UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(Mark
One)




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




For the
fiscal year end March 31,
2009




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




For the
transition period from _____ to _____




COMMISSION
FILE NUMBER 033-24138-D




IMAGENETIX,
INC.


(Exact
name of registrant as specified 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 105San Diego, California
                
                92127(Address
      of principal executive offices)
                
                (Zip
      Code)




Registrant’s
telephone number, including area code  (858)
674-8455




Securities
registered pursuant to Section 12(b) of the Act: NONE.




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




COMMON STOCK, $0.001 PAR
VALUE PER SHARE.




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.




Yes   ̈     No  x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.




Yes   ̈     No  x




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




Yes  x     No   ̈




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


Yes   ̈       No  x




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
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-K
or any amendment to this Form 10-K.  ̈




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





Large
      accelerated filer
                 ̈
                
                Accelerated
      filer
                 ̈Non-Accelerated
      filer
                  (Do
      not check if a smaller reporting company)
                 ̈
                
                Smaller
      reporting company
                x





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




Yes   ̈     No  x




State 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
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter. $2,570,000




Indicate
the number of shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date.  11,010,788 issued and
outstanding as of June 17, 2009.




DOCUMENTS INCORPORATED BY
REFERENCE:None.







Annual
Report on Form 10-K


For
the Year Ended March 31, 2009





TABLE
OF CONTENTS 
 Page
                                                                                                                  NumbersPART
      I
                                                                                                                
                                                                                                                4ITEM
      1.
                                                                                                                
                                                                                                                Business
                                                                                                                
                                                                                                                4ITEM
      1A.
                                                                                                                
                                                                                                                Risk
      Factors
                                                                                                                
                                                                                                                11ITEM
      1B.
                                                                                                                
                                                                                                                Unresolved
      Staff Comments
                                                                                                                
                                                                                                                14ITEM
      2.
                                                                                                                
                                                                                                                Properties
                                                                                                                
                                                                                                                14ITEM
      3.
                                                                                                                
                                                                                                                Legal
      Proceedings
                                                                                                                
                                                                                                                14ITEM
      4.
                                                                                                                
                                                                                                                Submission
      Of Matters To a Vote Of Securities Holders
                                                                                                                
                                                                                                                14PART
      II
                                                                                                                
                                                                                                                14ITEM
      5.
                                                                                                                
                                                                                                                Market
      For Registrant's Common Equity, Related Stockholder Matters And Issuer
      Purchases Of Equity Securities
                                                                                                                
                                                                                                                14ITEM
      6.
                                                                                                                
                                                                                                                Selected
      Financial Data
                                                                                                                
                                                                                                                15ITEM
      7.
                                                                                                                
                                                                                                                Management's
      Discussion And Analysis Of Financial Condition And Results Of
      Operation
                                                                                                                
                                                                                                                15ITEM
      7A
                                                                                                                
                                                                                                                Quantitative
      And Qualitative Disclosures About Market Risk
                                                                                                                
                                                                                                                21ITEM
      8.
                                                                                                                
                                                                                                                Financial
      Statements And Supplementary Data
                                                                                                                
                                                                                                                21ITEM
      9.
                                                                                                                
                                                                                                                Changes
      In And Disagreements With Accountants On Accounting And Financial
      Disclosure
                                                                                                                
                                                                                                                21ITEM
      9A.
                                                                                                                
                                                                                                                Controls
      And Procedures (ITEM 9A(T))
                                                                                                                
                                                                                                                22ITEM
      9B.
                                                                                                                
                                                                                                                Other
      Information
                                                                                                                
                                                                                                                23


2
  PART
      III
                                                      
                                                      
                                                      
                                                      23ITEM
      10.
                                                      
                                                      Directors,
      Executive Officers And Corporate Governance
                                                      
                                                      23ITEM
      11.
                                                      
                                                      Executive
      Compensation
                                                      
                                                      25ITEM
      12.
                                                      
                                                      Security
      Ownership Of Certain Beneficial Owners And Management And Related
      Stockholder Matters
                                                      
                                                      27ITEM
      13.
                                                      
                                                      Certain
      Relationships And Related Transactions, And Director
      Independence
                                                      
                                                      28ITEM
      14.
                                                      
                                                      Principal
      Accounting Fees And Services
                                                      
                                                      28PART
      IV
                                                      
                                                      
                                                      
                                                      30ITEM
      15.
                                                      
                                                      Exhibits,
      Financial Statements Schedules
                                                      
                                                      30SIGNATURES




3




DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS




Certain
statements contained in this Annual Report on Form 10-K 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 "Risk Factors" and
elsewhere in this Form 10-K. 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-Q 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.




