on
Form SB-2 (File No.
333-148119), filed
December 17, 2007, and
incorporated herein by
reference.4.3
    
    Form of 2009 Private Placement Warrant.
    
    Filed as an exhibit to
LifeVantage Corporations
Annual Report on Form
10-K (File No.
000-30489), filed
September 28, 2009, and
incorporated herein by
reference.4.4
    
    Form of 2009 Unit Subscription Agreement.
    
    Filed as an exhibit to
LifeVantage Corporations
Annual Report on Form
10-K (File No.
000-30489), filed
September 28, 2009, and
incorporated herein by
reference.4.5
    
    Form of Debenture issued in connection with
November 2009 Financing.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on November 18,
2009, and incorporated
herein by reference.4.6
    
    Form of Warrant issued in connection with
November 2009 Financing.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on November 18,
2009, and incorporated
herein by reference.4.7
    
    Amendment to Debentures and Warrants, dated
as of December 11, 2009.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on February 16,
2010, and incorporated
herein by reference.4.8
    
    Form of Restated Debenture issued pursuant
to Amended and Restated Securities Purchase
Agreement dated December 11, 2009.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on February 16,
2010, and incorporated
herein by reference.4.9
    
    Form of Restated Warrant issued pursuant to
Amended and Restated Securities Purchase
Agreement dated December 11, 2009.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on February 16,
2010, and incorporated
herein by reference.4.10
    
    Form of 8% Convertible Debentures issued on
each of December 31, 2009, January 20,
2010, February 4, 2010 and February 26,
2010.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on May 14, 2010,
and incorporated herein
by reference.4.11
    
    Form of Common Stock Purchase Warrant
issued on each of December 31, 2009,
January 20, 2010, February 4, 2010 and
February 26, 2010.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on May 14, 2010,
and incorporated herein
by reference.10.1
    
    Form of Unit Warrant Certificate.
    
    Filed as an exhibit to
LifeVantage Corporations
Registration Statement on
Form SB-2 (File No.
333-126288), filed on
June 30, 2005, and
incorporated herein by
reference.10.2
    
    Form of Bridge Warrant Certificate.
    
    Filed as an exhibit to
LifeVantage Corporations
Registration Statement on
Form SB-2 (File No.
333-126288), filed on
June 30, 2005, and
incorporated herein by
reference.10.3
    
    Form of Placement Agent Warrant Certificate.
    
    Filed as an exhibit to
LifeVantage Corporations
Registration Statement on
Form SB-2 (File No.
333-126288), filed on
June 30, 2005, and
incorporated herein by
reference.10.4
    
    Form of Placement Agent Warrant Certificate.
    
    Filed as an exhibit to
LifeVantage Corporations
Registration Statement on
Form SB-2/A (File No.
333-126288), filed on
February 6, 2006, and
incorporated herein by
reference.
 -41-




---



##### Table of Contents



ExhibitNo.
    
    Document Description
    
    Incorporation by Reference10.5#
    
    LifeVantage Corporation 2007 Long-Term
Incentive Plan.
    
    Filed with the
LifeVantage Proxy on Form
14-A (File No. 000-30489)
dated October 20, 2006,
and incorporated herein
by reference.10.6
    
    Lease dated July 1, 2008 between Bernardo
Regency, L.L.C. and LifeVantage
Corporation.
    
    Filed as an exhibit to
LifeVantage Corporations
Annual Report on Form
10-KSB (file No.
000-30489), filed on
September 23, 2008, and
incorporated herein by
reference.10.7
    
    Sublease dated March 1, 2009 between
Broadweave Networks Inc. and LifeVantage
Corporation.
    
    Filed as an exhibit to
LifeVantage Corporations
Annual Report on Form
10-K (File No.
000-30489), filed
September 28, 2009, and
incorporated herein by
reference.10.8
    
    Agreement between Cornerstone Research and
Development and LifeVantage Corporation.
    
    Filed as an exhibit to
LifeVantage Corporations
Annual Report on Form
10-K (File No.
000-30489), filed
September 28, 2009, and
incorporated herein by
reference.10.9
    
    Confidential Termination Agreement and
General Release of Claims dated February
14, 2007 between Gerald J. Houston and the
Company.
    
    Filed as an exhibit to
LifeVantage Corporations
Quarterly Report on Form
10-QSB (file No.
000-30489), filed on May
14, 2007, and
incorporated herein by
reference.10.10
    
    Letter Agreement dated June 1, 2007 between
Aspenwood Capital and LifeVantage
Corporation.
    
    Filed as an exhibit to
LifeVantage Corporations
Registration Statement on
Form SB-2 (File No.
333-148119), filed
December 17, 2007, and
incorporated herein by
reference.10.11
    
    Letter Agreement dated September 28, 2007
between Bolder Venture Partners and
LifeVantage Corporation.
    
