**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-KSB**




(Mark
      One)




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




For
      the
      fiscal year end **March
      31, 2008**




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




For
      the
      transition period from _____ to _____




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




**IMAGENETIX,
      INC.**


(Name
      of
      small business issuer in its charter)




**NEVADA**
            
            **87-043772**(State
                or other jurisdiction of incorporation or
              organization)
            
            (I.R.S.
                Employer Identification No.)**10845
                Rancho Bernardo Road, Suite 105****San
                Diego, California**
            
            **92127**(Address
                of principal executive offices)
            
            (Zip
                Code)




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




Securities
      registered under Section 12(b) of the Exchange Act: **NONE.** ****




Securities
      registered under Section 12(g) of the Exchange Act:




**COMMON
      STOCK, $0.001 PAR VALUE PER SHARE.** ****




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act  ̈




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




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will be
      contained, to the best of registrant's knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-KSB
      or any amendment to this Form 10-KSB. x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act) Yes o  **** No **** **x**




Revenues
      for the fiscal year ended March 31, 2008 were **:
      $5,569,593.**




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold as of **June
      16, 2008**  **was**  **$5,891,765** . ****




State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date. **As
      of June 25, 2008 the issuer had 10,960,788**  **shares
      of Common Stock outstanding.**




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
















**Annual
      Report on Form 10-KSB**


**For
      the Year Ended March 31, 2008**





**TABLE
      OF CONTENTS**





PagePART
                IITEM
                1.
            Description
                of Business
            3ITEM
                2.
            Description
                of Property
            10ITEM
                3.
            Legal
                Proceedings
            10ITEM
                4.
            Submission
                of Matters to a Vote of Security Holders
            10PART
                IIITEM
                5.
            Market
                for Common Equity, Related Stockholder Matters and Small Business
                Issuer
                Purchases of Equity Securities
            10ITEM
                6.
            Management's
                Discussion and Analysis or Plan of Operation
            11ITEM
                7.
            Financial
                Statements
            19ITEM
                8.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            19ITEM 8A.
            Controls
                and Procedures
            19ITEM 8B.
            Other
                Information
            21PART
                IIIITEM
                9.
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance With
                Section
                16(a) of the Exchange Act
            21ITEM
                10.
            Executive
                Compensation
            23ITEM
                11.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            24ITEM
                12.
            Certain
                Relationships and Related Transactions
            25ITEM
                13.
            Exhibits
            25ITEM
                14.
            Principal
                Accountant Fees and Services
            27


2




**DISCLOSURE
      REGARDING FORWARD-LOOKING STATEMENTS**




Certain
      statements contained in this Annual Report on Form 10-KSB constitute
      "forward-looking statements". These statements, identified by words such as
      “plan”, "anticipate", "believe", "estimate", "should," "expect" and similar
      expressions, include our expectations and objectives regarding our future
      financial position, operating results and business strategy. These statements
      reflect the current views of management with respect to future events and are
      subject to risks, uncertainties and other factors that may cause our actual
      results, performance or achievements, or industry results, to be materially
      different from those described in the forward-looking statements. Such risks
      and
      uncertainties include those set forth under the caption "Management's Discussion
      and Analysis or Plan of Operation" and elsewhere in this Form 10-KSB. We advise
      you to carefully review the reports and documents we file from time to time
      with
      the Securities and Exchange Commission (“SEC”), particularly our quarterly
      reports on Form 10-QSB and our current reports on Form 8-K.




As
      used
      in this annual report, the terms "we", "us", "our", and “Imagenetix” mean
      Imagenetix, Inc., unless otherwise indicated.




**PART
      I**




**ITEM
      1.     DESCRIPTION OF
      BUSINESS.**




**Overview**




We
      were
      organized as a Nevada corporation in March 1988. Our principal executive offices
      are located at 10845 Rancho Bernardo Road, Suite 105, San Diego, California
      92127, and our telephone number is (858) 674-8455. Our home page can be located
      on the World Wide Web at http://www.imagenetix.net .





We
      develop, formulate and market over-the-counter, natural-based nutritional
      supplements and skin care products. Our products are proprietary, often
      supported by scientific studies which we request and are offered through
      multiple channels of distribution, including direct marketing companies, also
      known as network marketing or multi-level marketing companies, and chain store
      retailers. Our primary product is Celadrin® a product formulation which we sell
      to the mass market through retailers and on a private label basis to wholesale
      customers.





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





We
      sell
      InflameAway, our own Celadrin® branded product, directly to the mass markets
      through retail sellers. We also develop and sell products and formulations
      to
      businesses and organizations that market these products through multiple
      channels of distribution, including direct marketing companies, mass marketing
      companies, medical, health and nutritional professionals, medical newsletters
      and direct response radio and television. We also offer Celadrin® products
      through wholesale customers that in turn offer their products containing
      Celadrin® to mass market retailers.





**Our
      Business**





We
      develop, formulate and market over-the-counter, natural-based nutritional
      supplements and skin care products. Our products are proprietary, often
      supported by scientific studies which we request and are offered through
      multiple channels of distribution including direct sales to the mass market
      through retailers, direct marketing companies, medical, health and nutritional
      professionals, medical newsletters and direct response radio and television.





A
      key
      part of our marketing strategy is to provide a "turnkey" approach to the
      marketing and distribution of our products. Our "turnkey" approach provides:


3


•
            Specific
                product formulations requested by our customers;





•
            Scientific
                studies to support claims made for our products;





•
            Assistance
                in complying with U.S. laws and regulations;





•
              Assistance
                  in obtaining foreign country regulatory approval for sale of our
                  products;





•
            Marketing
                materials and marketing assistance to support product sales; and





•
            Manufacture
                of products with delivery directly to the customer.





Following
      development of a new product, and on behalf of our customers, we:





•
            Conduct
                and complete any scientific studies necessary for regulatory compliance;





•
            Arrange
                for the manufacture of finished products to our specifications;
                and





•
              Develop
                  marketing tools and plans to promote product sales, including labelsand
                  graphic designs, promotional brochures and providing speakers to
                  promotethe
                  products.





Our
      management and key personnel have many years experience in developing and
      selling nutritional products to domestic and international marketers, including
      direct marketers, health food stores and mass market merchandisers.





Our
      two
      largest customers accounted for 29% and 16% of our net sales for the year ended
      March 31, 2008 and 23% and 15% for the year ended March 31, 2007.





**Our
      Strategy**





We
      are a
      developer, formulator and supplier of natural-based products, designed to
      enhance human and animal health. We develop, formulate over-the-counter topical
      creams, nutritional and skin care products marketed globally through multiple
      channels of distribution. Our strategy involves:





•
            Continuing
                to develop innovative and proprietary nutritional and skin care products;





•
            Continuing
                to offer "turnkey" services, including product development, regulatory
                compliance, manufacturing and marketing services, to assist our customers
                in quickly bringing new products to market;





•
            Marketing
                our products internationally by assisting our customers in registering
                their products for sale in foreign countries.





To
      date,
      we have completed the registration of over 25 products in foreign countries,
      including Japan, Australia, Norway, Venezuela, Germany, India and Canada. Most
      of the products registered contain our proprietary Celadrin® compound.





**Industry
      Overview**





The
      dietary supplement industry is highly diversified and intensely competitive.
      It
      includes companies that manufacture, distribute and sell products that are
      generally intended to supplement our daily diets with nutrients that may enhance
      the body's performance and well-being. Dietary supplements include vitamins,
      minerals, herbs, botanicals, amino acids and compounds. Specific statutory
      provisions governing the dietary supplement industry were codified in the
      Dietary Supplement Health and Education Act. This act provides new statutory
      protections for dietary supplements and allows for statements that inform
      consumers of the effect dietary supplements have upon the structure or functions
      of the body.


4


We
      expect
      that the following factors will contribute to the ongoing growth of the domestic
      nutritional supplement industry:





•
            The
                aging of the American population, which is likely to cause increased
                consumption of nutritional supplements;





•
            New
                product introductions in response to new research supporting the
                positive
                health effects of certain nutrients;





•
            The
                nationwide trend toward preventative medicine resulting from rising
                health
                care costs;





•
            Increased
                consumer interest in alternative health products such as herb-based
                nutritional supplements;





•
            A
                heightened awareness of the connection between diet and health.





Nutritional
      supplements are sold primarily through:





•
            Mass
                market retailers, including mass merchandisers, drug stores, supermarkets
                and discount stores;





•
            Health
                food stores;





•
            Mail
                order companies; and





•
            Direct
                sales organizations, including network marketing companies.





**Products**





We
      offer
      a variety of specialized proprietary nutritional formulations, over-the-counter
      topical creams, and skin care products. Since beginning operations in February
      1999, we have developed and sold over 90 products and formulations to businesses
      and organizations that market these products through multiple channels of
      distribution, including direct selling, sales to mass market retailers, direct
      response radio, nutritional newsletters and medical care professionals. Our
      product formulations may be developed by our customers, co-developed by us
      and
      our customers or developed exclusively by us for the customer.





Our
      leading product is Celadrin®, a nutritional supplement compound comprised of a
      complex of fatty acid esters which plays a role in human and animal joint health
      and scientifically supported by our clinical studies. For the year ended March
      31, 2008, approximately 74% of our revenue was generated from the sale of
      various formulations containing Celadrin®. We offer Celadrin® as part of a
      formulated branded or private label product and also as a branded ingredient
      to
      be used by our wholesale customers in their own product formulations.





A
      number
      of safety and efficacy studies have been conducted on Celadrin®'s principal
      composition, cetylated fatty acids. Studies have been presented at international
      scientific conferences, with two studies having been published in the Journal
      of
      Rheumatology and one study published in the Journal of Strength and Conditioning
      Research. We are continuing research to determine Celadrin®'s effects on the
      body, including any role it may play in providing support for the normal
      functioning of muscles and joints. We produce a wide range of formulas using
      the
      Celadrin® compounds and market these formulations through multiple distribution
      channels. Our wholesale customers resell Celadrin® and other formulated products
      under their own labels and trade names. We do not own or have any ownership
      interest in the labels or trade names under which these products are sold.
      Using
      multiple manufacturing processes to produce Celadrin®, we offer the product to
      our customers in soft gel capsule, tablet, two-piece capsules and topical cream
      forms.


5


We
      use
      paid consultants who are medical doctors, scientific research consultants,
      independent scientific researchers and laboratories and universities to assist
      us in the development and testing of our products. We believe Celadrin® will
      continue to be our principal compound. We intend to expand the number of
      customers who use this compound in formulas and to develop other formulas for
      new customers.





In
      addition to Celadrin®, which we sell in many formulations including an oral
      product, a cream, and as a pet product, we have also developed other natural
      based products designed to address specific health issues, including compounds
      and formulations involving a proprietary blend of fruit and vegetable extracts
      which represented approximately 13% of our sales and a weight loss product
      which
      represented approximately 12% of our sales for the year ended March 31, 2008.





We
      also
      are at the early stage of developing therapies for the treatment of inflammatory
      conditions, such as periodontal disease. We have conducted in-vivo and in-vitro
      efficacy and safety studies on our drug compound for the treatment of gum
      disease including periodontitis.





**Raw
      Materials and Manufacturing**





We
      develop and formulate proprietary, natural based, nutritional supplements,
      over-the-counter topical creams and skin care products but do not manufacture
      any of these products. We currently purchase ingredients from suppliers for
      delivery to manufacturers chosen by us. We have an agreement with our sole
      supplier of Celadrin® to purchase sufficient quantities of the compound to meet
      our anticipated needs through January 2012. We believe this agreement can be
      extended although we can give no such assurance. All other ingredients can
      be
      obtained from a number of suppliers, although the loss of any supplier could
      adversely affect our business.





We
      use a
      number of manufacturers to combine ingredients furnished by our suppliers into
      our nutritional and skin care products. By outsourcing product manufacture,
      we
      eliminate the capital required to manufacture our own products and increase
      the
      flexibility of our manufacturing resources. We have written confidentiality
      and
      exclusivity agreements with key manufacturers and believe suitable replacement
      manufacturers are available. However, the loss of a manufacturer could adversely
      affect our business.





**Marketing
      and Distribution.**





We
      market
      our products to customers in multiple channels of distribution. Our marketing
      strategy consists of:





•
            Continuing
                to offer our proprietary products to existing customers while seeking
                new
                customers, emphasizing those engaged in the direct selling and mass
                marketing of nutraceutical supplements and other nutraceutical products;





•
            Continuing
                to assist our customers in designing new nutritional, topical, and
                skin
                care products using our formulations;





•
            Continuing
                to design marketing materials, provide marketing spokespersons and
                offering other value added services to assist customers in expanding
                their
                sales of our product;





•
            Developing
                and offering new products to direct marketing and mass marketing
                companies;





•
            Offering
                products for distribution through medical and nutritional oriented
                professionals;





•
            Offering
                products for distribution through direct response radio and television.





We
      will
      continue to offer our customers a turn key approach to their product needs.
      This
      approach emphasizes providing the customer with the support necessary to allow
      them to sell our products, including providing the scientific studies required
      by U.S. and foreign regulators, tailoring our product formulations specifically
      for each customer, obtaining approvals in foreign countries for our customers
      to
      market there, providing full marketing support for the products, including
      product information, product descriptions and speakers to discuss products
      at
      customer conventions and seminars and arranging for manufacture and shipment
      of
      the products according to customer instructions.


6


Approximate
      sales by principal geographic area (as a percentage of sales) for fiscal years
      ended March 31, 2008 and 2007 were as follows:





2008
            
            2007Domestic
                sales
            
            
            88.2
            %
            
            96.9
            %Foreign
                sales:Canada
            
            
            10.4
            
            
            0.5India
            
            
            0.9
            
            
            2.2Australia
            
            
            0.5
            
            
            0.3Taiwan
            
            
            -
            
            
            0.1Total
                foreign sales
            
            
            11.8
            
            
            3.1Total
                sales
            
            
            100.0
            %
            
            100.0
            %





All
      of
      our operating assets are located within the United States. While sales to
      certain geographic areas generally vary from year to year, we do not expect
      that
      changes in the geographic composition of sales will have a material adverse
      effect on operations .





**Competition**





The
      nutritional supplement and skin care industries are large and intensely
      competitive. We compete generally with companies that manufacture and market
      competitive nutritional products in each of our product lines, including
      companies such as Twin Labs, Weider Nutrition, IVC Industries and Perrigo.
      We
      also compete with companies that supply nutritional products to direct
      distribution companies, such as Leiner Health, Natural Alternatives and
      Vitatech. We also compete with companies that develop and sell skin care
      products, such as West Coast Cosmetics, CA Botana and Cosmetic Products
      International.





Competitive
      factors in the nutritional supplement and skin care markets include product
      effectiveness, scientific validation, proprietary formulations, price, quality
      of products, reliability of product delivery and marketing services offered
      to
      customers. We believe we compete favorably with respect to each of these
      factors. Nevertheless, most of our competitors have longer operating histories,
      wider product offerings, greater name recognition and financial resources than
      do we. However, we believe our turnkey approach of offering our customers
      significant regulatory and marketing support, as well as unique, scientifically
      validated products, improves our competitive position.





**Government
      Regulation**





In
      both
      the United States and foreign markets, we are subject to extensive laws and
      governmental regulations at the federal, state and local levels. For example,
      we
      are subject, directly or indirectly, to regulations pertaining to:





•
            Dietary
                ingredients;





•
            The
                manufacturing, packaging, labeling, promotion, distribution, importation,
                sale and storage of our products;





•
            Product
                claims, labeling and advertising (including direct claims and advertising
                by us as well as claims in labeling and advertising by others, for
                which
                we may be held responsible);





•
            Transfer
                pricing and similar regulations that affect the level of foreign
                taxable
                income and customs duties; and




7




•
            Taxation,
                which in some instances may impose an obligation on us to collect
                taxes
                and maintain appropriate records.