4


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:





•
            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 labels and
      graphic designs, promotional brochures and providing speakers to promote
      the 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
largest customers accounted for 23%, 19% and 17% of our net sales for the year
ended March 31, 2009 and 29% and 16% for the year ended March 31,
2008.





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.





5





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 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.





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.








6





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, 2009, 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.





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 7% of our sales and a weight loss product which
represented approximately 19% of our sales for the year ended March 31,
2009.





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 had in the past agreements with
our sole supplier of Celadrin® to purchase sufficient quantities of the compound
to meet our anticipated needs. We believe our relationship with this supplier
will continue 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:





7






•
              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.





Approximate
sales by principal geographic area (as a percentage of sales) for fiscal years
ended March 31, 2009 and 2008 were as follows:





2009
                        
                        
                        2008Domestic
      sales
                        
                        
                        98.6
                        %
                        
                        
                        88.2
                        %Foreign
      sales:India
                        
                        
                        1.2
                        
                        
                        
                        0.9United
      Kingdom
                        
                        
                        0.4
                        
                        
                        
                        -Canada
                        
                        
                        (0.2
                        )
                        
                        
                        10.4Australia
                        
                        
                        -
                        
                        
                        
                        0.5Total
      foreign sales
                        
                        
                        1.4
                        
                        
                        
                        11.8Total  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.





8





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





•
            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:




9




•
            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:





•
            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.





10





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 our 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.





Employees





At March
31, 2009, we had eight full-time employees and six part-time consultants,
including our executive officers.




ITEM
1A.     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 66% of our
products and which represented approximately 74% of our sales for the year ended
March 31, 2009. 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.





11




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





Our
largest customers accounted for 23%, 19% and 17% of our net sales for the year
ended March 31, 2009 and 29% and 16% for the year ended March 31,
2008.  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.





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.





12





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
11,010,788 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 5,326,957 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.





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





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





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





13





"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
1B.     UNRESOLVED STAFF
COMMENTS.




None




ITEM
2.     PROPERTIES.




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 $11,430 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 REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES 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.





14











The
following table sets forth the high and low closing price for the Common Stock
for the fiscal years ended March 31, 2009 and 2008:





Closing
      PriceHigh
                      
                      
                      LowFiscal
      Year Ended March 31, 2009First
      Quarter
                      
                      $
                      1.00
                      
                      
                      $
                      0.60Second
      Quarter
                      
                      $
                      0.83
                      
                      
                      $
                      0.35Third
      Quarter
                      
                      $
                      0.60
                      
                      
                      $
                      0.25Fourth
      Quarter
                      
                      $
                      0.50
                      
                      
                      $
                      0.16Fiscal
      Year Ended March 31, 2008First
      Quarter
                      
                      $
                      1.49
                      
                      
                      $
                      0.90Second
      Quarter
                      
                      $
                      1.42
                      
                      
                      $
                      0.94Third
      Quarter
                      
                      $
                      1.22
                      
                      
                      $
                      0.77Fourth
      Quarter
                      
                      $
                      1.05
                      
                      
                      $
                      0.54





We
had approximately 300 shareholders of record as of June 17, 2009. 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.     SELECTED FINANCIAL
DATA.






ITEM
7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS 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.





15





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.





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.




16


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 17 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, 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 $261,000 and
$893,000 for the years ended March 31, 2009 and 2008.




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, 2009,
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,
2009 there were no returns that would suggest a liability needed to be
recorded.





17




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.  We have 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.




Selected
Financial Information




Results
of Operations




Year
Ended March 31, 2009 Compared to Year Ended March 31, 2008




Year
      EndedIncrease3/31/09
                      
                      
                      3/31/08
                      
                      
                      (Decrease)
                      
                      
                      %Statements
      of OperationsNet
      sales
                      
                      $
                      7,460,872
                      
                      
                      $
                      5,569,593
                      
                      
                      $
                      1,891,279
                      
                      
                      
                      34.0
                      %Cost
      of goods sold
                      
                      
                      4,003,303
                      
                      
                      
                      3,344,034
                      
                      
                      
                      659,269
                      
                      
                      
                      19.7
                      %%
      of net sales
                      
                      
                      53.66
                      %
                      
                      
                      60.04
                      %
                      
                      
                      -6
                      %
                      
                      
                      -10.6
                      %Gross
      profit
                      
                      
                      3,457,569
                      
                      
                      