    Filed as an exhibit to
LifeVantage Corporations
Registration Statement on
Form SB-2 (File No.
333-148119), filed
December 17, 2007, and
incorporated herein by
reference.10.12
    
    Purchase Agreement between General
Nutrition Distribution, LP and LifeVantage
Corporation, dated June 21, 2006.
    
    Filed as an exhibit to
LifeVantage Corporations
Registration Statement on
Form SB-2 (File No.
333-126288), filed on
June 30, 2005, and
incorporated herein by
reference.10.13#
    
    Employment Agreement, dated January 10,
2008, between LifeVantage Corporation and
David W. Brown.
    
    Filed as an exhibit to
LifeVantage Corporations
Current Report on Form
8-K (File No. 000-
30489), filed on January
16, 2008, and
incorporated herein by
reference.10.14#
    
    LifeVantage Compensation Plan.
    
    Filed herewith.10.15#
    
    Scientific Advisory Board Agreement
effective as of October 1, 2009 by and
between the LifeVantage Corporation and Joe
McCord, Ph.D.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on February 16,
2010, and incorporated
herein by reference.10.16
    
    Form of Securities Purchase Agreement
entered into in connection with November
2009 Financing.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on November 18,
2009, and incorporated
herein by reference.10.17
    
    Form of Amended and Restated Securities
Purchase Agreement originally dated
December 11, 2009.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on February 16,
2010, and incorporated
herein by reference.10.18#
    
    First Amendment to Chief Executive Officer
Employment Agreement dated December 15,
2009 between the LifeVantage Corporation
and David W. Brown.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on February 16,
2010, and incorporated
herein by reference.10.19
    
    Settlement Agreement dated December 18,
2009 by and between Zrii, LLC and William
F. Farley, on the one hand, and the
LifeVantage Corporation, Wellness
Acquisition Group, and the other parties
thereto, on the other hand.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on February 16,
2010, and incorporated
herein by reference.10.20
    
    Amendment to and Acknowledgement of
Cancellation of Promissory Note Agreement
dated February 4, 2010 by and between the
LifeVantage Corporation and C. Mike Lu.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on February 16,
2010, and incorporated
herein by reference.10.21
    
    Securities Purchase Agreement dated
December 31, 2009, among the LifeVantage
Corporation and the purchaser parties
thereto.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on May 14, 2010,
and incorporated herein
by reference.
 -42-




---



##### Table of Contents



ExhibitNo.
    
    Document Description
    
    Incorporation by Reference10.22
    
    Securities Purchase Agreement dated January
20, 2010, among the LifeVantage Corporation
and the purchaser parties thereto.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on May 14, 2010,
and incorporated herein
by reference.10.23
    
    Securities Purchase Agreement dated
February 4, 2010, among the LifeVantage
Corporation and the purchaser parties
thereto.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on May 14, 2010,
and incorporated herein
by reference.10.24
    
    Securities Purchase Agreement dated
February 26, 2010, among the LifeVantage
Corporation and the purchaser parties
thereto.
    
    Incorporated by reference
to LifeVantage
Corporations Form 8-K
(File No. 000-30489),
filed on May 14, 2010,
and incorporated herein
by reference.21.1
    
    List of Subsidiaries.
    
    Filed as an exhibit to
LifeVantage Corporations
Annual Report on Form
10-KSB (File No.
000-30489), filed on
October 13, 2005, and
incorporated herein by
reference.23.1
    
    Consent of Ehrhardt Keefe Steiner & Hottman
PC.
    
    Filed herewith.31.1
    
    Certification of Chief Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
    
    Filed herewith.31.2
    
    Certification of Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
    
    Filed herewith.32.1
    
    Certification of Chief Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
    
    Furnished herewith.32.2
    
    Certification of Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
    
    Furnished herewith.
 -43-




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##### Table of Contents



LIFEVANTAGE CORPORATION
 Index to Consolidated Financial Statements
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Financial Statements:Consolidated Balance Sheets as of June 30, 2010 and 2009
    
    
    F-3Consolidated Statements of Operations for the years ended June 30, 2010 and 2009
    
    
    F-4Consolidated Statements of Stockholders Deficit and Comprehensive Income for the years ended June 30, 2010 and 2009
    
    
    F-5Consolidated Statements of Cash Flows for the years ended June 30, 2010 and 2009
    
    
    F-6F-7Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 F-2




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##### Table of Contents



As of,June 30, 2010
    
    
    June 30, 2009ASSETSCurrent assetsCash and cash equivalents
    
    $
    1,637,676
    
    
    $
    608,795Restricted Cash
    
    
    
    
    
    
    259,937Marketable securities, available for sale
    
    
    340,000
    
    
    