The
      dietary ingredients, manufacturing, packaging, storing, labeling, advertising,
      promotion, distribution and sale of our products are subject to regulation
      by
      one or more governmental agencies, including the Food and Drug Administration,
      the Federal Trade Commission, the Consumer Product Safety Commission, the
      Department of Agriculture, the Department of Customs, the Patent and Trademark
      Office, and the Environmental Protection Agency. Our activities are, or may
      be,
      regulated by various agencies of the states, localities and foreign countries
      in
      which our products are manufactured, distributed and/or sold. The FDA, in
      particular, regulates the ingredients, manufacture, packaging, storage,
      labeling, promotion, distribution and sale of foods, dietary supplements and
      over-the-counter drugs, such as those we distribute. We and our suppliers are
      required by FDA regulations to meet relevant current good manufacturing practice
      guidelines for the preparation, packing and storage of foods and drugs. The
      FDA
      has also published proposed rules for the establishment of good manufacturing
      practices for dietary supplements, but it has not yet issued a proposal rule.
      The FDA conducts unannounced inspections of companies that manufacture,
      distribute and sell dietary supplements, issues warning letters for rule
      violations found during these inspections and refers matters to the U.S.
      Attorney and Justice Department for prosecution under the Federal Food, Drug
      and
      Cosmetic Act. There can be no assurance that the FDA will not question our
      labeling or other operations in the future.





The
      Dietary Supplement Health and Education Act revised the provisions governing
      dietary ingredients and labeling of dietary supplements. The legislation created
      a new statutory class of "dietary supplements." This new class includes
      vitamins, minerals, herbs, botanicals, other dietary substances to supplement
      the daily diet, and concentrates, metabolites, constituents, extracts and
      combinations thereof. The legislation requires no federal pre-market approval
      for the sale of dietary ingredients that were on the market before October
      15,
      1994. Since cetylated fatty acids, the primary ingredient in Celadrin®, was on
      the market prior to October 15, 1994, we have not been required to provide
      the
      FDA with any proof as to safety or efficacy of Celadrin®. Dietary ingredients
      first marketed after October 15, 1994 may not be distributed or marketed in
      interstate commerce unless:





•
            The
                manufacturer has proof that the dietary ingredient has been present
                in the
                food supply as an article used for food and in a form in which the
                food
                has not been chemically altered, or





•
            The
                manufacturer supplies the FDA with proof to the FDA's satisfaction
                of the
                dietary ingredient's safety.





Manufacturers
      and distributors of dietary supplements may include statements of nutritional
      support, including structure and function claims, on labels and in advertising
      if:





•
            The
                claims are corroborated by "competent and reliable scientific evidence"
                consistent with FTC standards for advertising review;





•
            The
                claims for labels and labeling are filed in a certified notice with
                the
                FDA no later than 30 days after first market use of the claims;





•
            The
                manufacturer retains substantiation that the claims are truthful
                and
                non-misleading;





•
            Each
                claim on labels and in labeling is cross-referenced by an asterisk
                to a
                mandatory FDA disclaimer.





The
      majority of the products marketed, or proposed to be marketed, by us are
      classified as dietary supplements. In September 1997, the FDA issued regulations
      governing the labeling and marketing of dietary supplement products. The
      regulations cover:


8


•
            The
                identification of dietary supplements and their nutrition and ingredient
                labeling;





•
            The
                terminology to be used for nutrient content claims, health claims
                and
                statements of nutritional support, including structure and function
                claims;





•
            Labeling
                requirements for dietary supplements for which "high potency" and
                "antioxidant" claims are made;





•
            Notification
                procedures for statements of nutritional support, including structure
                and
                function claims, on dietary supplement labels and in their labeling;





•
            Pre-market
                notification procedures for new dietary ingredients in dietary
                supplements.





Dietary
      supplements are subject to federal laws dealing with drugs and regulations
      imposed by the FDA. Those laws regulate, among other things, health claims,
      ingredient labeling and nutrition content claims characterizing the level of
      nutrient in the product. They also prohibit the use of any health claim for
      dietary supplements, unless the health claim is supported by significant
      scientific agreement and is pre-approved by the FDA. A federal court has ruled
      that the FDA must authorize health claims presented to the agency in health
      claims petitions unless they are inherently misleading and must rely on
      disclaimers to eliminate any potentially misleading connotation conveyed by
      a
      claim. The court also held that even claims not supported by significant
      scientific agreement must be allowed if disclaimers can correct misleading
      connotations.





Prior
      to
      permitting sales of our products in foreign markets, we may be required to
      obtain an approval, license or certification from the country's ministry of
      health or comparable agency. The approval process generally would require us
      to
      present each product and product ingredient to appropriate regulators and,
      in
      some instances, arrange for testing of products by local technicians for
      ingredient analysis. These approvals may be conditioned on reformulation of
      our
      products or may be unavailable with respect to certain products or certain
      ingredients. We must also comply with product labeling and packaging regulations
      that vary from country to country.





The
      Federal Trade Commission, which exercises jurisdiction over the marketing
      practices and advertising of products similar to those we offer, has in the
      past
      several years instituted enforcement actions against several dietary supplement
      companies for deceptive marketing and advertising practices. These enforcement
      actions have frequently resulted in consent orders and agreements. In certain
      instances, these actions have resulted in the imposition of monetary redress
      requirements. Importantly, the commission requires that "competent and reliable
      scientific evidence" corroborate each claim of health benefit made in
      advertising before the advertising is first made. A failure to have that
      evidence on hand at the time an advertisement is first made violates federal
      law. While we have not been the subject to enforcement action for the
      advertising of its products, there can be no assurance that this agency will
      not
      question our advertising or other operations in the future.





We
      believe we are in compliance with all material government regulations which
      apply to our products. However, we are unable to predict the nature of any
      future laws, regulations, interpretations or applications, nor can we predict
      what effect additional governmental regulations or administrative orders, when
      and if promulgated, would have on our business in the future. These future
      changes could, however, require the reformulation or elimination of certain
      products; imposition of additional record keeping and documentation
      requirements; imposition of new federal reporting and application requirements;
      modified methods of importing, manufacturing, storing or distributing certain
      products; and expanded or different labeling and substantiation requirements
      for
      certain products and ingredients. Any or all of these requirements could harm
      our business.





**Trademarks
      and Patents**





We
      received a trademark for "Celadrin" in February 2002.





In
      March
      2003 we filed a patent application for Genepril, seeking approval of claims
      for
      the prevention and treatment of various types of arthritis and other
      inflammatory joint diseases, as well as periodontal, psoriasis, lupus and
      cardiovascular conditions. We received notification that the application had
      been approved and that a patent could be issued. Subsequent to the notification,
      we requested additional claims be added to the application. Accordingly, the
      patent office is continuing its review of our application. There can be no
      assurance that others may not develop compounds superior to Genepril.


9


**Employees**





At
      March
      31, 2008, we had seven full-time employees and four part-time consultants,
      including our executive officers.




**ITEM
      2.**  **DESCRIPTION
      OF PROPERTY.**




We
      conduct our corporate functions and manufacturing, product development, sales
      and marketing activities in San Diego, California. We rent 5,426 square feet
      of
      office space at 10845 Rancho Bernardo Road, Suite 105, San Diego, California
      92127 under a seven-year lease ending December 2012 for a monthly rent ranging
      from a current level of $11,044 increasing annually to $12,673 for the seventh
      year. The average monthly rent for the seven-year period is $11,212. In addition
      we rent 4,575 square feet of distribution and storage space at 1420 Decision
      Street, Suite B, Vista, California 92083 under a three-year lease ending August
      31, 2009 for a monthly rent of $3,889. This space is intended to meet our needs
      for the foreseeable future.




**ITEM
      3.     LEGAL PROCEEDINGS.**




We
      are
      not aware of any legal proceedings, pending or threatened, to which we are
      a
      party.




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




None.




**PART
      II**




**ITEM
      5.     MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND SMALL BUSINESS ISSUER PRUCHASES OF EQUITY
      SECURITIES.**




Our
      Common Stock is traded in the over-the-counter market and is quoted on the
      NASD
      OTC Bulletin Board system maintained by the National Association of Securities
      Dealers, Inc. Prices reported represent prices between dealers, do not include
      markups, markdowns or commissions and do not necessarily represent actual
      transactions. The market for our shares has been sporadic and at times very
      limited.





The
      following table sets forth the high and low closing price for the Common Stock
      for the fiscal years ended March 31, 2008 and 2007:





**Closing
                Price****High**
            
            **Low**Fiscal
                Year Ended March 31, 2008First
                Quarter
            
            $
            1.49
            
            $
            0.90Second
                Quarter
            
            $
            1.42
            
            $
            0.94Third
                Quarter
            
            $
            1.22
            
            $
            0.77Fourth
                Quarter
            
            $
            1.05
            
            $
            0.54Fiscal
                Year Ended March 31, 2007First
                Quarter
            
            $
            1.25
            
            $
            0.85Second
                Quarter
            
            $
            1.13
            
            $
            0.80Third
                Quarter
            
            $
            0.83
            
            $
            0.59Fourth
                Quarter
            
            $
            1.17
            
            $
            0.61


10


We
      had
      approximately 314 shareholders of record as of June 25, 2008. Because most
      of
      our common stock is held by brokers and other institutions on behalf of
      stockholders, we are unable to estimate the total number of beneficial owners
      represented by these record holders. We have never paid a cash dividend on
      our
      common stock and do not expect to pay one in the foreseeable
      future.





**Recent
      Sale of Unregistered Securities**





None




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




**Overview**




We
      develop, formulate and market over-the-counter, natural-based nutritional
      supplements and skin care products. Our products are proprietary, often
      supported by scientific studies which we request and are offered through
      multiple channels of distribution, including direct marketing companies, also
      known as network marketing or multi-level marketing companies, and chain store
      retailers. Our primary product is Celadrin® a product formulation which we sell
      to the mass market through retailers and on a private label basis to wholesale
      customers.





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





We
      sell
      InflameAway, our own Celadrin® branded product, directly to the mass markets
      through retail sellers. We also develop and sell products and formulations
      to
      businesses and organizations that market these products through multiple
      channels of distribution, including direct marketing companies, mass marketing
      companies, medical, health and nutritional professionals, medical newsletters
      and direct response radio and television. We also offer Celadrin® products
      through wholesale customers that in turn offer their products containing
      Celadrin® to mass market retailers.





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





**Critical
      Accounting Policies and Estimates**





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





*1.
      Cash and Cash Equivalents.*


For
      purposes of the financial statements, we consider all highly liquid debt
      investments purchased with a maturity of three months or less to be cash
      equivalents.





*2.
      Accounts receivable* .


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


11


*3.
      Inventory*


Inventory
      is carried at the lower of cost or market. Cost is determined by the first-in
      first-out method. Indirect overhead costs are allocated to
      inventory.





*4.
      Property and Equipment*





Property
      and equipment are stated at cost. Expenditures for major renewals and
      betterments that extend the useful lives of property and equipment are
      capitalized, upon being placed in service. Expenditures for maintenance and
      repairs are charged to expense as incurred. Depreciation is computed over the
      estimated useful life of three to seven years, except leasehold improvements
      which are depreciated over the lesser of the remaining lease life or the life
      of
      the asset, using the straight-line method. We follow the provisions of the
      Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
      Standards ("SFAS") No. 144, "Accounting for the Impairment of Long-lived
      Assets." Long-lived assets and certain identifiable intangibles to be held
      and
      used by us are reviewed for impairment whenever events or changes in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. We continuously evaluate the recoverability of our long-lived
      assets based on estimated future cash flows and the estimated fair value of
      such
      long-lived assets, and provide for impairment if such undiscounted cash flows
      are insufficient to recover the carrying amount of the long-lived
      asset.





*5.
      Trademarks and Patents*





Patents
      and trademarks are carried at cost less accumulated amortization and are
      amortized over their estimated useful lives of from 8 to 17 years for patents
      and 10 years for trademarks. The carrying value of patents and trademarks is
      periodically reviewed and impairments, if any, are recognized when the expected
      future benefit to be derived from individual intangible assets is less than
      its
      carrying value determined based on the provisions of SFAS No. 144 as discussed
      above.





*6.*  *Stock
      Based Compensation*





We
      adopted SFAS No.123R effective January 1, 2006, which requires that share-based
      payments be reflected as an expense based upon the grant-date fair value of
      those awards. The expense is recognized over the remaining vesting periods
      of
      the awards. The Company estimates the fair value of these awards, including
      stock options and warrants, using the Black-Scholes model. This model requires
      management to make certain estimates in the assumptions used in this model,
      including the expected term the award will be held, volatility of the underlying
      common stock, discount rate and forfeiture rate. We develop our assumptions
      based on our past historical trends as well as consider changes for future
      expectations.





*7.
      Revenue Recognition*




We
      recognize revenue in accordance with the SEC’s Staff Accounting Bulletin
      No. 104, “Revenue Recognition in Financial Statements” (SAB104), Statement
      of Financial Accounting Standards No. 48, “Revenue Recognition When Right
      of Return Exists” (SFAS 48), and Emerging Issues Task Force Abstract (EITF)
      No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer
      (Including a Reseller of the Vendor’s Products.” SAB 104 requires that four
      basic criteria be met before revenue can be recognized: 1) there is evidence
      that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or
      determinable; and 4) collectibility is reasonably assured. SFAS 48 states that
      revenue from sales transactions where the buyer has the right to return the
      product shall be recognized at the time of sale only if (1) the seller’s
      price to the buyer is substantially fixed or determinable at the date of sale;
      (2) the buyer has paid the seller, or the buyer is obligated to pay the
      seller and the obligation is not contingent on resale
      of
      the product; (3) the buyer’s obligation to the seller would not be changed
      in the event of theft or physical destruction or damage of the product;
      (4) the buyer acquiring the product for resale has economic substance apart
      from that provided by the seller; (5) the seller does not have significant
      obligations for future performance to directly bring about resale of the product
      by the buyer; and (6) the amount of future returns can be reasonably
      estimated. We recognize revenue upon determination that all criteria for revenue
      recognition have been met. The criteria are usually met at the time title passes
      to the customer, which usually occurs upon shipment. Revenue from shipments
      where title passes upon delivery is deferred until the shipment has been
      delivered.




We
      account for payments made to customers in accordance with EITF 01-09, which
      states that cash consideration (including a sales incentive) given by a vendor
      to a customer is presumed to be a reduction of the selling prices of the
      vendor’s products or services and, therefore, should be characterized as a
      reduction of revenue when recognized in the vendor’s income statement, rather
      than a sales and marketing expense. We have various agreements with customers
      that provide for discounts and rebates. These agreements are classified as
      a
      reduction of revenue. Certain other costs associated with customers that meet
      the requirements of EITF 01-09 are recorded as sales and marketing expense.
      Vendor considerations recorded as a reduction of sales were $893,000 and
      $232,000 for the years ended March 31, 2008 and 2007.


12


We
      guarantee customer satisfaction. Our policy requires the customer to return
      the
      unused product to the retailer from whom they originally purchased it. We pay
      the retailer for the returned product plus a handling cost. We periodically
      assess the adequacy of this policy and will record a liability as necessary.
      For
      the year ended March 31, 2008, there were no returns that would suggest a
      liability needed to be recorded.