                      2,225,559
                      
                      
                      
                      1,232,010
                      
                      
                      
                      55.4
                      %%
      of net sales
                      
                      
                      46
                      %
                      
                      
                      40
                      %
                      
                      
                      6
                      %
                      
                      
                      15.0
                      %Operating
      expensesGeneral
      and administrative
                      
                      
                      2,240,988
                      
                      
                      
                      2,456,192
                      
                      
                      
                      (215,204
                      )
                      
                      
                      -8.8
                      %Payroll
      expense
                      
                      
                      1,076,473
                      
                      
                      
                      1,037,775
                      
                      
                      
                      38,698
                      
                      
                      
                      3.7
                      %Consulting
      expense
                      
                      
                      1,059,309
                      
                      
                      
                      961,349
                      
                      
                      
                      97,960
                      
                      
                      
                      10.2
                      %Total
      operating expenses
                      
                      
                      4,376,770
                      
                      
                      
                      4,455,316
                      
                      
                      
                      (78,546
                      )
                      
                      
                      -1.8
                      %Interest
      expense
                      
                      
                      (1,741
                      )
                      
                      
                      (4,367
                      )
                      
                      
                      (2,626
                      )
                      
                      
                      -60.1
                      %Settlement
      income
                      
                      
                      1,785,000
                      
                      
                      
                      -
                      
                      
                      
                      (1,785,000
                      )
                      
                      NAOther
      income
                      
                      
                      25,012
                      
                      
                      
                      32,182
                      
                      
                      
                      (7,170
                      )
                      
                      
                      -22.3
                      %Income
      tax (expense) benefit
                      
                      
                      (459,114
                      )
                      
                      
                      425,300
                      
                      
                      
                      (884,414
                      )
                      
                      
                      -208.0
                      %Net
      income (loss)
                      
                      
                      429,956
                      
                      
                      
                      (1,776,642
                      )
                      
                      
                      (2,206,598
                      )
                      
                      
                      -124.2
                      %Net
      income (loss) per share basicand diluted
                      
                      
                      0.04
                      
                      
                      
                      (0.16
                      )
                      
                      
                      0.20
                      
                      
                      
                      -124.1
                      %




Net
Sales




Net sales
for the year ended March 31, 2009 increased $1,891,279, 34.0%, to $7,460,872
compared to $5,569,593 for the year ended March 31, 2008.  Net sales
to distributors increased by approximately $837,000, to the mass market by
approximately $702,000 and to our weight loss customers by approximately
$819,000.  These increases were partially offset by a $467,000
reduction in net sales to wholesalers.  We anticipate the sales
increases to continue during our next fiscal year as a result of our continuing
marketing and advertising campaigns.





18




Cost of Goods
Sold




Cost of
goods sold as a percentage of net sales decreased from 60% for the year ended
March 31, 2008 to 54% for the year ended March 31, 2009.  This
decrease was primarily due to the product mix moving to distribution, mass
market and weight loss customers which typically have larger margins and away
from the wholesale market where margins are typically lower.




General and
Administrative




General
and administrative expenses decreased by $215,204, an 8.8% decrease, to
$2,240,988 for the year ended March 31, 2009 from $2,456,192 for the year ended
March 31, 2008.  The primary reasons for the decrease were an
approximate decrease of $257,000 of marketing costs related to introducing
Celadrin® into the mass market through a rebate offer at one particular
customer.




Payroll
Expense




Payroll
expense increased to $1,076,473 for the year ended March 31, 2009, an increase
of 3.7% or $38,698, compared to $1,037,775 for the year ended March 31,
2008.   This increase was a result of  normal salary
and bonus increases during the current fiscal year.




Consulting
Expenses




Consulting
expenses increased to $1,059,309 for the year ended March 31, 2009, an increase
of 10.2% or $97,960, compared to $961,349 for the year ended March 31,
2008.  This increase was a result of  an increase in
litigation expenses.




Settlement
Income




During
the year ended March 31, 2009, we received $2,100,000 ($1,785,000 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 provide Celadrin® for
use in their products.




Provision for Income
Taxes




As a
result of income during the year ended March 31, 2009, we reflected an income
tax provision of $459,114 compared to income tax benefit of $425,300 for the
year ended March 31, 2008 when we incurred a taxable loss.