    520,000Accounts receivable, net
    
    
    401,597
    
    
    
    648,116Equity raise receivable
    
    
    
    
    
    
    119,750Inventory
    
    
    493,858
    
    
    
    740,014Prepaid expenses and deposits
    
    
    153,864
    
    
    
    89,220Total current assets
    
    
    3,026,995
    
    
    
    2,985,832Long-term assetsMarketable securities, available for sale
    
    
    85,000
    
    
    
    130,000Property and equipment, net
    
    
    196,353
    
    
    
    274,741Intangible assets, net
    
    
    2,045,471
    
    
    
    2,175,281Deferred debt offering costs, net
    
    
    844,792
    
    
    
    83,023Deposits
    
    
    28,613
    
    
    
    66,795TOTAL ASSETS
    
    $
    6,227,224
    
    
    $
    5,715,672LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilitiesAccounts payable
    
    $
    770,941
    
    
    $
    2,029,290Commissions payable
    
    
    591,035
    
    
    
    121,635Reserve for sales returns
    
    
    343,937
    
    
    
    68,542Other accrued expenses
    
    
    809,507
    
    
    
    631,847Customer deposits
    
    
    34,797
    
    
    
    Escrow for equity offering
    
    
    
    
    
    
    259,937Revolving line of credit and accrued interest
    
    
    433,985
    
    
    
    581,444Short-term derivative liabilities
    
    
    1,444,331
    
    
    
    Short-term convertible debt, net of discount
    
    
    702,361
    
    
    
    Capital lease obligations, current portion
    
    
    
    
    
    
    41,490Total current liabilities
    
    
    5,130,894
    
    
    
    3,734,185Long-term liabilitiesDeferred rent
    
    
    27,191
    
    
    
    23,677Derivative liabilities
    
    
    17,123,119
    
    
    
    8,429,710Convertible debt, net of discount
    
    
    121,014
    
    
    
    382,194Total liabilities
    
    
    22,402,218
    
    
    
    12,569,766Commitments and contingenciesStockholders deficitPreferred stock  par value $0.001, 50,000,000
shares authorized, no shares issued or outstanding
    
    
    
    
    
    
    Common stock  par value $0.001, 250,000,000
shares authorized and 61,494,849 and 53,968,628
issued and outstanding as of June 30, 2010 and
2009, respectively
    
    
    61,495
    
    
    
    53,969Additional paid-in capital
    
    
    21,457,145
    
    
    
    16,964,927Accumulated deficit
    
    
    (37,661,857
    )
    
    
    (23,872,990
    )Accumulated other comprehensive income
    
    
    (31,777
    )
    
    
    Total stockholders deficit
    
    
    (16,174,994
    )
    
    
    (6,854,094
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    $
    6,227,224
    
    
    $
    5,715,672
  F-3




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##### Table of Contents



For the years ended,June 30, 2010
    
    
    June 30, 2009Sales, net
    
    $
    11,478,460
    
    
    $
    4,141,304Cost of sales
    
    
    1,905,992
    
    
    
    852,804Gross profit
    
    
    9,572,468
    
    
    
    3,288,500Operating expenses:Sales and marketing
    
    
    8,481,496
    
    
    
    4,107,768General and administrative
    
    
    7,765,331
    
    
    
    6,588,414Research and development
    
    
    392,691
    
    
    
    224,366Depreciation and amortization
    
    
    254,902
    
    
    
    173,030Total operating expenses
    
    
    16,894,420
    
    
    
    11,093,578Operating loss
    
    
    (7,321,952
    )
    
    
    (7,805,078
    )Other income and (expense):Interest expense, net
    
    
    (6,828,049
    )
    
    
    (1,309,556
    )Change in fair value of derivative liabilities
    
    
    3,101,673
    
    
    
    Total other income (expense)
    
    
    (3,726,376
    )
    
    
    (1,309,556
    )Net loss
    
    $
    (11,048,328
    )
    
    $
    (9,114,634
    )Net loss per share, basic and diluted
    
    $
    (0.19
    )
    
    $
    (0.23
    )Weighted average shares outstanding, basic and diluted
    
    
    57,373,483
    
    
    
    40,360,592
  F-4




---



##### Table of Contents



AccumulatedOtherCommon Stock
    
    Additional
    
    Accumulated
    
    ComprehensiveShares
    
    Amount
    
    Paid In Capital
    
    Deficit
    
    Income
    
    TotalBalances, July 1, 2008
    
    
    24,766,117
    
    
    $
    24,766
    
    
    $
    17,902,840
    
    
    $
    (14,758,356
    )
    
    $
    
    
    
    $
    3,169,250Options/Warrants issued for
services
    
    
    
    
    
    
    
    
    