We
      review
      gross revenue for estimated returns of private label contract manufacturing
      products and direct-to-consumer products. The estimated returns are based upon
      the trailing six months of private label contract manufacturing gross sales
      and
      our historical experience for both private label contract manufacturing and
      direct-to-consumer product returns. However, the estimate for product returns
      does not reflect the impact of a large product recall resulting from product
      nonconformance or other factors as such events are not predictable nor is the
      related economic impact estimable. For the year ended March 31, 2008 there
      were
      no returns that would suggest a liability needed to be recorded.




As
      part
      of the services we provide to our private label contract manufacturing
      customers, we may perform, but are not required to perform, certain research
      and
      development activities related to the development or improvement of their
      products. While our customers typically do not pay directly for this service,
      the cost of this service is included as a component of the price we charge
      to
      manufacture and deliver their products.





*8.
      Income Taxes*




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




**Selected
      Financial Information**




**Results
      of Operations**




*Year
      Ended March 31, 2008 Compared to Year Ended March 31, 2007*


Year
                  EndedIncrease3/31/08
              
              3/31/07
              
              (Decrease)
              
              %Statements
                  of OperationsNet
                  sales
              
              $
              5,569,593
              
              $
              5,596,725
              
              $
              (27,132
              )
              
              -0.5
              %Cost
                  of goods sold
              
              
              3,344,034
              
              
              2,969,002
              
              
              375,032
              
              
              12.6
              %%
                  of net sales
              
              
              60.04
              %
              
              53.05
              %
              
              7
              %
              
              13.2
              %Gross
                  profit
              
              
              2,225,559
              
              
              2,627,723
              
              
              (402,164
              )
              
              -15.3
              %%
                  of net sales
              
              
              40
              %
              
              47
              %
              
              -7
              %
              
              -14.9
              %Operating
                  expensesGeneral
                  and administrative
              
              
              2,456,192
              
              
              1,407,996
              
              
              1,048,196
              
              
              74.4
              %Payroll
                  expense
              
              
              1,037,775
              
              
              712,945
              
              
              324,830
              
              
              45.6
              %Consulting
                  expense
              
              
              961,349
              
              
              1,339,515
              
              
              (378,166
              )
              
              -28.2
              %Total
                  operating expenses
              
              
              4,455,316
              
              
              3,460,456
              
              
              994,860
              
              
              28.7
              %Interest
                  expense
              
              
              (4,367
              )
              
              (6,791
              )
              
              (2,424
              )
              
              -35.7
              %Other
                  income
              
              
              32,182
              
              
              32,885
              
              
              (703
              )
              
              -2.1
              %Income
                  tax benefit
              
              
              425,300
              
              
              139,000
              
              
              286,300
              
              
              206.0
              %Net
                  (loss)
              
              
              (1,776,642
              )
              
              (667,639
              )
              
              1,109,003
              
              
              166.1
              %Net
                  (loss) per share basic and diluted
              
              
              (0.16
              )
              
              (0.06
              )
              
              (0.10
              )
              
              160.9
              %


13




Net
      Sales




Net
      sales
      for the year ended March 31, 2008 decreased $27,132, 0.5%, to $5,569,593
      compared to $5,596,725 for the year ended March 31, 2007. Gross sales increased
      by approximately $1 million due to our initiating a direct mass market strategy
      with our own product, InflameAway, that identifies Celadrin â as its
      marquee ingredient. This sales increase was offset by a like amount in product
      rebates and giveaways in support of marketing InflameAway through retail
      distribution channels. We anticipate, the new marketing program coupled with
      additional distribution agreements to wholesale and multi-level marketing
      customers to result in improved sales during our next fiscal year.




Cost
      of Goods Sold




Cost
      of
      goods sold as a percentage of net sales increased from 53% for the year ended
      March 31, 2007 to 60% for the year ended March 31, 2008. This increase was
      primarily due to the rebate and giveaway marketing strategy discussed above
      which resulted in InflameAway product being provided at no cost to the eventual
      customer. Although rebate and giveaway programs are customary in the mass market
      distribution channel, we do not anticipate this year’s level of activity used to
      launch the awareness of InflameAway to continue during the next fiscal
      year.




General
      and Administrative




General
      and administrative expenses increased by $1,048,196, a 74.4% increase, to
      $2,456,192 for the year ended March 31, 2008 from $1,407,996 for the year ended
      March 31, 2007. The primary reasons for the increase were an approximate
      increase of $1,268,000 of marketing and advertising costs related to the media
      campaign to introduce InflameAway to the mass market offset by an approximate
      $231,000 decrease in research and development costs during the current fiscal
      year.




Payroll
      Expense




Payroll
      expense increased to $1,037,775 for the year ended March 31, 2008, an increase
      of 45.6% or $324,830, compared to $712,945 for the year ended March 31, 2007.
      This increase was a result of non-cash compensation expense of approximately
      $269,000 related to the issuance of employee stock options and approximately
      $55,000 in normal salary and bonus increases during the current fiscal year.




Consulting
      Expenses




Consulting
      expenses decreased to $961,349 for the year ended March 31, 2008, a decrease
      of
      28.2% or $378,166, compared to $1,339,515 for the year ended March 31, 2007.
      This decrease was a result of a decrease in litigation expenses of approximately
      $100,000, a decrease in consulting related to new product introduction including
      our periodontal application of approximately $204,000, and a reduction in
      accounting and other professional and technical expenses across the
      board.




Provision
      for Income Taxes




As
      a
      result of the loss during the year ended March 31, 2008, we reflected an income
      tax benefit of $425,300 compared to income tax benefit of $139,000 for the
      year
      ended March 31, 2007. Since we have used up our federal and state tax loss
      carry-forwards, we anticipate income tax expense to increase in the future
      relative to income before taxes.


14


**Capital
      Resources**





Year
                EndedIncrease3/31/08
            
            3/31/07
            
            (Decrease)Working
                CapitalCurrent
                assets
            
            $
            4,012,527
            
            $
            4,583,149
            
            $
            (570,622
            )Current
                liabilities
            
            
            929,300
            
            
            650,602
            
            
            278,698Working
                capital
            
            $
            3,083,227
            
            $
            3,932,547
            
            $
            (849,320
            )Long-term
                debt
            
            $
            2,980
            
            $
            37,239
            
            $
            (34,259
            )Stockholders'
                equity
            
            $
            3,083,592
            
            $
            4,572,762
            
            $
            (1,120,170
            )Statements
                of Cash Flows Select InformationNet
                cash provided (used) by:Operating
                activities
            
            $
            (116,736
            )
            $
            (819,292
            )
            $
            702,556Investing
                activities
            
            $
            (30,626
            )
            $
            (51,838
            )
            $
            21,212Financing
                activities
            
            $
            211,021
            
            $
            22,010
            
            $
            189,011Balance
                Sheet Select InformationCash
                and cash equivalents
            
            $
            1,022,555
            
            $
            958,896
            
            $
            63,659Accounts
                receivable, net
            
            $
            765,492
            
            $
            1,576,641
            
            $
            (811,149
            )Inventory,
                net
            
            $
            1,109,845
            
            $
            1,284,458
            
            $
            (174,613
            )Accounts
                payable and accrued expenses
            
            $
            785,625
            
            $
            432,354
            
            $
            353,271




**Liquidity**




We
      have
      historically financed our operations internally and through debt and equity
      financings. At March 31, 2008, we had cash holdings of $1,022,555, an increase
      of $63,659 compared to March 31, 2007. Our net working capital position at
      March
      31, 2008, was $3,083,227 compared to $3,932,547 as of March 31, 2007. This
      reduction was primarily the result of a decrease in accounts receivable and
      inventory. We believe that our cash position is sufficient to fund our operating
      activities for at least the next 12 months.





**New
      Accounting Pronouncements**





In
      December 2007, the Financial Accounting Standards Board, or FASB, issued SFAS
      No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities—an amendment of FASB
      Statement No. 133.* This
      standard requires companies to provide enhanced disclosures about (a) how and
      why an entity uses derivative instruments, (b) how derivative instruments and
      related hedged items are accounted for under Statement 133 and its related
      interpretations, and (c) how derivative instruments and related hedged items
      affect an entity’s financial position, financial performance, and cash flows.
      This Statement is effective for financial statements issued for fiscal years
      and
      interim periods beginning after November 15, 2008, with early application
      encouraged. The Company has not yet adopted the provisions of SFAS No. 161,
      but
      does not expect it to have a material impact on its consolidated financial
      position, results of operations or cash flows.


15


In
        December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110 regarding
        the use of a "simplified" method, as discussed in SAB No. 107 (SAB 107),
        in
        developing an estimate of expected term of "plain vanilla" share options
        in
        accordance with SFAS No. 123 (R), *Share-Based
        Payment* .  In
        particular, the staff indicated in SAB 107 that it will accept a company's
        election to use the simplified method, regardless of whether the company
        has
        sufficient information to make more refined estimates of expected term. At
        the
        time SAB 107 was issued, the staff believed that more detailed external
        information about employee exercise behavior (e.g., employee exercise patterns
        by industry and/or other categories of companies) would, over time, become
        readily available to companies. Therefore, the staff stated in SAB 107 that
        it
        would not expect a company to use the simplified method for share option
        grants
        after December 31, 2007. The staff understands that such detailed information
        about employee exercise behavior may not be widely available by December
        31,
        2007. Accordingly, the staff will continue to accept, under certain
        circumstances, the use of the simplified method beyond December 31, 2007.
        The
        Company currently uses the simplified method for “plain vanilla” share options
        and warrants, and will assess the impact of SAB 110 for fiscal year 2009.
        It is
        not believed that this will have an impact on the Company’s consolidated
        financial position, results of operations or cash flows.


In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements* —an
      amendment of ARB No. 51.  This statement amends ARB 51 to establish
      accounting and reporting standards for the noncontrolling interest in a
      subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
      noncontrolling interest in a subsidiary is an ownership interest in the
      consolidated entity that should be reported as equity in the consolidated
      financial statements. Before this statement was issued, limited guidance existed
      for reporting noncontrolling interests. As a result, considerable diversity
      in
      practice existed. So-called minority interests were reported in the consolidated
      statement of financial position as liabilities or in the mezzanine section
      between liabilities and equity. This statement improves comparability by
      eliminating that diversity. This statement is effective for fiscal years, and
      interim periods within those fiscal years, beginning on or after December 15,
      2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier
      adoption is prohibited. The effective date of this statement is the same as
      that
      of the related Statement 141 (revised 2007). The Company will adopt this
      Statement beginning April 1, 2009. It is not believed that this will have an
      impact on the Company’s consolidated financial position, results of operations
      or cash flows.





In
      December 2007, the FASB, issued FAS No. 141 (revised 2007), *Business
      Combinations.* ’This
      Statement replaces FASB Statement No. 141, *Business
      Combinations* ,
      but
      retains the fundamental requirements in Statement 141.  This
      Statement establishes principles and requirements for how the acquirer: (a)
      recognizes and measures in its financial statements the identifiable assets
      acquired, the liabilities assumed, and any noncontrolling interest in the
      acquiree; (b) recognizes and measures the goodwill acquired in the business
      combination or a gain from a bargain purchase; and (c) determines what
      information to disclose to enable users of the financial statements to evaluate
      the nature and financial effects of the business combination. This statement
      applies prospectively to business combinations for which the acquisition date
      is
      on or after the beginning of the first annual reporting period beginning on
      or
      after December 15, 2008. An entity may not apply it before that date. The
      effective date of this statement is the same as that of the related FASB
      Statement No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements* .  The
      Company will adopt this statement beginning April 1, 2009. It is not believed
      that this will have an impact on the Company’s consolidated financial position,
      results of operations or cash flows.





In
      February 2007, the FASB, issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Liabilities* —Including
      an Amendment of FASB Statement No. 115.  This standard permits an
      entity to choose to measure many financial instruments and certain other items
      at fair value. This option is available to all entities. Most of the provisions
      in FAS 159 are elective; however, an amendment to FAS 115 *Accounting
      for Certain Investments in Debt and Equity Securities* applies
      to all entities with available for sale or trading securities. Some requirements
      apply differently to entities that do not report net income. SFAS No. 159 is
      effective as of the beginning of an entities first fiscal year that begins
      after
      November 15, 2007. Early adoption is permitted as of the beginning of the
      previous fiscal year provided that the entity makes that choice in the first
      120
      days of that fiscal year and also elects to apply the provisions of SFAS No.
      157 *Fair
      Value Measurements* .  The
      Company will adopt SFAS No. 159 beginning April 1, 2008 and is currently
      evaluating the potential impact the adoption of this pronouncement will have
      on
      its consolidated financial statements.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* This
      statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles (GAAP), and expands disclosures
      about fair value measurements. This statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      statement will change current practice. This statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. Earlier application is
      encouraged, provided that the reporting entity has not yet issued financial
      statements for that fiscal year, including financial statements for an interim
      period within that fiscal year. The Company will adopt this statement April
      1,
      2008, and it is not believed that this will have an impact on the Company’s
      consolidated financial position, results of operations or cash
      flows.


16




**Risk
      Factors**




You
      should consider the following discussion of risks as well as other information
      regarding our common stock. The risks and uncertainties described below are
      not
      the only ones. Additional risks and uncertainties not presently known to us
      or
      that we currently deem immaterial also may impair our business operations.
      If
      any of the following risks actually occur, our business could be harmed.





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





There
      is
      only one supplier for Celadrin®, which we use in approximately 58% of our
      products and which represented approximately 74% of our sales for the year
      ended
      March 31, 2008. We will rely upon Celadrin® to expand our product lines and
      revenue in the future. If our Celadrin® supplier goes out of business or elects
      for any reason not to supply us with Celadrin®, we would have to find another
      Celadrin® supplier or suffer a significant reduction in our
      revenue.




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





Our
      two
      largest customers accounted for 29% and 16% of our net sales for the year ended
      March 31, 2008 and 23% and 15% for the year ended March 31, 2007. The loss
      of
      any of these customers could significantly reduce our revenue and adversely
      affect our cash flow and earnings, if any.





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





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





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





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





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





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


17


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





We
      are
      subject to laws and regulations which cover:





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





•
            the
                health and safety of food and drugs;





•
            trade
                practice and direct selling laws; and





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





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





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





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





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





We
      have
      10,960,788 common shares outstanding which are freely tradeable or saleable
      under Rule 144. We also have outstanding common stock warrants and stock options
      exercisable into up to 4,846,957 shares of common stock which could become
      free
      trading if exercised. If our stockholders sell substantial amounts of our common
      stock, the market price of our common stock could decrease.





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





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





•
            The
                lack of readily available price quotations;





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





•
            Lower
                trading volume; and





•
            Market
                conditions.


18


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





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





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





"Penny
      stocks" are equity securities with a market price below $5.00 per share, other
      than a security that is registered on a national exchange or included for
      quotation on the Nasdaq system, unless, as in our case, the issuer has net
      tangible assets of more than $2,000,000 and has been in continuous operation
      for
      greater than three years. Issuers who have been in operation for less than
      three
      years must have net tangible assets of at least $5,000,000.





Rules
      promulgated by the Securities and Exchange Commission under Section 15(g) of
      the
      Exchange Act require broker-dealers engaging in transactions in penny stocks,
      to
      first provide to their customers a series of disclosures and documents,
      including:





•
            A
                standardized risk disclosure document identifying the risks inherent
                in
                investment in pennystocks;





•
            All
                compensation received by the broker-dealer in connection with the
                transaction;





•
            Current
                quotation prices and other relevant market data; and





•
            Monthly
                account statements reflecting the fair market value of the securities.
                In
                addition, theserules
                require that a broker-dealer obtain financial and other information
                from a
                customer, determine that transactions in penny stocks are suitable
                for
                such customer and deliver a written statement to such customer setting
                forth the basis for this determination.