19







Capital
Resources




Year
      EndedIncrease3/31/09
                              
                              
                              3/31/08
                              
                              
                              (Decrease)Working
      CapitalCurrent
      assets
                              
                              $
                              4,303,138
                              
                              
                              $
                              4,012,527
                              
                              
                              $
                              290,611Current
      liabilities
                              
                              
                              530,285
                              
                              
                              
                              929,300
                              
                              
                              
                              (399,015
                              )Working
      capital
                              
                              $
                              3,772,853
                              
                              
                              $
                              3,083,227
                              
                              
                              $
                              689,626Long-term
      debt
                              
                              $
                              -
                              
                              
                              $
                              2,980
                              
                              
                              $
                              (2,980
                              )Stockholders'
      equity
                              
                              $
                              4,087,441
                              
                              
                              $
                              3,452,592
                              
                              
                              $
                              634,849Statements
      of Cash Flows Select InformationNet
      cash provided (used) by:Operating
      activities
                              
                              $
                              274,547
                              
                              
                              $
                              (116,736
                              )
                              
                              $
                              391,283Investing
      activities
                              
                              $
                              (41,839
                              )
                              
                              $
                              (30,626
                              )
                              
                              $
                              (11,213
                              )Financing
      activities
                              
                              $
                              (29,540
                              )
                              
                              $
                              211,021
                              
                              
                              $
                              (240,561
                              )Balance
      Sheet Select InformationCash
      and cash equivalents
                              
                              $
                              1,225,723
                              
                              
                              $
                              1,022,555
                              
                              
                              $
                              203,168Accounts
      receivable, net
                              
                              $
                              1,095,946
                              
                              
                              $
                              765,492
                              
                              
                              $
                              330,454Inventory,
      net
                              
                              $
                              1,337,241
                              
                              
                              $
                              1,109,845
                              
                              
                              $
                              227,396Accounts
      payable and accrued expenses
                              
                              $
                              355,007
                              
                              
                              $
                              785,625
                              
                              
                              $
                              (430,618
                              )




Liquidity




We have
historically financed our operations internally and through debt and equity
financings. At March 31, 2009, we had cash holdings of $1,225,723, an increase
of $203,168 compared to March 31, 2008. Our net working capital position at
March 31, 2009, was $3,772,853 compared to $3,083,227 as of March 31,
2008.  This increase was primarily the result of a return to
profitability.  We believe that our cash position is sufficient to
fund our operating activities for at least the next 12 months.


20





New
Accounting Pronouncements





In June
2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own
Stock.  EITF No. 07-5 provides that an entity should use a two
step approach to evaluate whether equity-linked financial instrument (embedded
feature) is indexed to its own stock, including evaluating the instrument’s
contingent exercise and settlement provisions. It also clarifies on the impact
of foreign currency denominated strike prices and market-based employee stock
option valuation instruments on the evaluation.  EITF No. 07-5 is
effective for years beginning after December 15, 2008.  The Company
does not expect that the adoption of EITF No. 07-5 will have a material effect
on its consolidated financial statements.





In
April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments, to require disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. This FSP also amends APB
Opinion No. 28, Interim Financial Reporting, to require those disclosures in
summarized financial information at interim reporting periods. The Company will
comply with the additional disclosure requirements beginning in the first
quarter of fiscal 2010.





In April
2009, the FASB issued FSP No. SFAS 115-2 and SFAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments. This FSP amends the
other-than-temporary impairment guidance in U.S. GAAP for debt and equity
securities in the financial statements. This FSP does not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. This FSP shall be effective for interim and annual
reporting periods ending after June 15, 2009. The Company currently does not
have any financial assets that are other-than-temporary impaired.





In April
2009, the SEC released SAB No. 111 ("SAB 111"), which amends SAB Topic 5-M. SAB
111 notes that SFAS No. 115-2 and SFAS 124-2 were scoped to debt securities
only, and the FSP referred readers to SEC SAB Topic 5-M for factors to consider
with respect to other-than-temporary impairments for equity securities. With the
amendments in SAB 111, debt securities are excluded from the scope of Topic 5-M,
but the SEC staff's views on equity securities are still included within the
topic. The Company currently does not have any financial assets that are
other-than-temporary impaired.





A variety
of proposed or otherwise potential accounting standards are currently under
study by standard-setting organizations and various regulatory
agencies.  Because of the tentative and preliminary nature of these
proposed standards, management has not determined whether implementation of such
proposed standards would be material to the Company’s consolidated financials
statements.




ITEM 7A.  QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.




Not
applicable.




ITEM
8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.