    
    1,454,249
    
    
    
    
    
    
    
    
    
    
    
    1,454,249Exercise of options and warrants
    
    
    6,426,810
    
    
    
    6,427
    
    
    
    525,403
    
    
    
    
    
    
    
    
    
    
    
    531,830Shares and warrants issued
pursuant to private placement
    
    
    21,785,701
    
    
    
    21,786
    
    
    
    4,978,214
    
    
    
    
    
    
    
    
    
    
    
    5,000,000Private placement fees and
shares issued for services
    
    
    65,000
    
    
    
    65
    
    
    
    (402,815
    )
    
    
    
    
    
    
    
    
    
    
    (402,750
    )Reclassification of warrant as
derivative warrant liability
    
    
    
    
    
    
    
    
    
    
    (7,652,023
    )
    
    
    
    
    
    
    
    
    
    
    (7,652,023
    )Conversion of debt to equity
    
    
    925,000
    
    
    
    925
    
    
    
    159,059
    
    
    
    
    
    
    
    
    
    
    
    159,984Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,114,634
    )
    
    
    
    
    
    
    (9,114,634
    )Balances, June 30, 2009
    
    
    53,968,628
    
    
    $
    53,969
    
    
    $
    16,964,927
    
    
    $
    (23,872,990
    )
    
    $
    
    
    
    $
    (6,854,094
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (448,619
    )
    
    
    (2,740,539
    )
    
    
    
    
    
    
    (3,189,158
    )Shares issued for services
    
    
    1,284,500
    
    
    
    1,285
    
    
    
    343,556
    
    
    
    
    
    
    
    
    
    
    
    344,841Options/Warrants issued for
services
    
    
    
    
    
    
    
    
    
    
    2,315,074
    
    
    
    
    
    
    
    
    
    
    
    2,315,074Exercise of options and warrants
    
    
    809,453
    
    
    
    809
    
    
    
    11,168
    
    
    
    
    
    
    
    
    
    
    
    11,977Conversion of debt to equity
    
    
    2,848,600
    
    
    
    2,848
    
    
    
    1,369,335
    
    
    
    
    
    
    
    
    
    
    
    1,372,183Shares and warrants issued
pursuant to private placement
    
    
    2,583,668
    
    
    
    2,584
    
    
    
    901,704
    
    
    
    
    
    
    
    
    
    
    
    904,288Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,777
    )
    
    
    (31,777
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,048,328
    )
    
    
    
    
    
    
    (11,048,328
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,080,105
    )Balances, June 30, 2010
    
    
    61,494,849
    
    
    $
    61,495
    
    
    $
    21,457,145
    
    
    $
    (37,661,857
    )
    
    $
    (31,777
    )
    
    $
    (16,174,994
    )
  F-5




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##### Table of Contents



For the years ended June 30,2010
    
    
    2009Cash Flows from Operating Activities:Net loss
    
    $
    (11,048,328
    )
    
    $
    (9,114,634
    )Adjustments to reconcile net loss to net cash used by operating activities:Depreciation and amortization
    
    
    254,902
    
    
    
    173,030Loss on disposition of equipment
    
    
    
    
    
    
    6,652Stock based compensation to employees
    
    
    1,131,657
    
    
    
    824,974Stock based compensation to non-employees
    
    
    1,528,258
    
    
    
    629,275Non-cash interest expense from convertible debentures
    
    
    6,190,180
    
    
    
    343,710Non-cash interest expense from amortization of deferred offering costs
    
    
    376,891
    
    
    
    85,445Change in fair value of derivative liabilities
    
    
    (3,101,673
    )
    
    
    777,687Changes in operating assets and liabilities:(Increase)/decrease in accounts receivable, net
    
    
    246,519
    
    
    
    (550,108
    )Decrease/(increase) in inventory
    
    
    246,156
    
    
    
    (635,599
    )Decrease in deposits to manufacturer
    
    
    
    
    
    
    271,497(Increase)/ decrease in prepaid expenses and deposits
    
    
    (64,644
    )
    
    
    51,311Decrease/(increase) in deposits
    
    
    38,182
    
    
    
    (18,348
    )(Decrease)/increase in accounts payable
    
    
    (1,258,349
    )
    
    
    1,889,487Increase in customer deposits
    
    
    34,797
    
    
    
    Increase in accrued expenses
    
    
    925,969
    
    
    
    507,433(Decrease) in deferred revenue
    
    
    
    
    
    
    (510,765
    )Decrease in deferred expenses
    
    
    
    
    
    
    62,049Net Cash Used by Operating Activities
    
    
    (4,499,483
    )
    
    
    (5,206,904
    )Cash Flows Provided by Investing Activities:Redemption of marketable securities
    
    
    225,000
    
    
    