**ITEM
      7.     FINANCIAL STATEMENTS.**




The
      financial statements required by this item begin on page F-1 with the index
      to
      consolidated financial statements.




**ITEM
      8.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND**  **FINANCIAL
      DISCLOSURE.**




None





**ITEM 8A(T).
      CONTROLS AND PROCEDURES**





(a)  Management’s
      Annual **Report
      on Internal Control** Over
      Financial Reporting





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting. Internal control over financial reporting
      is
      defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act,
      as amended, as a process designed by, or under the supervision of, a company’s
      principal executive and principal financial officers and effected by a company’s
      board of directors, management and other personnel to provide reasonable
      assurance regarding the reliability of financial reporting and the preparation
      of financial statements for external purposes in accordance with generally
      accepted accounting principles. Our internal control over financial reporting
      includes those policies and procedures that:


19


*
            pertain
                to the maintenance of records that, in reasonable detail, accurately
                and
                fairly reflect the transactions and dispositions of our assets;


*
            provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with generally
                accepted
                accounting principles, and that our receipts and expenditures are
                being
                made only in accordance with authorizations of our management and
                directors;


*
            and
                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 over financial reporting cannot provide absolute assurance of achieving
      financial reporting objectives because of its inherent limitations. Internal
      control over financial reporting is a process that involves human diligence
      and
      compliance and is subject to lapses in judgment and breakdowns resulting from
      human failures. Internal control over financial reporting also can be
      circumvented by collusion or improper management override. Because of such
      limitations, there is a risk that material misstatements may not be prevented
      or
      detected on a timely basis by internal control over financial reporting.
      However, these inherent limitations are known features of the financial
      reporting process. Therefore, it is possible to design into the process
      safeguards to reduce, though not eliminate, this risk. In addition, projections
      of any evaluation of effectiveness to future periods are subject to the risk
      that controls may become inadequate because of changes in conditions or that
      the
      degree of compliance with the policies or procedures may deteriorate. In order
      to evaluate the effectiveness of our internal control over financial reporting
      as of March 31, 2008, as required by Sections 404 of the Sarbanes-Oxley Act
      of 2002, our management commenced an assessment, based on the criteria set
      forth
      in Internal Control—Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (the “ COSO Framework “). A material
      weakness is a control deficiency, or a combination of control deficiencies,
      that
      results in more than a remote likelihood that a material misstatement of our
      annual or interim financial statements will not be prevented or detected on
      a
      timely basis. In assessing the effectiveness of our internal control over
      financial reporting, our management, including the chief executive officer
      and
      chief financial officer, identified the following deficiencies:





(1)
      Deficiencies in Segregation of Duties. The Chief Executive Officer and the
      Chief
      Financial Officer are actively involved in the preparation of the financial
      statements, and therefore cannot provide an independent review and quality
      assurance function within the accounting and financial reporting group. The
      limited number of qualified accounting personnel discussed above results in
      an
      inability to have independent review and approval of financial accounting
      entries. Furthermore, management and financial accounting personnel have
      wide-spread access to create and post entries in the Company’s financial
      accounting system. There is a risk that a material misstatement of the financial
      statements could be caused, or at least not be detected in a timely manner,
      due
      to insufficient segregation of duties, and (2) Our financial statement
      closing process did not identify all the journal entries that needed to be
      recorded as part of the closing process for certain complex and non-routine
      transactions. As part of the audit, our independent registered public accounting
      firm proposed certain entries that should have been recorded as part of the
      normal closing process. Our internal control over financial reporting did not
      detect such matters and, therefore, was not effective in detecting misstatements
      in the financial statements.





To
      address the material weakness, we performed additional analysis and other
      post-closing procedures in an effort to ensure our consolidated financial
      statements included in this annual report have been prepared in accordance
      with
      generally accepted accounting principles. Accordingly, management believes
      that
      the financial statements included in this report fairly present in all material
      respects our financial condition, results of operations and cash flows for
      the
      periods presented. As a result, we have put an implementation plan in place
      whereby in fiscal year 2009 sufficient testing to satisfy COSO requirements
      will
      be performed. The absence of the ability to conclude as to the sufficiency
      of
      internal controls, is a material weakness.





This
      annual report does not include an attestation report of our independent
      registered public accounting firm regarding internal control over financial
      reporting. Our internal controls were not subject to attestation by our
      independent registered public accounting firm pursuant to temporary rules of
      the
      Securities and Exchange Commission that permit us to provide only managements
      report in this annual report.





(b) *Changes
      in Internal Control Over Financial Reporting* .
      There
      were no significant changes in the Company’s internal controls or in other
      factors that could significantly affect internal controls subsequent to the
      date
      of the evaluation above.


20




**ITEM
      8B.**  **OTHER
      INFORMATION.**




None.




**PART
      III**




**ITEM
      9.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
      CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.**




The
      following table and biographical summaries set forth information, including
      principal occupations and business experience, about our directors and the
      executive officer at March 31, 2008:





**Name**
            
            **Age******
            
            **Position******William
                P. Spencer
            
            55
            
            Chief
                Executive Officer, President and DirectorDebra
                L. Spencer
            
            56
            
            Secretary,
                Treasurer and DirectorLowell
                W. Giffhorn
            
            61
            
            Chief
                Financial OfficerDerek
                C. Boosey
            
            65
            
            Vice
                President—InternationalJeffrey
                G. McGonegal
            
            57
            
            DirectorRobert
                Burg
            
            51
            
            DirectorBarry
                S. King
            
            62
            
            Director





**Biographical
      Information**





*William
      P. Spencer* has
      served as a director and has been our president since January 1999. From
      January 1986 to December 1996 he served as chief operating officer,
      chief financial officer and executive vice-president of Natural Alternatives
      International, Inc., a company engaged in the formulation and production of
      encapsulated vitamins and nutrients. He was president of NAI from
      December 1996 to October 1998 and was a director from
      January 1986 to October 1998. From 1976 to 1988 he was a regional vice
      president for San Diego Trust and Savings Bank. Mr. Spencer earned a B.S.
      degree in finance and an MBA degree from San Diego State University.





*Debra
      L. Spencer* has
      served as a director and has been our secretary since March 1999 and served
      as
      our treasurer from March 1999 to July 2005. Her responsibilities also include
      product label copy and graphic design in compliance with FDA regulations as
      well
      as developing marketing materials for our private label products. From 1970
      to
      1981 she was an Executive Assistant to the Vice President of a local San Diego
      bank. She was a homemaker from 1981 to 1987. From 1987 to 1993 she served as
      vice president, secretary and treasurer for Vitamin Direct, Inc., a
      consumer mail order vitamin company.





*Derek
      C. Boosey* has
      served as our vice-president—international since September 1999. From 1994
      to September 1999, he was new business manager for National Alternatives
      International, Inc., and from 1990 to 1994 was director of marketing for
      Athletics Canada. From 1984 to 1990, Mr. Boosey was a technical advisor to
      the Korean Ministry of Sports and a sports and marketing consultant for MKC
      International. He earned degrees in physical education from Keele University
      (England) and Opu University (England) and is the Senior Olympics world record
      holder in the triple jump in the age 55 to 60 class.





*Barry
      S. King*  joined
      our Board in 2003. He was the Director of Marketing for the United States
      Olympic Committee from 1987 to 2002. Since 2002, Mr. King has been the Vice
      President and General Manager of Triactive America. Mr. King graduated with
      a B.A. degree from the University of Colorado in 1969.





*Lowell
      W. Giffhorn* has
      served as our Chief Financial Officer since July 2005. Since October 2005,
      Mr.
      Giffhorn also has served as the Chief Financial Officer and, since December
      2005, has served on the board of directors of Brendan Technologies, Inc., a
      publicly held company that provides computer software to the pharmaceutical
      and
      life science industries. From November 1996 to June 2005, Mr. Giffhorn was
      the
      Chief Financial Officer of Patriot Scientific Corp., a publicly held
      semiconductor and intellectual property company. From June 1992 to August 1996
      and from September 1987 to June 1990 he was the CFO of Sym-Tek Systems, Inc.
      and
      Vice President of Finance for its successor, Sym-Tek Inc., a supplier of capital
      equipment to the semiconductor industry. Mr. Giffhorn obtained a M.B.A. degree
      from National University in 1976 and he obtained a B.S. in Accountancy from
      the
      University of Illinois in 1969. Mr. Giffhorn is also a director and chairman
      of
      the audit committee of DND Technologies, Inc., a publicly held company. Mr.
      Giffhorn devotes approximately 50% of his time to our affairs.


21


*Jeffrey
      G. McGonegal* joined
      our board in 2005. He also serves as the chief financial officer of AspenBio
      Pharma, Inc., a publicly-held biomedical company and of Security with Advanced
      Technology, Inc., a publicly held security products and services company and
      as
      senior vice president — finance of Cambridge Holdings, a publicly-held real
      estate and business development firm with limited activities, and since 1997,
      Mr. McGonegal has served as managing director of McGonegal and Co., a company
      engaged in providing accounting and business consulting services. From 1974
      to
      1997, he was an accountant with BDO Seidman LLP. While at BDO Seidman, Mr.
      McGonegal served as managing partner of the Denver, Colorado office. Until
      April
      2007, following its sale he was also a member of the board of directors of
      Applied Medical Devices, Inc., a publicly-held shell company. Mr. McGonegal
      received a B.A. degree in accounting from Florida State University and he is
      a
      certified public accountant licensed in Colorado.





*Robert
      Burg* joined
      our board in 2005. Since 1998, Mr. Burg has been the owner of The Burg Group,
      a
      business development company based in the sports industry. From 1992 to 1998,
      Mr. Burg held several executive level positions, including President from 1995
      to 1998, with Royal Grip, Inc., a publicly traded company that designed and
      distributed golf club grips and athletic headware. He received a B.A. degree
      in
      Business from the Great Western States University in 1977.





William
      P. Spencer and Debra L. Spencer are married to each other.




**Committees
      of the Board Of Directors**





Our
      Board
      has a standing Audit Committee. The entire Board serves as the Compensation
      Committee.





***Audit
      Committee.*** **** The
      Audit
      Committee is responsible for: (1) selection and oversight of our independent
      accountant; (2) establishing procedures for the receipt, retention and treatment
      of complaints regarding accounting, internal controls and auditing matters;
      (3)
      establishing procedures for the confidential, anonymous submission of concerns
      regarding accounting and auditing matters; (4) engaging outside advisors; and,
      (5) funding for the outside auditors and any outside advisors engagement by
      the
      audit committee. The Audit Committee, which met four times during 2008, is
      composed of one employee director and one other director, who was determined
      by
      the Board to be an independent director. During 2008, the Audit Committee
      consisted of Mr. McGonegal (Chairman) and Mr. Spencer.




The
      Board
      of Directors has determined that Mr. McGonegal is an audit committee
      financial expert as defined in Item 401 of Regulation S-B promulgated by the
      Securities and Exchange Commission. The Board's conclusions regarding the
      qualifications of Mr. McGonegal as an audit committee financial expert were
      based on his service as a chief financial officer of a public company, his
      prior
      practice as an audit partner for a national certified public accounting firm
      and
      his degrees in accounting and business administration.




**Code
      of Ethics**




Imagenetix
      has set forth its policy on ethical behavior in a document called "Code of
      Business Conduct and Ethics." This policy applies to the members of our Board
      of
      Directors and all employees, including (but not limited to) our principal
      executive officer, principal financial officer, principal accounting officer
      or
      controller and persons performing similar functions. This policy comprises
      written standards that are reasonably designed to deter wrongdoing and to
      promote the behavior described in Item 406 of Regulation S-B promulgated by
      the Securities and Exchange Commission. No waivers of the Code were granted
      in
      2008.




**Compliance
      with Section 16(a) of the Securities Exchange Act**




Due
      to
      our status as a Section 15(d) reporting company, our executive officers,
      directors, and persons who beneficially own more than 10% of a registered class
      of our equity securities are not required to file with the SEC reports of
      ownership and changes in ownership of Imagenetix's equity securities pursuant
      to
      Section 16(a) of the Securities Exchange Act of 1934.


22




**ITEM
      10.**  **EXECUTIVE
      COMPENSATION.**




There
      is
      shown below information concerning the compensation of our principal executive
      officer and the most highly compensated executive officers whose total
      compensation exceeded $100,000 (each a “Named Officer”) for the fiscal years
      ended March 31, 2008 and 2007.





**SUMMARY
      COMPENSATION TABLE**





Name and
            
            Fiscal
            
            
            
            
            
            Option
            
            All OtherPrincipal Position
            
            Year
            
            Salary ($)
            
            Bonus ($)
            
            Awards ($)
            
            Compensation ($)
            
            Total ($)[a]
            
            
            [b]
            
            
            [c]
            
            
            [d]
            
            
            [f]
            
            
            [i]
            
            
            [j]William
                P. Spencer
            
            
            2008
            
            $
            178,956
            
            $
            30,500
            
            $
            20,000
            
            $
            9,903
            
            $
            239,359President,
                CEO and Director
            
            
            2007
            
            $
            174,386
            
            $
            39,000
            
            
            -
            
            $
            9,903
            
            $
            223,289





The
      amount included in other compensation during the year ended March 31, 2008,
      is a
      car allowance paid to Mr. Spencer. We estimate the fair value of the option
      issued to Mr. Spencer at the issuance date by using the Black-Scholes
      option-pricing model with the following weighted-average assumptions used for
      those options issued during the year ended March 31, 2008: dividend yield of
      zero percent; expected volatility of 71%, risk-free interest rates of 4.55%;
      and
      expected life of 5 years. ****





**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END**





Name
            
            Number
            
            Number
            
            Option
            
            Optionof
            
            of
            
            Exercise
            
            ExpirationSecurities
            
            Securities
            
            Price
            
            DateUnderlying
            
            Underlying
            
            ($)Unexercised
            
            UnexercisedOptions
            
            Options(#)
            
            (#)Exercisable
            
            Unexercisable[a]
            
            [b]
            
            [c]
            
            [e]
            
            [f]William
                P. Spencer
            
            
            25,000
            
            
            -
            
            $
            2.00
            
            
            Aug. 21, 2010President, CEO and
            
            
            60,000
            
            
            -
            
            $
            1.95
            
            
            July 1, 2010Director
            
            
            12,500
            
            
            12,500
            
            $
            1.30
            
            
            May 8, 2012





**Employment
      Contracts**





We
      do not
      have employment contracts with any of our executive officers.





**DIRECTOR
      COMPENSATION**





Name
            
            Fees
            
            Option
            
            All Other
            
            TotalEarned
            
            Awards
            
            Compensation
            
            ($)or
            
            ($)
            
            ($)Paid InCash($)[a]
            
            [b]
            
            (d)
            
            [g]
            
            [h]Debra
                Spencer
            
            $
            -
            
            $
            20,000
            
            $
            86,371
            
            $
            106,371Jeffrey
                McGonegal
            
            $
            10,000
            
            $
            16,000
            
            $
            -
            
            $
            26,000Barry
                King
            
            $
            4,800
            
            $
            12,000
            
            $
            -
            
            $
            16,800Robert
                Burg
            
            $
            7,500
            
            $
            16,000
            
            $
            -
            
            $
            23,500





Mrs.
      Spencer is an employee and director of ours. The amount reflected as other
      compensation is the amount she was paid as an employee. She received no
      compensation for being a director.