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




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




None


21





ITEM 9A(T).  CONTROLS
AND PROCEDURES





(a)
            Management’s
      Annual Report on Internal
      ControlOver 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:





*
            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, 2009, 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.





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.


22





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.




ITEM 9B.
     OTHER
INFORMATION.




None.




PART
III




ITEM
10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.




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, 2009:





Name
                    
                    Age
                    
                    PositionWilliam
      P. Spencer
                    
                    56
                    
                    Chief
      Executive Officer, President and DirectorDebra
      L. Spencer
                    
                    57
                    
                    Secretary,
      Treasurer and DirectorLowell
      W. Giffhorn
                    
                    62
                    
                    Chief
      Financial OfficerDerek
      C. Boosey
                    
                    66
                    
                    Vice
      President—InternationalJeffrey
      G. McGonegal
                    
                    58
                    
                    DirectorRobert
      Burg
                    
                    52
                    
                    DirectorBarry
      S. King
                    
                    63
                    
                    Director





Biographical
Information





William P. Spencerhas 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. Booseyhas served as
our vice-president—international since September 1999. From 1994 to
September 1999, he was new business manager for Natural 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.


23





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. Giffhornhas 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.





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 PepperBall Technologies, 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 its sale in April 2007,
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 Burgjoined
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 fiscal
year 2009, is composed of one employee director and one other director, who was
determined by the Board to be an independent director. During fiscal year 2009,
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.


24




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
2009.




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.




ITEM
11.     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, 2009 and 2008.




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
                                  
                                  2009
                                  
                                  
                                  $
                                  212,341
                                  
                                  
                                  $
                                  50,400
                                  
                                  
                                  $
                                  10,800
                                  
                                  
                                  $
                                  10,802
                                  
                                  
                                  $
                                  284,343President,
      CEO and Director
                                  
                                  2008
                                  
                                  
                                  $
                                  178,956
                                  
                                  
                                  $
                                  30,500
                                  
                                  
                                  $
                                  20,000
                                  
                                  
                                  $
                                  9,903
                                  
                                  
                                  $
                                  239,3592007
                                  
                                  
                                  $
                                  174,386
                                  
                                  
                                  $
                                  39,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  9,903
                                  
                                  
                                  $
                                  223,289Debra
      L. Spencer
                                  
                                  2009
                                  
                                  
                                  $
                                  97,032
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  7,200
                                  
                                  
                                  $
                                  10,802
                                  
                                  
                                  $
                                  115,034Secretary
      and Director





The
amounts included in other compensation are car allowances paid to Mr. and Mrs.
Spencer


25





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
                                  
                                  
                                  25,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  1.30
                                  
                                  
                                  May
      8, 201215,000
                                  
                                  
                                  
                                  15,000
                                  
                                  
                                  $
                                  0.65
                                  
                                  
                                  June
      25, 2013Debra
      L. Spencer
                                  
                                  
                                  25,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  2.00
                                  
                                  
                                  Aug.
      21, 2010Secretary
      and
                                  
                                  
                                  18,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  1.95
                                  
                                  
                                  July
      1, 2010Director
                                  
                                  
                                  25,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  1.30
                                  
                                  
                                  May
      8, 201210,000
                                  
                                  
                                  
                                  10,000
                                  
                                  
                                  $
                                  0.65
                                  
                                  
                                  June
      25, 2013





Employment
Contracts





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





DIRECTOR
COMPENSATION





Name
                      
                      Fees
                      
                      
                      Option
                      
                      
                      TotalEarned
                      
                      
                      Awards
                      
                      
                      ($)or
                      
                      
                      ($)Paid InCash($)[a]
                      
                      [b]
                      
                      
                      (d)
                      
                      
                      [h]Jeffrey McGonegal
                      
                      $
                      10,000
                      
                      
                      $
                      3,600
                      
                      
                      $
                      13,600Barry
      King
                      
                      $
                      3,600
                      
                      
                      $
                      3,600
                      
                      
                      $
                      7,200Robert
      Burg
                      
                      $
                      5,625
                      
                      
                      $
                      3,600
                      
                      
                      $
                      9,225





We
estimate the fair value of the options issued to our officers and 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, 2009: dividend yield of zero percent; expected volatility
of 61%, risk-free interest rates of 3.54%; and expected life of 5
years.





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;


26





•
            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
12.     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 17, 2009, 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.