    450,000(Purchase) of equipment
    
    
    (6,075
    )
    
    
    (226,701
    )(Purchase) of intangible assets
    
    
    (40,629
    )
    
    
    (18,807
    )Net Cash Provided by Investing Activities
    
    
    178,296
    
    
    
    204,492Cash Flows from Financing Activities:Net proceeds 
(payments) from revolving line of credit and accrued interest
    
    
    (148,367
    )
    
    
    414,824Principal payments under capital lease obligation
    
    
    (41,490
    )
    
    
    (9,830
    )Issuance of
common stock and warrants
    
    
    916,265
    
    
    
    5,531,830Receivable from equity raise
    
    
    119,750
    
    
    
    (119,750
    )Private placement fees
    
    
    (464,313
    )
    
    
    (402,750
    )Proceeds from issuance of private placement of convertible debentures & warrants
    
    
    5,000,000
    
    
    
    Net Cash Provided by Financing Activities
    
    
    5,381,845
    
    
    
    5,414,324Foreign Currency Effect on cash
    
    
    (31,777
    )
    
    
    Increase in cash and cash equivalents
    
    
    1,028,881
    
    
    
    411,912Cash and Cash Equivalents  beginning of period
    
    
    608,795
    
    
    
    196,883Cash and Cash Equivalents  end of period
    
    
    1,637,676
    
    
    
    608,795
  F-6




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##### Table of Contents



For the years ended June 30,2010
    
    
    2009SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONConversion of long-term debt to common stock
    
    $
    914,720
    
    
    $
    185,000Conversion
of derivative to common stock
    
    $
    457,463
    
    
    $
    Warrants issued for private placement fees
    
    $
    674,347
    
    
    $
    689,385Equipment acquired through a capital lease
    
    
    
    
    
    $
    51,319Write down of deferred offering costs related to conversion of debt
    
    
    
    
    
    $
    25,016Cash paid for interest expense
    
    $
    165,943
    
    
    $
    104,222Cash paid for income taxes
    
    $
    
    
    
    $
    
   F-7




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##### Table of Contents



LIFEVANTAGE CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Organization and Basis of Presentation:
    Note 2  Summary of Significant Accounting Policies
 Consolidation
  Use of Estimates
  Fair Value of Financial Instruments
   Fair Value Measurements
  F-8




---



##### Table of Contents



Fair value hierarchy:
 (1)
    
    Level 1 inputs are quoted prices in active markets for identical assets and
liabilities.
 (2)
    
    Level 2 inputs are inputs which include quoted prices for similar assets and
liabilities in active markets and inputs that are observable for the assets or liabilities,
either directly or indirectly, for substantially the full term of the financial instrument.
 (3)
    
    Level 3 inputs are unobservable inputs and significant to the fair value
measurement.
   June 30, 2010Instrument
    
    Fair Value
    
    Carrying Value
    
    Level
    
    Valuation MethodologyMarketable Securities
    
    $
    425,000
    
    
    $
    425,000
    
    
    
    2
    
    
    Market PriceDerivative warrant liabilities
    
    $
    10,573,084
    
    
    $
    10,573,084
    
    
    
    3
    
    
    Black-ScholesEmbedded conversion liability
    
    $
    7,994,366
    
    
    $
    7,994,366
    
    
    
    3
    
    
    Lattice model
 June 30, 2009Instrument
    
    Fair Value
    
    Carrying Value
    
    Level
    
    Valuation MethodologyMarketable Securities
    
    $
    650,000
    
    
    $
    650,000
    
    
    
    2
    
    
    Market PriceDerivative warrant liabilities
    
    $
    8,429,710
    
    
    $
    8,429,710
    
    
    
    3
    
    
    Black-Scholes
  June 30, 2010
    
    

June 30, 2009Beginning balance: Derivative liabilities
    
    $
    8,429,710
    
    
    $
    Total (gains) losses
    
    
    (3,101,673
    )
    
    
    777,687Adoption of change in accounting principle
    
    
    3,267,253
    
    
    
    Purchases, sales, issuances and settlements, net
    
    
    9,972,160
    
    
    
    7,652,023Ending balance: Derivative liabilities
    
    $
    18,567,450
    
    
    $
    8,429,710
 Cash and Cash Equivalents
  Restricted Cash
  Marketable Securities
  F-9




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##### Table of Contents



(a)
    
    The greater of 10 percent or $25,000 to be completed by June 30, 2010;
 (b)
    
    The greater of 10 percent or $25,000 to be completed by June 30, 2011;
 (c)
    
    The balance of outstanding ARPS to be repurchased by June 30, 2012.
    Accounts Receivable
  Inventory
  June 30,2010
    
    
    2009Finished goods
    
    $
    326,095
    
    
    $
    522,599Raw materials
    
    
    167,763
    
    
    