We
      estimate the fair value of the options issued to our directors at the issuance
      date by using the Black-Scholes option-pricing model with the following
      weighted-average assumptions used for those options issued during the year
      ended
      March 31, 2008: dividend yield of zero percent; expected volatility of 71%,
      risk-free interest rates of 4.55%; and expected life of 5
      years.


23


**Liability
      and Indemnification of Officers and Directors**





Our
      Articles of Incorporation provides that our directors will not be liable for
      monetary damages for breach of their fiduciary duty as directors, other than
      the
      liability of a director for:





•
            A
                breach of the director’s duty of loyalty to our company or our
                stockholders;





•
            Acts
                or omissions by the director not in good faith or which involve
                intentional misconduct or a knowing violation of law;





•
            Willful
                or negligent declaration of an unlawful dividend, stock purchase
                or
                redemption; or





•
            Transactions
                from which the director derived an improper personal benefit.





Our
      Articles of Incorporation require us to indemnify all persons whom we may
      indemnify pursuant to Nevada law to the full extent permitted by Nevada law.





Our
      bylaws require us to indemnify our officers and directors and other persons
      against expenses, judgments, fines and amounts incurred or paid in settlement
      in
      connection with civil or criminal claims, actions, suits or proceedings against
      such persons by reason of serving or having served as officers, directors,
      or in
      other capacities, if such person acted in good faith and in a manner such person
      reasonably believed to be in or not opposed to our best interests and, in a
      criminal action or proceeding, if he had no reasonable cause to believe that
      his/her conduct was unlawful. The termination of any action, suit or proceeding
      by judgment, order, settlement, conviction or upon a plea of no contest or
      its
      equivalent shall not, of itself, create a presumption that the person did not
      act in good faith and in a manner which he or she reasonably believed to be
      in
      or not opposed to our best interests or that he or she had reasonable cause
      to
      believe his or her conduct was unlawful. Indemnification as provided in our
      bylaws shall be made only as authorized in a specific case and upon a
      determination that the person met the applicable standards of conduct. Insofar
      as the limitation of, or indemnification for, liabilities arising under the
      Securities Act of 1933 may be permitted to directors, officers, or persons
      controlling us pursuant to the foregoing, or otherwise, we have been advised
      that, in the opinion of the Securities and Exchange Commission, such limitation
      or indemnification is against public policy as expressed in the Securities
      Act
      of 1933 and is, therefore, unenforceable.





**ITEM
      11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
      AND MANAGEMENT AND  RELATED STOCKHOLDER MATTERS.**





The
      following table sets forth certain information concerning our common stock
      ownership as of June 25, 2008, by (1) each person who is known by us to be
      the
      beneficial owner of more than five percent of our common stock; (2) each of
      our
      executive officers and directors; and (3) all of our directors and executive
      officers as a group. The address of each such stockholder is in care of us
      at
      10845 Rancho Bernardo Road, Suite 105, San Diego, California 92127.





**Amount of Benefical**
            
            **Percent of****Name of Beneficial Owner**
            
            **Ownership (1)(2)**
            
            **Ownership**William
                P.and Debra L. Spencer (3)
            
            
            2,918,000
            
            
            26.2
            %Gary
                J. McAdam (4)
            
            
            2,988,108
            
            
            23.9
            %Estate
                of James Scibelli (5)
            
            
            901,625
            
            
            7.8
            %Barry
                S. King (6)
            
            
            24,000
            
            
            *Robert
                Burg (7)
            
            
            70,000
            
            
            *Jeffrey
                G. McGonegal (7)
            
            
            70,000
            
            
            *Lowell
                W. Giffhorn (8)
            
            
            70,000
            
            
            *Derek
                C. Boosey (9)
            
            
            225,000
            
            
            2.0
            %All
                officers and directors as a group (6 persons) (10)
            
            
            3,377,000
            
            
            29.3
            %


24


*
            Represents
                less than 1%





(1)
            Reflects
                amounts as to which the beneficial owner has sole voting power and
                sole
                investment power.


(2)
            Includes
                stock options and common stock purchase warrants exercisable within
                60
                days from the date hereof.


(3)
            Comprised
                of 2,740,000 shares and 178,000 stock options. William P. and Debra
                Spencer are husband and wife and are deemed to share beneficial ownership
                of these shares and options.


(4)
            Comprised
                of 1,435,557 shares and 1,552,551 common stock purchase warrants,
                all of
                which are owned by entities controlled by Mr. McAdam.


(5)
            Includes
                370,000 shares and 531,625 common stock purchase warrants, all of
                which
                are owned by entities controlled by the estate of Mr. Scibelli.


(6)
            Comprised
                of 24,000 stock options.


(7)
            Comprised
                of 70,000 stock options.


(8)
            Comprised
                of 30,000 shares and 40,000 stock
                options.


(9)
            Comprised
                of 50,000 shares and 175,000 stock
                options.


(10)
            Comprised
                of 2,820,000 shares and 557,000 stock
                options.




**Equity
      Compensation Plan Information**




**Number of securities****remaining available****Number of securities**
            
            
            
            **for issuance under****to be issued upon**
            
            **Weighted average**
            
            **equity compensaton****exercise of**
            
            **exercise price of**
            
            **plans (excluding****outstanding options,**
            
            **outstanding options,**
            
            **securities reflected in****warrants and rights**
            
            **warrants and rights**
            
            **column (a))****Plan Category**
            
            **(a)**
            
            **(b)**
            
            **(c)**Equity
                compensation plans approved by security holders
            
            
            944,000
            
            $
            1.76
            
            
            771,000Equity
                compensation plans not approved by security holders
            
            
            3,902,957
            
            $
            1.18
            
            
            -Total
            
            
            4,846,957
            
            $
            1.30
            
            
            771,000




Common
      shares issuable on the exercise of common stock warrants have not been approved
      by the security holders and, accordingly, have been segregated in the above
      table.




**ITEM
      12.     CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS.**




GJM
      Trading Partners, Ltd., an entity controlled by Gary McAdam, a principal
      stockholder, holds exclusive rights to market some of our products through
      certain e-commerce distribution channels.





In
      January 2005 we entered into a consulting agreement with Business Partners
      Operations, LLC., a company in which Mr. McAdam is an officer and principal
      stockholder. Under the agreement, Mr. McAdam provides us with business
      consulting in the areas of finance and marketing strategies. The agreement,
      which was verbally amended in January 2008, calls for us to pay a fee of $6,500
      per month and can be terminated by either party with a 30 day notice.





We
      believe that the above transactions were fair, reasonable and upon terms at
      least as favorable to us as those we might have obtained from unaffiliated
      third
      parties.




**ITEM
      13.****EXHIBITS.**




(a)
            The
                following documents are filed as a part of this Report:


25


1.
            Financial
                Statements. The following consolidated financial statements and Report
                of


IndependentRegistered
                  Certified Public Accounting Firm are included in Part II of this
                  Report:





Report
      of
      HJ Associates & Consultants LLP, Independent Registered Public Accounting
      Firm





Consolidated
      Balance Sheets- As of March 31, 2008 and 2007





Consolidated
      Statements of Operation- Years Ended March 31, 2008 and 2007





Consolidated
      Statement of Stockholders' Equity- Years Ended March 31, 2008


and
      2007





Consolidated
      Statements of Cash Flows- Years Ended March 31, 2008 and 2007





Notes
      to
      Consolidated Financial Statements





2.
            Exhibits.
                The following Exhibits are filed as part of, or incorporated by reference
                into, this
                Report:




**Exhibit No.**
            
            **Title******3.01
            
            Articles
                of Incorporation of the Registrant(1)3.02
            
            Bylaws
                of the Registrant(1)3.03
            
            Amendment
                to Articles of Incorporation (Name change)(2)4.01
            
            2000
                Stock Option Plan (6)10.01
            
            Celadrin®
                Supply Agreement with Organic Technologies(2)10.19
            
            Business
                Partners Operations Agreement (4)10.20
            
            Office
                Lease Agreement with Bernardo Gateway Partners (5)10.21
            
            Patent
                License with University of Minnesota (5)10.22
            
            Patent
                License with EHP Products, Inc. (5)14
            
            Code
                of Ethics (3)31.1
            
            302
                Certification of William P. Spencer31.2
            
            302
                Certification of Lowell W. Giffhorn32.1
            
            906
                Certification of William P. Spencer32.2
            
            906
                Certification of Lowell W. Giffhorn





(1)
            Incorporated
                by reference to our Registration Statement on Form SB-1, file number
                333-87535,filed
                on September 22, 1999.





(2)
            Incorporated
                by reference to our Registration Statement on Form SB-2, File Number
                333-71756,declared
                effective on July 26, 2002 and post-effective amendment No. 1 thereto
                declared effective on August 25, 2003.


26


(3)
            Incorporated
                by reference to our Annual Report on Form 10-KSB for the year ended
                March
                31, 2005.





(4)
            Incorporated
                by reference to our Registration Statement on Form SB-2, File Number
                333-123159, declared effective on March 18,
                2005.





(5)
            Incorporated
                by reference to our Annual Report on Form 10-KSB for the year ended
                March
                31, 2006.





(6)
            Incorporated
                by reference to our Registration Statement on Form S-8, File Number
                333-146318, filed on September 26,
                2007.




**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.**




The
      following is a summary of the fees billed to Imagenetix by its principal
      accountants for the fiscal years ended March 31, 2008 and 2007:





HJ Associates &
            
            HJ Associates &
            
            Mayer HoffmanConsultants LLP
            
            Consultants LLP
            
            McCann P.C.Fee
                category
            
            
            2008
            
            
            2007
            
            
            2007Audit
                fees
            
            $
            58,896
            
            $
            33,563
            
            $
            5,000Audit-related
                fees
            
            $
            -
            
            $
            3,513
            
            $
            3,440Tax
                fees
            
            $
            3,934
            
            $
            1,922
            
            $
            -All
                other fees
            
            $
            -
            
            $
            -
            
            $
            -Total
                fees
            
            $
            62,830
            
            $
            38,998
            
            $
            8,440





Audit
      fees. Consists of fees for professional services rendered by our principal
      accountants for the audit of our annual financial statements and the review
      of
      financial statements included in our Forms 10-QSB or services that are normally
      provided by our principal accountants in connection with statutory and
      regulatory filings or engagements.





Audit-related
      fees. Consists of fees for assurance and related services by our principal
      accountants that are reasonably related to the performance of the audit or
      review of our financial statements and are not reported under "Audit fees."





Tax
      fees.
      Consists of fees for professional services rendered by our principal accountants
      for tax compliance, tax advice and tax planning.





All
      other
      fees. Consists of fees for products and services provided by our principal
      accountants, other than the services reported under "Audit fees," "Audit-related
      fees" and "Tax fees" above. The fees disclosed in this category include due
      diligence, preparation of pro forma financial statements as a discussion piece
      for a Board member, and preparation of letters in connection with the filing
      of
      Current Reports on Form 8-K.


27


**Pre-Approval
      Policies and Procedures**





All
      services provided by our independent registered public accounting firm, HJ
      Associates & Consultants LLP (“HJ”), are subject to pre-approval by our
      Audit Committee. The Audit Committee has authorized each of its members to
      approve services by HJ in the event there is a need for such approval prior
      to
      the next full Audit Committee meeting. The Audit Committee has also adopted
      policies and procedures that are detailed as to the particular service and
      that
      do not include delegation of the Audit Committee’s responsibilities to
      management under which management may engage HJ to render audit or non-audit
      services. Any interim approval given by an Audit Committee member and any such
      engagement by management must be reported to the Audit Committee no later than
      its next scheduled meeting. Before granting any approval, the Audit Committee
      (or a committee member if applicable) gives due consideration to whether
      approval of the proposed service will have a detrimental impact on HJ’s
      independence. The full Audit Committee pre-approved all services provided by
      HJ
      in fiscal 2008.





Based
      upon the Audit Committee's discussion with management and the independent
      auditors and the Audit Committee review of the representations of management
      and
      the report of the independent accountants to the Audit Committee, the Audit
      Committee recommended that the Board of Directors include our audited financial
      statements in our Annual Report on Form 10-KSB for the year ended March 31,
      2008
      filed with the Securities and Exchange Commission.


28


**Index
      to Consolidated Financial Statements**





Report
                of Independent Registered Public Accounting Firm
            
            F-2Consolidated
                Balance Sheets, March 31, 2008 and 2007
            
            F-3Consolidated
                Statements of Operation, for the years ended March 31, 2008 and
                2007
            
            F-4Consolidated
                Statement of Stockholders' Equity, for the years ended March 31,
                2008 and
                2007
            
            F-5Consolidated
                Statements of Cash Flows, for the years ended March 31, 2008 and
                2007
            
            F-6Notes
                to Consolidated Financial Statements
            
            F-7-F-25


F-1


**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Board of Directors


Imagenetix,
      Inc.


San
      Diego, California





We
      have
      audited the consolidated balance sheets of Imagenetix, Inc. and subsidiary
      as of
      March 31, 2008 and 2007, and the related consolidated statements of operations,
      stockholders’ equity and cash flows for the years then ended. These consolidated
      financial statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall consolidated financial statement
      presentation. We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Imagenetix,
      Inc. and subsidiary as of March 31, 2008 and 2007, and the results of their
      operations and their cash flows for the years then ended, in conformity with
      U.S. generally accepted accounting principles.





We
      were
      not engaged to examine management's assertion about the effectiveness of
      Imagenetix, Inc.'s internal control over financial reporting as of March 31,
      2008 included in the accompanying Form 10-KSB and, accordingly, we do not
      express an opinion thereon.