    217,415Total inventory
    
    $
    493,858
    
    
    $
    740,014
 F-10




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##### Table of Contents



Property and Equipment
  June 30,2010
    
    
    2009Equipment
    
    $
    360,699
    
    
    $
    357,135Software
    
    
    85,463
    
    
    
    82,952Accumulated depreciation
    
    
    (249,809
    )
    
    
    (165,346
    )Property and equipment, net
    
    $
    196,353
    
    
    $
    274,741
  Intangible Assets
   June 30,2010
    
    
    2009Patent costs
    
    $
    2,278,953
    
    
    $
    2,255,696Trademark costs
    
    
    150,061
    
    
    
    132,712Accumulated amortization
    
    
    (383,543
    )
    
    
    (213,127
    )Intangible assets, net
    
    $
    2,045,471
    
    
    $
    2,175,281
  Patents
  Impairment of Long-Lived Assets
  F-11




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##### Table of Contents



Concentration of Credit Risk
  Derivative Financial Instruments
     
    
    The market price of our common stock, which significantly affects the fair
value of our derivative financial instruments, experienced material price fluctuations. To
illustrate, the closing price of our common stock decreased from $0.67 on June 30, 2009 to
$0.39 on September 30, 2009 and then to $0.25 on December 31, 2009. The closing price of
our common stock then increased to $0.39 on March 31, 2010 and increased further to $0.51
at June 30, 2010.
 Convertible Debt Instruments
   F-12




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##### Table of Contents



Revenue Recognition
  Shipping and Handling
  Research and Development Costs
  Advertising Costs
  Stock-Based Compensation
    F-13




---



##### Table of Contents



1.
    
    risk-free interest rate of between 2.01 and 3.52 percent in fiscal 2010, and between 1.15
and 3.86 percent in fiscal 2009;2.
    
    dividend yield of -0- percent in fiscal 2010 and 2009;3.
    
    expected life of 3 to 6 years in fiscal 2010 and 2009;4.
    
    a volatility factor of the expected market price of the Companys common stock of between
130 and 337 percent in fiscal 2010 and 334 percent in fiscal 2009.
  Income Taxes
   Loss Per Share
  Segment Information
  Years ended June 30,2010
    
    
    2009Revenues from unaffiliated customersU.S. operations
    
    $
    10,886,008
    
    
    $
    4,141,304Japan operations
    
    
    436,637
    
    
    
    Mexico operations
    
    
    155,815
    
    
    
    Total revenues
    
    $
    11,478,460
    
    
    $
    4,141,304
 F-14




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##### Table of Contents



Comprehensive Income
  New Accounting Pronouncements
  Standards Implemented
    Improving Disclosures about Fair Value Measurements.
 Note 3  Convertible Debentures
 2007
  F-15




---



##### Table of Contents



DiscountFace
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortized at
    
    
    Net Value atValue
    
    
    Debt
    
    
    Face Value
    
    
    Discount
    
    
    June 30,
    
    
    June 30,Date Issued
    
    Issued
    
    
    Discount
    
    
    Converted
    
    
    Converted
    
    
    2010
    
    
    2010September 26, 2007
    
    $
    1,075,000
    
    
    $
    (937,510
    )
    
    $
    (400,000
    )
    
    $
    231,415
    
    
    $
    566,332
    
    
    $
    535,237October 31, 2007
    
    
    415,000
    
    
    
    (378,235
    )
    
    
    (165,000
    )
    
    
    129,078
    
    
    
    166,281
    
    
    
    167,124Totals
    
    $
    1,490,000
    
    
    $
    (1,315,745
    )
    
    $
    (565,000
    )
    
    $
    360,493
    
    
    $
    732,613
    
    
    $
    702,361
  F-16




---



##### Table of Contents



2009
  DiscountFace
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortized at
    
    
    Net Value atValue
    
    
    Debt
    
    
    Face Value
    
    
    Discount
    
    
    June 30,
    
    
    June 30,Date Issued
    
    Issued
    
    
    Discount
    
    
    Converted
    
    
    Converted
    
    
    2010
    
    
    2010November 18, 2009
    
    $
    246,896
    
    
    $
    (246,896
    )
    
    $
    (79,940
    )
    
    $
    74,374
    
    
    $
    4,804
    
    
    $
    (762
    )December 11, 2009
    
    
    874,125
    
    
    
    (874,125
    )
    
    
    (149,900
    )
    
    
    148,704
    
    
    
    20,188
    
    
    
    18,992December 31, 2009
    
    
    254,745
    
    
    
    (254,745
    )
    
    
    
    
    
    
    
    
    
    
    6,799
    
    
    
    6,799January 20, 2010
    
    
    1,255,743
    
    
    
    (1,255,743
    )
    
    
    
    
    
    
    
    
    
    
    36,380
    
    
    
    36,380February 4, 2010
    
    
    1,849,149
    
    
    
    (1,849,149
    )
    
    
    (119,880
    )
    
    
    119,232
    
    
    
    45,183
    
    
    
    44,535February 25, 2010
    
    
    514,342
    
    
    
    (514,342
    )
    
    
    
    
    
    
    
    
    
    
    15,070
    
    
    
    15,070Totals
    
    $
    4,995,000
    
    
    $
    (4,995,000
    )
    
    $
    (349,720
    )
    
    $
    342,310
    
    
    $
    128,424
    
    
    $
    121,014
 F-17




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##### Table of Contents



F-18




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##### Table of Contents



Note 4  Capital Leases
  Note 5  Line of Credit
  Note 6  Stockholders Equity
    
    
    March 16, 2009: The issuance of 3,925,000 shares of common stock of the Company at
a purchase price of $0.20 per share and warrants exercisable for 3,925,000 shares of common
stock with an exercise price of $0.50 per share. Gross proceeds received amounted to
$785,000. Total cash fees for this offering were $78,500.
    
    March 26, 2009: The issuance of 9,115,000 shares of common stock of the Company at
a purchase price of $0.20 per share and warrants exercisable for 9,115,000 shares of common
stock with an exercise price of $0.50 per share. Gross proceeds received amounted to
$1,823,000. Total cash fees for this offering were $182,300.
    
    April 6, 2009: The issuance of 4,460,000 shares of common stock of the Company at a
purchase price of $0.20 per share and warrants exercisable for 4,460,000 shares of common
stock with an exercise price of $0.50 per share. Gross proceeds received amounted to
$892,000. Total cash fees for this offering were $39,200.
  Note 7  Stock Option Grants and Warrants
 Stock Option Grants
  F-19




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##### Table of Contents



Weighted
    
    
    WeightedAverage
    
    
    Average RemainingOptions
    
    
    Exercise Price
    
    
    Contractual TermOutstanding and exercisable, June 30, 2008
    
    
    3,397,116
    
    
    $
    0.45
    
    
    
    9.22Granted
    
    
    5,652,000
    
    
    $
    0.62
    
    
    
    9.73Exercised
    
    
    (15,000
    )
    
    $
    0.21
    
    
    
    8.37Forfeited
    
    
    (601,693
    )
    
    $
    0.57
    
    
    
    Expired or Cancelled
    
    
    (24,000
    )
    
    $
    3.37
    
    
    
    Outstanding and exercisable, June 30, 2009
    
    
    8,408,423
    
    
    $
    0.55
    
    
    
    9.23Granted
    
    
    1,840,001
    
    
    $
    0.42
    
    
    
    9.34Exercised
    
    
    (35,000
    )
    
    $
    0.21
    
    
    
    7.37Forfeited
    
    
    (1,517,693
    )
    
    $
    0.65
    
    
    
    Expired or Cancelled
    
    
    (160,000
    )
    
    $
    0.75
    
    
    
    8.85Outstanding and exercisable, June 30, 2010
    
    
    8,535,731
    
    
    $
    0.50
    
    
    
    8.39
 F-20




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##### Table of Contents



Warrants
    WarrantsOutstanding and exercisable, June 30, 2008
    
    
    11,275,080Granted
    
    
    20,790,128Cancelled
    
    
    Exercised
    
    
    (9,128,564
    )Expired
    
    
    (484,000
    )Outstanding and exercisable, June 30, 2009
    
    
    22,452,644Granted
    
    
    18,961,602Cancelled
    
    
    (1,537,858
    )Exercised
    
    
    (832,864
    )Expired
    
    
    (463,230
    )Outstanding and exercisable, June 30, 2010
    
    
    38,580,294
  1)
    
    risk free rate of 0.61 percent;2)
    
    dividend yield of -0- percent in fiscal;3)
    
    expected life of 1.74 to 1.79 years;4)
    
    a volatility factor of the expected market price of the Companys common stock of
between 150 and 155 percent.
  1)
    
    risk free rate of 1.79 percent;2)
    
    dividend yield of -0- percent in fiscal;3)
    
    expected life of 4.44 to 4.73 years;4)
    
    a volatility factor of the expected market price of the Companys common stock of 144
percent.
 