HJ
      Associates & Consultants, LLP


Salt
      Lake
      City, Utah


June
      23,
      2008


F-2




**Imagenetix,
      Inc.**


**Consolidated
      Balance Sheets**





March
                31,
            
            **2008**
            
            2007**ASSETS****Current
                assets:**Cash
                and cash equivalents
            
            **$**
            **1,022,555**
            
            $
            958,896Accounts
                receivable, net
            
            
            **765,492**
            
            
            1,576,641Inventories,
                net
            
            
            **1,109,845**
            
            
            1,284,458Prepaid
                expenses and other current assets
            
            
            **252,138**
            
            
            384,217Income
                tax receivable
            
            
            **-**
            
            
            269,140Deferred
                tax asset
            
            
            **862,497**
            
            
            109,797Total
                current assets
            
            
            **4,012,527**
            
            
            4,583,149**Property
                and equipment,**net
            
            
            **112,190**
            
            
            125,456**Long-term
                prepaid expenses**
            
            
            **42,000**
            
            
            **-****Other
                assets**
            
            
            **218,155**
            
            
            551,998**Total
                Assets**
            
            **$**
            **4,384,872**
            
            $
            5,260,603**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                liabilities:**Accounts
                payable
            
            **$**
            **713,324**
            
            $
            368,089Accrued
                liabilities
            
            
            **72,301**
            
            
            64,265Customer
                deposits
            
            
            **63,216**
            
            
            136,645Contract
                payable
            
            
            **46,200**
            
            
            49,970Short
                term license payable
            
            
            **34,259**
            
            
            31,633Total
                current liabilities
            
            
            **929,300**
            
            
            650,602**Long
                term license payable**
            
            
            **2,980**
            
            
            37,239**Total
                Liabilities**
            
            
            **932,280**
            
            
            687,841**Stockholders'
                equity**Preferred
                stock, $.001 par value; 5,000,000 shares authorized: none
                outstanding
            
            
            **-**
            
            
            -Common
                stock, $.001par value; 50,000,000 shares authorized: 10,960,788 and
                10,871,400 issued and outstanding at March 31, 2008 and 2007,
                respectively
            
            
            **10,960**
            
            
            10,871Capital
                in excess of par value
            
            
            **12,481,407**
            
            
            10,734,945Accumulated
                deficit
            
            
            **(9,039,775**
            **)**
            
            (6,173,054
            )Total
                stockholders' equity
            
            
            **3,452,592**
            
            
            4,572,762**Total
                Liabilities and Stockholders' Equity**
            
            **$**
            **4,384,872**
            
            $
            5,260,603





*See
      accompanying report of independent registered public accounting firm, summary
      of
      accounting policies and notes to consolidated financial
      statements.*


F-3


**Imagenetix,
      Inc.**


**Consolidated
      Statements of Operation**





*Years
                Ended March 31,*
            
            **2008**
            
            2007Net
                sales
            
            **$**
            **5,569,593**
            
            $
            5,596,725Cost
                of sales
            
            
            **3,344,034**
            
            
            2,969,002Gross
                profit
            
            
            **2,225,559**
            
            
            2,627,723Operating
                expenses:General
                and administrative
            
            
            **2,456,192**
            
            
            1,407,996Payroll
                expense
            
            
            **1,037,775**
            
            
            712,945Consulting
                expense
            
            
            **961,349**
            
            
            1,339,515Operating
                expenses
            
            
            **4,455,316**
            
            
            3,460,456Operating
                (loss)
            
            
            **(2,229,757**
            **)**
            
            (832,733
            )Other
                income (expense):Other
                income
            
            
            **32,182**
            
            
            32,885Interest
                expense (Note 6)
            
            
            **(4,367**
            **)**
            
            (6,791
            )Other
                income (expense)
            
            
            **27,815**
            
            
            26,094Loss
                before income taxes
            
            
            **(2,201,942**
            **)**
            
            (806,639
            )Benefits
                from taxes (Note 10)
            
            
            **(425,300**
            **)**
            
            (139,000
            )Net
                (loss)
            
            **$**
            **(1,776,642**
            **)**
            $
            (667,639
            )Basic
                and diluted (loss) per share
            
            **$**
            **(0.16**
            **)**
            $
            (0.06
            )





*See
      accompanying report of independent registered public accounting firm, summary
      of
      accounting polices and notes to consolidated financial
      statements.*


F-4


**Imagenetix,
      Inc.**


**Consolidated
      Statements of Stockholders' Equity**





*Years
                Ended March 31, 2008 and 2007*Common Stock
            
            Capital in excess
            
            Retained Earnings
            
            Stockholders'Shares
            
            Amount
            
            of Par Value
            
            (Deficit)
            
            EquityBalance,
                April 1, 2006
            
            
            10,721,400
            
            
            10,721
            
            
            10,342,395
            
            
            (5,398,019
            )
            
            4,955,097Issuance
                of common stock for services at $.94 per share
            
            
            150,000
            
            
            150
            
            
            140,850
            
            
            -
            
            
            141,000Purchase
                price of warrants
            
            
            -
            
            
            -
            
            
            1,250
            
            
            -
            
            
            1,250Value
                of warrants issued
            
            
            -
            
            
            -
            
            
            143,054
            
            
            -
            
            
            143,054Non-cash
                dividend issued to certain warrant holders
            
            
            -
            
            
            -
            
            
            107,396
            
            
            (107,396
            )
            
            -Net
                (loss) for the year ended March 3l, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            (667,639
            )
            
            (667,639
            )Balance
                March 31, 2007
            
            
            10,871,400
            
            $
            10,871
            
            $
            10,734,945
            
            $
            (6,173,054
            )
            $
            4,572,762Warrants
                exercised at $1.00 to $1.10 per share
            
            
            89,388
            
            
            89
            
            
            90,799
            
            
            -
            
            
            90,888Cash
                received on extension of warrants
            
            
            -
            
            
            -
            
            
            155,536
            
            
            -
            
            
            155,536Value
                of stock options and warrants issued
            
            
            -
            
            
            -
            
            
            410,048
            
            
            -
            
            
            410,048Non-cash
                dividend issued to certain warrant holders
            
            
            -
            
            
            -
            
            
            1,090,079
            
            
            (1,090,079
            )
            
            -Net
                (loss) for the year ended March 3l, 2008
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,776,642
            )
            
            (1,776,642
            )Balance
                March 31, 2008
            
            
            10,960,788
            
            $
            10,960
            
            $
            12,481,407
            
            $
            (9,039,775
            )
            $
            3,452,592





*See
      accompanying report of independent registered public accounting firm, summary
      of
      accounting policies and notes to consolidated finacial
      statements.*


F-5


**Imagenetix,
      Inc.**


**Consolidated
      Statements of Cash Flows**




*Years
                Ended March 31,*
            
            
            **2008**
            
            
            2007**Operating
                activities:**Net
                (loss)
            
            $
            (1,776,642
            )
            $
            (667,639
            )Adjustments
                to reconcile net (loss) to cash provided (used) by operating
                activities:Amortization
                and depreciation
            
            
            **50,334**
            
            
            41,410Provision
                for doubtful accounts
            
            
            **15,000**
            
            
            40,000Provision
                for inventory obsolescence
            
            
            **15,454**
            
            
            (61,380
            )Non
                cash expense related to issuance of warrants and stock
                options
            
            
            **410,048**
            
            
            143,054Stock
                issued for services
            
            
            **-**
            
            
            141,000Change
                in deferred taxes
            
            
            **(425,300**
            **)**
            
            (100,497
            )Changes
                in assets and liabilities:(Increase)
                decrease in accounts receivable
            
            
            **796,149**
            
            
            (805,443
            )(Increase)
                decrease in employee receivable
            
            
            **3,177**
            
            
            2,870(Increase)
                decrease in inventory
            
            
            **159,159**
            
            
            518,390(Increase)
                decrease in other assets
            
            
            **86,904**
            
            
            (147,591
            )Increase
                (decrease) in accounts payable
            
            
            **345,234**
            
            
            (372,372
            )Increase
                (decrease) in accrued liabilities
            
            
            **8,036**
            
            
            12,316Increase
                (decrease) in customer deposits
            
            
            **(73,429**
            **)**
            
            88,160Increase
                (decrease) in income taxes payable
            
            
            **269,140**
            
            
            348,430Net
                cash (used in) operating activities
            
            
            **(116,736**
            **)**
            
            (819,292
            )**Investing
                activities:**Acquisition
                of office equipment and leasehold improvements
            
            
            **(19,014**
            **)**
            
            (51,838
            )Trademarks,
                patents and infomercial
            
            
            **(11,612**
            **)**
            
            -Net
                cash used in investing activities
            
            
            **(30,626**
            **)**
            
            (51,838
            )**Financing
                activities:**Proceeds
                from extension of warrants
            
            
            **155,536**
            
            
            -Proceeds
                from exercise of warrants
            
            
            **90,888**
            
            
            -Proceeds
                from issuance of warrant
            
            
            **-**
            
            
            1,250Proceed
                from contracts payable
            
            
            **95,605**
            
            
            102,143Payments
                on contracts payable
            
            
            **(99,375**
            **)**
            
            (52,173
            )Payments
                on patent license financed
            
            
            **(31,633**
            **)**
            
            (29,210
            )Net
                cash provided by financing activities
            
            
            **211,021**
            
            
            22,010**Net
                increase (decrease) in cash**
            
            
            **63,659**
            
            
            (849,120
            )**Cash
                and cash equivalents**,
                beginning of year
            
            
            **958,896**
            
            
            1,808,016**Cash
                and cash equivalents,**end of year
            
            $
            1,022,555
            
            $
            958,896**Supplemental
                Disclosure of Cash Flow Information:**Cash
                paid during the period for:Interest
            
            $
            4,367
            
            $
            6,791Income
                taxes
            
            $
            -
            
            $
            -**Non
                Cash Investing and Financing Activities:**Non-cash
                dividend issued to certain warrant holders
            
            $
            1,090,079
            
            $
            107,396Non-cash
                expense related to issuance of warrants and stock options
            
            $
            410,048
            
            $
            143,054Stock
                issued for services
            
            $
            -
            
            $
            141,000





*See
      accompanying report of independent registered public accounting firm, summary
      of
      accounting policies and notes to consolidated financial
      statements.*


F-6


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements


March
      31,
      2008 and 2007





NOTE
      1 –  SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





Organization





The
      accompanying consolidated financial statements represent the accounts of
      Imagenetix, Inc. [“Parent”] organized under the laws of the State of Nevada on
      March 28, 1988; and its subsidiary Imagenetix, Inc [“Subsidiary”] organized
      under the laws of the state of Colorado on July 26, 1996 and its subsidiary
      Imagenetix [“Imagenetix CA”] organized under the laws of the State of California
      on January 7, 1999. We are engaged in the business of developing and marketing
      nutritional supplements and skin care products primarily in domestic
      markets.





On
      March
      23, 1999, Subsidiary completed an exchange agreement with Imagenetix CA wherein
      Subsidiary issued 3,900,000 shares of its common stock in exchange for all
      of
      the outstanding common stock of Imagenetix CA. The Acquisition was accounted
      for
      as a recapitalization of Imagenetix CA as the shareholders of the Imagenetix
      CA
      controlled the combined entity after the acquisition. There was no adjustment
      to
      the carrying values of the assets or liabilities of the Subsidiary or Imagenetix
      CA as a result of the recapitalization.





During
      October 2000, the Subsidiary entered into a definitive merger agreement and
      plan
      of reorganization with Parent. The transaction was accounted for as a
      recapitalization of the Subsidiary, wherein the Subsidiary became a wholly
      owned
      subsidiary of the Parent. After giving effect to the preceding transaction,
      the
      parent had 8,550,000 shares of common stock, 3,183,750 warrants, and 525,000
      options outstanding. In connection with the reverse acquisition, the Parent
      changed its name to Imagenetix, Inc.





We
      have,
      at the present time, not paid any dividends, and any dividends that may be
      paid
      in the future will depend upon our financial requirements and other relevant
      factors.





Consolidation





All
      significant intercompany transactions between the Parent, Subsidiary, and
      Imagenetix CA have been eliminated in consolidation.





Accounting
      Estimates





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





Cash
      and Cash Equivalents





For
      purposes of the financial statements, we consider all highly liquid debt
      investments purchased with a maturity of three months or less to be cash
      equivalents. At various times throughout the year, we have exceeded federally
      insured limits.


F-7


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





Accounts
      receivable





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





Inventory





Inventory
      is carried at the lower of cost or market. Cost is determined by the first-in
      first-out method. Indirect overhead costs are allocated to inventory.





Property
      and Equipment





Property
      and equipment are stated at cost. Expenditures for major renewals and
      betterments that extend the useful lives of property and equipment are
      capitalized, upon being placed in service. Expenditures for maintenance and
      repairs are charged to expense as incurred. Depreciation is computed over the
      estimated useful life of three to seven years, except leasehold improvements
      which are depreciated over the lesser of the remaining lease life or the life
      of
      the asset, using the straight-line method. We follow the provisions of the
      Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
      Standards ("SFAS") No. 144, "Accounting for the Impairment of Long-lived
      Assets." Long-lived assets and certain identifiable intangibles to be held
      and
      used by us are reviewed for impairment whenever events or changes in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. We continuously evaluate the recoverability of our long-lived
      assets based on estimated future cash flows and the estimated fair value of
      such
      long-lived assets, and provide for impairment if such undiscounted cash flows
      are insufficient to recover the carrying amount of the long-lived
      asset.





Trademarks
      and Patents





Patents
      and trademarks are carried at cost less accumulated amortization and are
      amortized over their estimated useful lives of from 8 to 17 years for patents
      and 10 years for trademarks. The carrying value of patents and trademarks is
      periodically reviewed and impairments, if any, are recognized when the expected
      future benefit to be derived from individual intangible assets is less than
      its
      carrying value determined based on the provisions of SFAS No. 144 as discussed
      above.





Stock
      Based Compensation





Effective
      January 1, 2006, we adopted FASB Statement No. 123R, “Accounting for Stock-Based
      Compensation” (“SFAS 123R”). SFAS 123R requires all share-based payments to
      employees, including grants of employee stock options and restricted stock,
      to
      be recognized in the financial statements based on their fair values. Under
      SFAS
      123R, the pro forma disclosures previously permitted under SFAS 123R are no
      longer an alternative to financial statement recognition.


F-8


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





We
      have
      selected the Black-Scholes method of valuation for share-based compensation
      and
      have adopted the modified prospective transition method under SFAS 123R, which
      requires that compensation cost be recorded, as earned, for all unvested stock
      options outstanding at the beginning of the first quarter of adoption of SFAS
      123R. As permitted by SFAS 123R, prior periods have not been restated. The
      charge is being recognized in non cash compensation, which is included in
      stock-based compensation expense, on a straight-line basis over the remaining
      service period after the adoption date based on the options’ original estimate
      of fair value. Prior to the adoption of SFAS 123R, the Company applied the
      intrinsic-value-based method of accounting prescribed by Accounting Principles
      Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.”
Under this method, compensation cost was recorded only if the market price
      of
      the underlying stock on the grant date exceeded the exercise price. As permitted
      by SFAS 123, the Company elected the disclosure only requirements of SFAS 123.
      The fair-value based method used to determine historical pro forma amounts
      under
      SFAS 123 was similar in most respects to the method used to determine
      stock-based compensation expense under SFAS 123R.




Revenue
      Recognition




We
      recognize revenue in accordance with the SEC’s Staff Accounting Bulletin
      No. 104, “Revenue Recognition in Financial Statements” (SAB104), Statement
      of Financial Accounting Standards No. 48, “Revenue Recognition When Right
      of Return Exists” (SFAS 48), and Emerging Issues Task Force Abstract (EITF)
      No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer
      (Including a Reseller of the Vendor’s Products.” SAB 104 requires that four
      basic criteria be met before revenue can be recognized: 1) there is evidence
      that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or
      determinable; and 4) collectibility is reasonably assured. SFAS 48 states that
      revenue from sales transactions where the buyer has the right to return the
      product shall be recognized at the time of sale only if (1) the seller’s
      price to the buyer is substantially fixed or determinable at the date of sale;
      (2) the buyer has paid the seller, or the buyer is obligated to pay the
      seller and the obligation is not contingent on  resale of the product;
      (3) the buyer’s obligation to the seller would not be changed in the event
      of theft or physical destruction or damage of the product; (4) the buyer
      acquiring the product for resale has economic substance apart from that provided
      by the seller; (5) the seller does not have significant obligations for
      future performance to directly bring about resale of the product by the buyer;
      and (6) the amount of future returns can be reasonably estimated. We
      recognize revenue upon determination that all criteria for revenue recognition
      have been met. The criteria are usually met at the time title passes to the
      customer, which usually occurs upon shipment. Revenue from shipments where
      title
      passes upon delivery is deferred until the shipment has been delivered.




We
      account for payments made to customers in accordance with EITF 01-09, which
      states that cash consideration (including a sales incentive) given by a vendor
      to a customer is presumed to be a reduction of the selling prices of the
      vendor’s products or services and, therefore, should be characterized as a
      reduction of revenue when recognized in the vendor’s income statement, rather
      than a sales and marketing expense. We have various agreements with customers
      that provide for discounts and rebates. These agreements are classified as
      a
      reduction of revenue. Certain other costs associated with customers that meet
      the requirements of EITF 01-09 are recorded as sales and marketing expense.
      Vendor considerations recorded as a reduction of sales were $893,000 and
      $232,000 for the years ended March 31, 2008 and 2007.