 F-21




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##### Table of Contents



Note 9  Income Taxes
  2010
    
    
    2009Current taxes
    
    $
    
    
    
    $
    Deferred taxes
    
    
    (965,000
    )
    
    
    (2,444,000
    )Less: valuation allowance
    
    
    965,000
    
    
    
    2,444,000Net income tax provision (benefit)
    
    $
    
    
    
    $
    
  2010
    
    2009Federal statutory income tax rate
    
    
    (34.00
    %)
    
    
    (34.00
    %)State income taxes, net of federal benefit
    
    
    (3.41
    %)
    
    
    (3.06
    %)Tax return to provision true-up
    
    
    (0.26
    %)
    
    
    1.97
    %Permanent differences: interest on convertible debt
    
    
    19.60
    %
    
    
    1.46
    % change in derivative liability
    
    
    4.86
    %
    
    
    3.30
    % stock option compensation
    
    
    3.59
    %
    
    
    3.50
    % other
    
    
    0.18
    %
    
    
    0.20
    %Increase/(Decrease) in valuation allowance
    
    
    9.44
    %
    
    
    26.63
    %Net income tax provision (benefit)
    
    
    
    
    
    
    
  2010
    
    
    2009Deferred tax assets:Federal and state net operating loss carryovers
    
    $
    5,677,000
    
    
    $
    5,366,000Research and Development Tax Credits
    
    
    25,000
    
    
    
    Contribution carryover
    
    
    2,000
    
    
    
    1,400Deferred debt offering costs
    
    
    51,000
    
    
    
    300Stock option compensation
    
    
    849,000
    
    
    
    381,000Property & Equipment
    
    
    20,000
    
    
    
    Accrued vacation & allowance for returns
    
    
    175,000
    
    
    
    71,000Deferred tax asset
    
    $
    6,799,000
    
    
    $
    5,819,700Deferred liabilities
    
    
    
    
    
    
    (3,700
    )Patents and trademarks
    
    
    (637,000
    )
    
    
    (685,000
    )Change in tax accounting methods
    
    
    (54,000
    )
    
    
    Property & equipment
    
    
    
    
    
    
    (38,000
    )Total deferred liabilities
    
    $
    (691,000
    )
    
    $
    (726,700
    )Net deferred tax asset
    
    
    6,108,000
    
    
    
    5,093,000Less: valuation allowance
    
    
    (6,108,000
    )
    
    
    (5,093,000
    )Deferred tax liability
    
    $
    
    
    
    $
    
  F-22




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##### Table of Contents



Note 10- Related Parties
    Note 11  Commitments
 Corporate Office
     Year ending June 30,2011
    
    $
    316,3182012
    
    
    305,8092013
    
    
    108,094Total future minimum Lease payments
    
    $
    730,221
 F-23




---



##### Table of Contents



Other Commitments
  Payments due by periodLess thanContractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 yearsConvertible Debt Obligations (subject to conversion to
common stock)
    
    
    5,570,280
    
    
    
    925,000
    
    
    
    4,645,280Operating Lease Obligations
    
    
    730,221
    
    
    
    316,318
    
    
    
    305,809
    
    
    
    108,094Revolving
line of Credit
    
    
    433,985
    
    
    
    433,985
    
    
    
    
    
    
    
    Total
    
    
    6,734,486
    
    
    
    1,675,303
    
    
    
    4,951,089
    
    
    
    108,094
 Note 12  Interim Financial Results (Unaudited)
  
 YearQuarter
    
    endedYear ended June 30, 2010
    
    First
    
    Second
    
    Third
    
    Fourth
    
    June 30, 2010Sales, net
    
    $
    1,858
    
    
    $
    2,456
    
    
    $
    2,724
    
    
    $
    4,441
    
    
    $
    11,479Gross profit
    
    
    1,545
    
    
    
    2,044
    
    
    
    2,276
    
    
    
    3,707
    
    
    $
    9,572Net income (loss)
    
    $
    2,865
    
    
    $
    (681
    )
    
    $
    (8,249
    )
    
    $
    (4,983
    )
    
    $
    (11,048
    )Per common share:Loss per share, basic and diluted
    
    $
    0.05
    
    
    $
    (0.01
    )
    
    $
    (0.14
    )
    
    $
    (0.08
    )
    
    $
    (0.19
    )
 YearQuarter
    
    endedYear ended June 30, 2009
    
    First
    
    Second
    
    Third
    
    Fourth
    
    June 30, 2009Sales, net
    
    $
    1,274
    
    
    $
    578
    
    
    $
    655
    
    
    $
    1,634
    
    
    $
    4,141Gross profit
    
    
    1,038
    
    
    
    451
    
    
    
    530
    
    
    
    1,270
    
    
    
    3,289Net income (loss)
    
    $
    (131
    )
    
    $
    (566
    )
    
    $
    (3,100
    )
    
    $
    (5,317
    )
    
    $
    (9,114
    )Per common share:Loss per share, basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.12
    )
    
    $
    (0.11
    )
    
    $
    (0.23
    )
 Note 13  Subsequent Events
  Note 14  Litigation
  F-24