F-9


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007




We
      guarantee customer satisfaction. Our policy requires the customer to return
      the
      unused product to the retailer from whom they originally purchased it. We pay
      the retailer for the returned product plus a handling cost. We periodically
      assess the adequacy of this policy and will record a liability as necessary.
      For
      the year ended March 31, 2008, there were no returns that would suggest a
      liability needed to be recorded.




We
      review
      gross revenue for estimated returns of private label contract manufacturing
      products and direct-to-consumer products. The estimated returns are based upon
      the trailing six months of private label contract manufacturing gross sales
      and
      our historical experience for both private label contract manufacturing and
      direct-to-consumer product returns. However, the estimate for product returns
      does not reflect the impact of a large product recall resulting from product
      nonconformance or other factors as such events are not predictable nor is the
      related economic impact estimable. For the year ended March 31, 2008 there
      were
      no returns that would suggest a liability needed to be recorded.




As
      part
      of the services we provide to our private label contract manufacturing
      customers, we may perform, but are not required to perform, certain research
      and
      development activities related to the development or improvement of their
      products. While our customers typically do not pay directly for this service,
      the cost of this service is included as a component of the price we charge
      to
      manufacture and deliver their products.





Income
      Taxes





We
      account for income taxes in accordance with Statement of Financial Accounting
      Standards No. 109, “Accounting for Income Taxes.” This statement requires an
      asset and liability approach for accounting for income taxes (See Note
      10).





Earnings
      Per Share





The
      computation of earnings per share is based on the weighted average number of
      shares outstanding during the period presented in accordance with Statement
      of
      Financial Accounting Standards No. 128, “Earnings Per Share” (See Note
      11).





Recently
      Enacted Accounting Standards





In
      December 2007, the Financial Accounting Standards Board, or FASB, issued SFAS
      No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities—an amendment of FASB
      Statement No. 133.* This
      standard requires companies to provide enhanced disclosures about (a) how and
      why an entity uses derivative instruments, (b) how derivative instruments and
      related hedged items are accounted for under Statement 133 and its related
      interpretations, and (c) how derivative instruments and related hedged items
      affect an entity’s financial position, financial performance, and cash flows.
      This Statement is effective for financial statements issued for fiscal years
      and
      interim periods beginning after November 15, 2008, with early application
      encouraged. The Company has not yet adopted the provisions of SFAS No. 161,
      but
      does not expect it to have a material impact on its consolidated financial
      position, results of operations or cash flows.


F-10


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





In
      December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110 regarding
      the use of a "simplified" method, as discussed in SAB No. 107 (SAB 107), in
      developing an estimate of expected term of "plain vanilla" share options in
      accordance with SFAS No. 123 (R), *Share-Based
      Payment* .  In
      particular, the staff indicated in SAB 107 that it will accept a company's
      election to use the simplified method, regardless of whether the company has
      sufficient information to make more refined estimates of expected term. At
      the
      time SAB 107 was issued, the staff believed that more detailed external
      information about employee exercise behavior (e.g., employee exercise patterns
      by industry and/or other categories of companies) would, over time, become
      readily available to companies. Therefore, the staff stated in SAB 107 that
      it
      would not expect a company to use the simplified method for share option grants
      after December 31, 2007. The staff understands that such detailed information
      about employee exercise behavior may not be widely available by December 31,
      2007. Accordingly, the staff will continue to accept, under certain
      circumstances, the use of the simplified method beyond December 31, 2007. The
      Company currently uses the simplified method for “plain vanilla” share options
      and warrants, and will assess the impact of SAB 110 for fiscal year 2009. It
      is
      not believed that this will have an impact on the Company’s consolidated
      financial position, results of operations or cash flows.





In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements* —an
      amendment of ARB No. 51.  This statement amends ARB 51 to establish
      accounting and reporting standards for the noncontrolling interest in a
      subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
      noncontrolling interest in a subsidiary is an ownership interest in the
      consolidated entity that should be reported as equity in the consolidated
      financial statements. Before this statement was issued, limited guidance existed
      for reporting noncontrolling interests. As a result, considerable diversity
      in
      practice existed. So-called minority interests were reported in the consolidated
      statement of financial position as liabilities or in the mezzanine section
      between liabilities and equity. This statement improves comparability by
      eliminating that diversity. This statement is effective for fiscal years, and
      interim periods within those fiscal years, beginning on or after December 15,
      2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier
      adoption is prohibited. The effective date of this statement is the same as
      that
      of the related Statement 141 (revised 2007). The Company will adopt this
      Statement beginning April 1, 2009. It is not believed that this will have an
      impact on the Company’s consolidated financial position, results of operations
      or cash flows.





In
      December 2007, the FASB, issued FAS No. 141 (revised 2007), *Business
      Combinations.* ’This
      Statement replaces FASB Statement No. 141, *Business
      Combinations* ,
      but
      retains the fundamental requirements in Statement 141.  This
      Statement establishes principles and requirements for how the acquirer: (a)
      recognizes and measures in its financial statements the identifiable assets
      acquired, the liabilities assumed, and any noncontrolling interest in the
      acquiree; (b) recognizes and measures the goodwill acquired in the business
      combination or a gain from a bargain purchase; and (c) determines what
      information to disclose to enable users of the financial statements to evaluate
      the nature and financial effects of the business combination. This statement
      applies prospectively to business combinations for which the acquisition date
      is
      on or after the beginning of the first annual reporting period beginning on
      or
      after December 15, 2008. An entity may not apply it before that date. The
      effective date of this statement is the same as that of the related FASB
      Statement No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements* .  The
      Company will adopt this statement beginning April 1, 2009. It is not believed
      that this will have an impact on the Company’s consolidated financial position,
      results of operations or cash flows.


F-11


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





In
      February 2007, the FASB, issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Liabilities* —Including
      an Amendment of FASB Statement No. 115.  This standard permits an
      entity to choose to measure many financial instruments and certain other items
      at fair value. This option is available to all entities. Most of the provisions
      in FAS 159 are elective; however, an amendment to FAS 115 *Accounting
      for Certain Investments in Debt and Equity Securities* applies
      to all entities with available for sale or trading securities. Some requirements
      apply differently to entities that do not report net income. SFAS No. 159 is
      effective as of the beginning of an entities first fiscal year that begins
      after
      November 15, 2007. Early adoption is permitted as of the beginning of the
      previous fiscal year provided that the entity makes that choice in the first
      120
      days of that fiscal year and also elects to apply the provisions of SFAS No.
      157 *Fair
      Value Measurements* .  The
      Company will adopt SFAS No. 159 beginning April 1, 2008 and is currently
      evaluating the potential impact the adoption of this pronouncement will have
      on
      its consolidated financial statements.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* This
      statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles (GAAP), and expands disclosures
      about fair value measurements. This statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      statement will change current practice. This statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. Earlier application is
      encouraged, provided that the reporting entity has not yet issued financial
      statements for that fiscal year, including financial statements for an interim
      period within that fiscal year. The Company will adopt this statement April
      1,
      2008, and it is not believed that this will have an impact on the Company’s
      consolidated financial position, results of operations or cash
      flows.





NOTE
      2 – ACCOUNTS RECEIVABLE





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


F-12


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007




March
                  31,2008
              
              2007Accounts
                  receivable - trade
              
              $
              870,492
              
              $
              1,666,641Allowance
                  for doubtful accounts
              
              
              (105,000
              )
              
              (90,000
              )Accounts
                  receivable, net
              
              $
              765,492
              
              $
              1,576,641




NOTE
      3 – INVENTORY





Inventory
      consisted of the following:





March
                31,2008
            
            2007Raw
                materials
            
            $
            824,807
            
            $
            797,498Finished
                products
            
            
            295,615
            
            
            401,895Boxes,
                labels, tubes & bottles
            
            
            139,965
            
            
            220,1531,260,387
            
            
            1,419,546Reserve
                for obsolescence
            
            
            (150,542
            )
            
            (135,088
            )$
            1,109,845
            
            $
            1,284,458





NOTE
      4 – PROPERTY AND EQUIPMENT





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





March
                31,2008
            
            2007Office
                equipment
            
            $
            72,632
            
            $
            66,456Lease-hold
                improvements
            
            
            139,191
            
            
            126,353211,823
            
            
            192,809Less
                accumulated depreciation
            
            
            99,633
            
            
            67,353$
            112,190
            
            $
            125,456





Depreciation
      expense for the year ended March 31, 2008 and 2007 was $32,280 and $23,956,
      respectively.


F-13


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





NOTE
      5 – OTHER ASSETS





The
      following is a summary of other assets included on the face of the balance
      sheet:





March
                31,2008
            
            2007Trademarks
            
            $
            13,032
            
            $
            13,032Patent
            
            
            172,965
            
            
            161,353Deferred
                tax asset
            
            
            87,700
            
            
            415,100273,697
            
            
            589,485Less
                accumulated amortization
            
            
            55,542
            
            
            37,487$
            218,155
            
            $
            551,998





For
      the
      year ended March 31, 2008 and 2007 amortization expense was $18,054 and $17,454,
      respectively. The estimated future amortization expense related to intangible
      assets as of March 31, 2008 is as follows:





Year
                Ended March 31.
            
            Amount2009
            
            
            19,8582010
            
            
            19,8582011
            
            
            19,8582012
            
            
            19,7572013
                and thereafter
            
            
            51,124





NOTE
      6 –  LICENSE
      AND ROYALTY PAYABLE




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


F-14


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





As
      of
      March 31, 2008 the following obligations were outstanding related to this
      license:





As of March 31,2008
            
            2007Patent
                License and Royalty Payable
            
            $
            37,239
            
            $
            68,872Less
                current portion
            
            
            34,259
            
            
            31,633Long
                term license payable
            
            $
            2,980
            
            $
            37,239





NOTE
      7 – LEASES OBLIGATIONS





Operating
      Lease





We
      entered into a seven-year building lease for our office commencing in January
      2006 and expiring in December 2012. In addition we entered into a three-year
      lease for warehouse space commencing in September 2006 and expiring in August
      2009. Lease expense for the years ended March 31, 2008 and 2007 amounted to
      $165,207 and $160,902, respectively. The following is a schedule of minimum
      annual rental payments for the next five years.




Years
                ending March 31,2009
            
            $
            184,4912010
            
            
            158,9932011
            
            
            143,2062012
            
            
            148,2182013
            
            
            114,056Thereafter
            
            
            -Total
                minimum lease payments
            
            $
            748,964





NOTE
      8 – COMMITMENTS AND CONTINGINCIES





Contingencies





We
      are
      involved in litigation from time to time in the normal course of business.





Management
      believes there are no such claims, which would have a material effect on our
      financial position.





Other
      agreements





We
      routinely enter into contracts and agreements with suppliers, manufacturers,
      consultants, product marketing, and sales representatives in the normal course
      of doing business. These agreements can be either short or long term and are
      normally limited to specific products and marketing opportunities. We are
      committed to purchase a minimum of $1,680,000 each year through 2012 of the
      major ingredient in our current products. However, we have in the past entered
      into waivers, which have eliminated a portion of the purchase
      commitment.


F-15


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





NOTE
      9 – CAPITAL STOCK





Preferred
      Stock





We
      have
      authorized 5,000,000 shares of preferred stock, $.001 par value, with such
      rights, preferences and designations and to be issued in such series as
      determined by the Board of Directors. No shares are issued and outstanding
      at
      March 31, 2008.





Common
      Stock





The
      Company has authorized 50,000,000 shares of common stock at $.001 par value.
      At
      March 31, 2008, the Company had 10,960,788 shares of common stock issued and
      outstanding.





During
      the year ended March 31, 2008, we issued 89,388 shares of common stock for
      proceeds of $90,888. The shares were issued upon shareholders exercising
      warrants with exercise prices ranging from $1.00 to $1.10 per
      share.





During
      the year ended March 31, 2007, we issued 150,000 shares of common stock to
      one
      individual in exchange for services he will provide to the company. The services
      to be performed were valued based on the price of the common stock on the date
      of issuance, $0.94 per share or $141,000 in the aggregate. This amount is being
      amortized over 24 months, the life of the contract under which the services
      are
      to be provided, as non-cash expense.





Stock
      Bonus Plan





During
      the year ended March 31, 2000, our board of directors adopted a stock bonus
      plan. The plan provides for the granting of awards of up to 724,500 shares
      of
      common stock to officers, directors, consultants and employees. Awards under
      the
      plan will be granted as determined by the board of directors. As of March 31,
      2008, 499,500 shares have been granted under the plan.





Warrants





A
      summary
      of the status of the warrants granted under various agreements at March 31,
      2008
      and 2007, and changes during the years then ended is presented
      below:


F-16


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





WarrantsWeighted
            
            WeightedAverage
            
            AverageExercise
            
            FairShares
            
            Price
            
            ValueOutstanding,
                April 1, 2006
            
            
            4,107,100
            
            
            1.26Granted
            
            
            250,000
            
            
            1.00
            
            $
            0.57Outstanding,
                March 31, 2007
            
            
            4,357,100
            
            $
            1.26Granted
            
            
            175,000
            
            
            1.30
            
            $
            0.80Exercised
            
            
            (89,388
            )
            
            1.02Cancelled/
                Expired
            
            
            (539,755
            )
            
            1.59Outstanding,
                March 31, 2008
            
            
            3,902,957
            
            $
            1.18Exercisable,
                March 31, 2007
            
            
            4,357,100
            
            $
            1.26Exercisable,
                March 31, 2008
            
            
            3,902,957
            
            $
            1.18





During
      the year ended March 31, 2008, we issued warrants to three individuals for
      services valued at $140,588 which we expensed to general and administrative
      expenses. We estimated the fair value of each warrant at the issuance date
      by
      using the Black-Scholes option-pricing model with the following weighted-average
      assumptions used for the year ended March 31, 2008: dividend yield of zero
      percent; expected volatility of 71%, risk-free interest rates of 4.55%; and
      expected lives of 5 years.





During
      the year ended March 31, 2007, we issued warrants to one individual for services
      valued at $143,054 which we are amortizing to general and administrative
      expenses over 24 months. We estimated the fair value of each warrant at the
      issuance date by using the Black-Scholes option-pricing model with the following
      weighted-average assumptions used for the year ended March 31, 2007: dividend
      yield of zero percent; expected volatility of 71%, risk-free interest rates
      of
      4.83%; and expected lives of 5 years.





During
      the year ended March 31, 2008, we offered warrant holders with warrants
      scheduled to expire on October 23, 2007, the right to extend their warrants
      for
      three additional years in exchange for a warrant extension fee of $0.05 per
      warrant share, such amount to be reduced from the existing exercise price,
      and a
      right for us to call the warrants should our common stock trade at a 20% premium
      to the revised exercise price for 10 business days. As a result of this offer,
      53 warrants with exercise prices ranging from $0.75 to $2.00 totaling 3,110,710
      warrant shares were extended until October 23, 2010 at an accumulated fee of
      $155,536. We determined that the offering was a modification of warrants which
      were originally issued as part of equity transactions. We calculated the
      incremental fair value of the modified warrants by using the Black Sholes
      pricing model and recorded a non-cash dividend of $1,090,079 for the year ended
      March 31, 2008.  We
      estimated the fair value of the non-cash dividends declared during the year
      ended March 31, 2008 by using the Black-Scholes pricing model with the following
      weighted average assumptions: dividend yield of zero percent; expected
      volatility of 55%; risk free interest rate of 3.09%; and expected lives of
      3
      years.


F-17


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





During
      the year ended March 31, 2007, we extended the expiration date on warrants
      exercisable for up to 415,375 shares of common stock to October 23, 2007. These
      warrants were issued in 2000 and 2001 as part of an equity unit sale. By the
      terms of the warrants, we were to use our best efforts to maintain a
      registration statement under which the holders could resell the common shares
      on
      the exercise of the warrants. Since we failed to maintain a timely registration
      statement, we decided to extend the expiration date of the warrants. Due to
      this
      modification, we recorded non-cash dividends of $107,396 for the year ended
      March 31, 2007. We estimated the fair value of the non-cash dividends declared
      during the year ended March 31, 2007 by using the Black-Scholes pricing model
      with the following weighted average assumptions: dividend yield of zero percent;
      expected volatility of 70% to 72%; risk free interest rate of 4.56% to 4.87%;
      and expected lives of 13 to 18 months.





A
      summary
      of the status of the warrants granted under the various agreements at


March
      31,
      2008, are presented in the table below:




Outstanding
                  
                  ExercisableWeightedAverage
                  
                  Weighted
                  
                  
                  
                  WeightedRange
                      of
                  
                  
                  
                  Remaining
                  
                  Average
                  
                  
                  
                  AverageExercise
                  
                  Number
                  
                  Contractual
                  
                  Exercise
                  
                  Number
                  
                  ExercisePrices
                  
                  Outstanding
                  
                  Life
                  
                  Price
                  
                  Exercisable
                  
                  Price***Warrants***$
                  0.65-0.95
                  
                  
                  1,068,210
                  
                  
                  2.56
                  
                  $
                  0.88
                  
                  
                  1,068,210
                  
                  $
                  0.88$
                  1.00-1.05
                  
                  
                  1,780,000
                  
                  
                  2.46
                  
                  $
                  1.04
                  
                  
                  1,780,000
                  
                  $
                  1.04$
                  1.20-1.70
                  
                  
                  522,250
                  
                  
                  2.76
                  
                  $
                  1.38
                  
                  
                  522,250
                  
                  $
                  1.38$
                  1.95
                  
                  
                  457,500
                  
                  
                  2.25
                  
                  $
                  1.95
                  
                  
                  457,500
                  
                  $
                  1.95$
                  2.33-3.45
                  
                  
                  74,997
                  
                  
                  2.17
                  
                  $
                  2.85
                  
                  
                  74,997
                  
                  $
                  2.853,902,957
                  
                  
                  2.50
                  
                  $
                  1.18
                  
                  
                  3,902,957
                  
                  $
                  1.18


Stock
      Option Plan




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




Under
      the
      Plan, we have reserved 1.5 million shares underlying stock options for
      issuance, of which 1,139,000 options have been granted to executive officers,
      employees and consultants at prices ranging from $.86 to $2.00 per share. The
      Plan is administered by the full Board of Directors, who determine which
      individuals shall receive stock options, the time period during which the stock
      options may be exercised, the number of shares of common stock that may be
      purchased under each stock option and the stock option price.


F-18


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007




The
      per
      share exercise price of incentive stock options may not be less than the fair
      market value of the common stock on the date the option is granted. The
      aggregate fair market value (determined as of the date the stock option is
      granted) of the common stock that any person may purchase under an incentive
      stock option in any calendar year pursuant to the exercise of incentive stock
      options will not exceed $100,000. No person who owns, directly or indirectly,
      at
      the time of the granting of an incentive stock option, more than 10% of the
      total combined voting power of all classes of our stock is eligible to receive
      incentive stock options under the Plan unless the stock option price is at
      least
      110% of the fair market value of the common stock subject to the stock option
      on
      the date of grant.




No
      incentive stock options may be transferred by an optionee other than by will
      or
      the laws of descent and distribution, and, during the lifetime of an optionee,
      the stock option may only be exercisable by the optionee. Except as otherwise
      determined by the Board of Directors, stock options may be exercised only if
      the
      stock option holder remains continuously associated with us from the date of
      grant to the date of exercise. The exercise date of a stock option granted
      under
      the Plan may not be later than ten years from the date of grant. Any stock
      options that expire unexercised or that terminate upon an optionee's ceasing
      to
      be employed by us will become available once again for issuance. Shares issued
      upon exercise of a stock option will rank equally with other shares then
      outstanding. No stock options will be granted by us at an exercise price less
      than 85% of the fair market value of the stock underlying the option on the
      date
      the option is granted. During the years ended March 31, 2008 and 2007 there
      were
      options granted to purchase up to 350,000 and 0, respectively, shares of common
      stock and there were no options exercised.




A
      summary
      of the status of the options granted under the Company’s 2000 stock option plan
      and other agreements at March 31, 2008 and 2007, and changes during the years
      then ended is presented below:


F-19


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





OptionsWeighted
            
            WeightedAverage
            
            AverageExercise
            
            FairShares
            
            Price
            
            ValueOutstanding,
                April 1, 2006
            
            
            1,129,000
            
            $
            1.74Granted
            
            
            -
            
            
            -
            
            
            -Cancelled
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Outstanding,
                March 31, 2007
            
            
            1,129,000
            
            $
            1.74Granted
            
            
            350,000
            
            $
            1.30
            
            $
            0.80Cancelled
            
            
            (535,000
            )
            $
            1.41Exercised
            
            
            -
            
            
            -Outstanding,
                March 31, 2008
            
            
            944,000
            
            $
            1.76Exercisable,
                March 31, 2007
            
            
            1,129,000
            
            $
            1.74Exercisable,
                March 31, 2008
            
            
            769,000
            
            $
            1.87





A
      summary
      of the status of the options granted under the stock option plan and other
      agreements at March 31, 2008, are presented in the table below:





Outstanding
            
            ExercisableWeightedAverage
            
            Weighted
            
            
            
            WeightedRange
                of
            
            
            
            Remaining
            
            Average
            
            
            
            AverageExercise
            
            Number
            
            Contractual
            
            Exercise
            
            Number
            
            ExercisePrices
            
            Outstanding
            
            Life
            
            Price
            
            Exercisable
            
            Price***Options***$
            1.30
            
            
            350,000
            
            
            4.09
            
            $
            1.30
            
            
            175,000
            
            $
            1.30$
            1.95
            
            
            249,000
            
            
            2.25
            
            $
            1.95
            
            
            249,000
            
            $
            1.95$
            2.00
            
            
            245,000
            
            
            2.39
            
            $
            2.00
            
            
            245,000
            
            $
            2.00$
            2.35
            
            
            100,000
            
            
            2.47
            
            $
            2.35
            
            
            100,000
            
            $
            2.35944,000
            
            
            2.99
            
            $
            1.76
            
            
            769,000
            
            $
            1.87





NOTE
      10 – INCOME TAXES





At
      March
      31, 2008 and 2007, the total of all deferred tax assets was approximately
      $950,197 and $524,897, respectively. There are no deferred tax liabilities
      for
      either year.


F-20


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





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





March
                31,2008
            
            2007Excess
                of financial accounting over tax depreciation
            
            $
            21,700
            
            $
            17,100State
                income tax benefits
            
            
            211,597
            
            
            12,497Net
                operating loss carryforward
            
            
            541,400
            
            
            -Allowance
                for obsolete inventory
            
            
            60,000
            
            
            53,800Allowance
                for bad debts
            
            
            41,800
            
            
            35,800Valuation
                of stock options and warrants
            
            
            66,000
            
            
            398,000Vacation
                accrual
            
            
            7,700
            
            
            7,700Net
                deferred tax asset
            
            $
            950,197
            
            $
            524,897





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





*March
                31,*
            
            2008
            
            2007Federal
                income tax expense computed at the Federal statutory rate
            
            $
            (748,700
            )
            $
            (274,300
            )State
                income tax expense net of Federal benefit
            
            
            (153,100
            )
            
            (46,300
            )Other-
                permanent differences
            
            
            476,500
            
            
            4,500Other
            
            
            -
            
            
            177,100Income
                tax expense (benefit)
            
            $
            (425,300
            )
            $
            (139,000
            )





The
      components of federal income tax (benefit) expense from continuing operations
      consisted of the following for the year ended:


F-21


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





March
                31,2008
            
            2007Current
                income tax expense:Federal
            
            $
            -
            
            $
            (97,300
            )State
            
            
            -
            
            
            -Net
                current tax expense
            
            $
            -
            
            $
            (97,300
            )Deferred
                tax expense (benefit) resulted from:Excess
                of financial accounting over tax depreciation
            
            $
            (4,500
            )
            $
            (11,200
            )State
                income tax benefits
            
            
            (199,200
            )
            
            35,100Valuation
                of stock options and warrants
            
            
            332,000
            
            
            (73,700
            )Net
                operating loss
            
            
            (541,400
            )
            
            -Allowance
                for obsolete inventory
            
            
            (6,200
            )
            
            24,400Vacation
                accrual
            
            
            -
            
            
            (400
            )Allowance
                for bad debts
            
            
            (6,000
            )
            
            (15,900
            )Net
                deferred tax expense (benefit)
            
            $
            (425,300
            )
            $
            (41,700
            )$
            (425,300
            )
            $
            (139,000
            )





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





At
      March
      31, 2008, the Company has net operating loss carry forwards for income tax
      reporting purposes of approximately $1,592,000 and $2,394,000 available to
      offset future federal and California taxable income, respectively. Based on
      current tax law, the Company’s federal net operating loss carry forward will
      begin to expire in the year ending March 31, 2028 and the state net operating
      loss carry forward will begin to expire in the year ending March 31,
      2016.





We
      periodically evaluate the likelihood of the realization of deferred tax assets,
      and adjust the carrying amount of the deferred tax assets by the valuation
      allowance to the extent the future realization of the deferred tax assets is
      not
      judged to be more likely than not. We consider many factors when assessing
      the
      likelihood of future realization of our deferred tax assets, including our
      recent cumulative earnings experience by taxing jurisdiction, expectations
      of
      future taxable income or loss, the carry forward periods available to us for
      tax
      reporting purposes, and other relevant factors.





At
      March
      31, 2008, based on the weight of available evidence, including cumulative losses
      in recent years and expectations of future taxable income, the Company
      determined that it was more likely that its deferred tax assets would be
      realized and has not recorded a valuation allowance associated with its deferred
      tax assets.


F-22


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





On
      April
      1, 2007, the Company adopted Financial Accounting Standards Board Interpretation
      No. 48, *Accounting
      for Uncertainty in Income taxes* (FIN
      48).  FIN 48 prescribes a comprehensive model of how a company should
      recognize, measure, present, and disclose in its financial statements uncertain
      tax positions that the company has taken or expects to take on a tax
      return.  FIN 48 states that a tax benefit from an uncertain position
      may be recognized if it is "more likely than not" that the position is
      sustainable, based upon its technical merits. The tax benefit of a qualifying
      position is the largest amount of tax benefit that is greater than 50 percent
      likely of being realized upon ultimate settlement with a taxing authority having
      full knowledge of all relevant information.





Upon
      adoption of FIN 48, there was no impact to the Company's consolidated financial
      statements.  The Company estimates that the unrecognized tax benefit
      will not change significantly within the next twelve months.  The
      Company will continue to classify income tax penalties and interest as part
      of
      general and administrative expense in its statements of
      operations.  Accrued interest on uncertain tax positions is not
      significant.  There are no penalties accrued as of March 31,
      2008.  The following table summarizes the open tax years for each
      major jurisdiction:





Jurisdiction
            
            Open
                Tax YearsFederal
            
            2004 – 2006California
            
            2004 – 2006





As
      the
      Company has significant net operating loss carry forwards, even if certain
      of
      the Company’s tax positions were disallowed, it is not foreseen that the Company
      would have to pay any taxes in the near future. Consequently, the Company does
      not calculate the impact of interest or penalties on amounts that might be
      disallowed.





NOTE
      11 – EARNINGS PER SHARE





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


F-23


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





For the Year EndedMarch 31,2008
            
            2007Income
                (loss) available to common shareholders (Numerator)
            
            $
            (1,776,642
            )
            $
            (667,639
            )Weighted
                average number of common shares outstanding used in basic income
                per share
                during the period (Denominator)
            
            
            10,936,657
            
            
            10,745,647Weighted
                average number of common shares outstanding used in diluted income
                per
                share during the period (Denominator)
            
            
            10,936,657
            
            
            10,745,647





At
      March
      31, 2008, we had options to purchase 944,000 shares of common stock at prices
      ranging from $1.30 to $2.35 per share and warrants to purchase 3,902,957 shares
      of common stock at prices ranging from $0.88 to $2.85 per share that were not
      included in the computation of earnings per share because their effects are
      anti-dilutive due to a loss being recognized for the year then
      ended.





At
      March
      31, 2007, we had options to purchase 1,129,000 shares of common stock at prices
      ranging from $0.86 to $2.00 per share and warrants to purchase 4,387,100 shares
      of common stock at prices ranging from $0.70 to $3.45 per share that were not
      included in the computation of earnings per share because their effects are
      anti-dilutive due to a loss being recognized for the year then
      ended.





NOTE
      12 – CONCENTRATIONS





Sales





During
      the year ended March 31, 2008, we had two significant customers which accounted
      for 29%, and 16% of sales.





During
      the year ended March 31, 2007, we had two significant customers which accounted
      for 23% and 15% of sales.





Supplier





We
      also
      have a single source and exclusive supplier arrangement with the supplier of
      a
      specific raw material, which is used as part of products which accounts for
      approximately 74% of our sales. The interruption of raw materials provided
      by
      this supplier or the loss of a significant customer would adversely affect
      our
      business and financial condition.


F-24


**IMAGENETIX,
      INC.**


Notes
      to
      the Consolidated Financial Statements (Continued)


March
      31,
      2008 and 2007





During
      the year ended March 31, 2008, we had one significant vendor who accounted
      for
      29% of cost of sales.





During
      the year ended March 31, 2007, we had one significant vendor which accounted
      for
      12% of cost of sales.





Accounts
      Receivable





At
      March
      31, 2008, we had two customers which accounted for 16% and 12% of our accounts
      receivable balances.








At
      March
      31, 2007, we had two customers which accounted for 47% and 16% of our accounts
      receivable balances.





NOTE
      13 – SUBSEQUENT EVENT





In
      May
      2008, we received $2,100,000 ($1,750,000 after costs) as a result of entering
      into a settlement agreement with a company we alleged was infringing on the
      Celadrin trademark. In addition, we entered into a supply agreement with the
      same company whereby we will provide Celadrin for use in their
      products.


F-25




**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





IMAGENETIX,
                INC.a
                Nevada corporationBy:
            /s/
                WILLIAM P. SPENCERWilliam
                P. SpencerChief
                Executive Officer





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated:





Signature
            
            Title
            
            Date/s/
                WILLIAM P. SPENCER
            
            Chief
                Executive Officer,
            
            June
                25, 2008William
                P. Spencer
            
            President
                and Director/s/
                DEBRA L. SPENCER
            
            Secretary,
                Treasurer, and Director
            
            June
                25, 2008Debra
                L. Spencer/s/
                BARRY S. KING
            
            Director
            
            June
                25, 2008Barry
                S. King/s/
                JEFFREY G. MC GONEGAL
            
            Director
            
            June
                25, 2008Jeffrey
                McGonegal/s/
                ROBERT BURG
            
            Director
            
            June
                25, 2008Robert
                Burg/s/
                LOWELL W. GIFFHORN
            
            Chief
                Financial Officer (Principal
            
            June
                25, 2008Lowell
                W. Giffhorn
            
            Accounting
                Officer)