Name of Beneficial Owner
                
                Amount of Benefical
                
                
                Percent
      ofOwnership (1)(2)
                
                
                OwnershipWilliam
      P.and Debra L. Spencer (3)
                
                
                2,933,000
                
                
                
                26.1
                %Gary
      J. McAdam (4)
                
                
                2,988,108
                
                
                
                23.8
                %Estate
      of James Scibelli (5)
                
                
                901,625
                
                
                
                7.8
                %Barry
      S. King (6)
                
                
                34,000
                
                
                
                *Robert
      Burg (7)
                
                
                80,000
                
                
                
                *Jeffrey
      G. McGonegal (7)
                
                
                80,000
                
                
                
                *Lowell
      W. Giffhorn (8)
                
                
                105,000
                
                
                
                *Derek
      C. Boosey (9)
                
                
                255,000
                
                
                
                2.3
                %All
      officers and directors as a group (7 persons) (10)
                
                
                3,487,000
                
                
                
                29.8
                %





*
            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.


27





(3)
            Comprised
      of 2,705,000 shares and 228,000 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 34,000 stock options.


(7)
            Comprised
      of 80,000 stock options.


(8)
            Comprised
      of 25,000 shares and 80,000 stock
options.


(9)
            Comprised
      of 50,000 shares and 205,000 stock
options.


(10)
            Comprised
      of 2,780,000 shares and 707,000 stock
options.




Equity
Compensation Plan Information




Number of securitiesremaining availableNumber of securities
                        
                        
                        
                        
                        
                        for issuance underto be issued upon
                        
                        
                        Weighted average
                        
                        
                        equity compensatonexercise of
                        
                        
                        exercise price of
                        
                        
                        plans (excludingoutstanding options,
                        
                        
                        outstanding options,
                        
                        
                        securities reflected inwarrants and rights
                        
                        
                        warrants and rights
                        
                        
                        column (a))Plan Category
                        
                        (a)
                        
                        
                        (b)
                        
                        
                        (c)Equity
      compensationplans
      approved bysecurity
      holders
                        
                        
                        1,249,000
                        
                        
                        $
                        1.49
                        
                        
                        
                        241,000Equity
      compensationplans
      not approvedby
      security holders
                        
                        
                        4,077,957
                        
                        
                        $
                        1.18
                        
                        
                        
                        -Total
                        
                        
                        5,326,957
                        
                        
                        $
                        1.25
                        
                        
                        
                        241,000




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
13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE.




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
14.     PRINCIPAL ACCOUNTING 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, 2009 and 2008:


28





HJ
      Associates &Consultants
      LLPFee
      category
                            
                            2009
                            
                            
                            2008Audit
      fees
                            
                            $
                            51,000
                            
                            
                            $
                            58,896Audit-related
      fees
                            
                            $
                            -
                            
                            
                            $
                            -Tax
      fees
                            
                            $
                            5,891
                            
                            
                            $
                            3,934All
      other fees
                            
                            $
                            -
                            
                            
                            $
                            -Total
      fees
                            
                            $
                            56,891
                            
                            
                            $
                            62,830





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-Q 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.





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 2009.





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-K for the year ended March 31, 2009
filed with the Securities and Exchange Commission.


29




PART
IV




ITEM
15.     EXHIBITS.




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





1.
              Financial
      Statements. The following consolidated financial statements and Report ofIndependent
      Registered 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, 2009 and 2008





Consolidated
Statements of Operation- Years Ended March 31, 2009 and 2008





Consolidated
Statement of Stockholders' Equity- Years Ended March 31, 2009 and
2008





Consolidated
Statements of Cash Flows- Years Ended March 31, 2009 and 2008





Notes to
Consolidated Financial Statements





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




Exhibit
      No.
                    
                    Title3.01
                    
                    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)




30





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 effectiveon
      August 25, 2003.





(3)
            Incorporated
      by reference to our Annual Report on Form 10-K 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-K 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.


31





Index to Consolidated
Financial Statements





Report
      of Independent Registered Public Accounting Firm
                    F-2Consolidated
      Balance Sheets, March 31, 2009 and 2008
                    F-3Consolidated
      Statements of Operations,for
      the years ended March 31, 2009 and 2008
                    F-4Consolidated
      Statement of Stockholders' Equity,for
      the years ended March 31, 2009 and 2008
                    F-5Consolidated
      Statements of Cash Flows, for theyears
      ended March 31, 2009 and 2008
                    F-6Notes
      to Consolidated Financial Statements
                    F-7-F-23


F-1





Report
of Independent Registered Public Accounting Firm





To the
Board of Directors


Imagenetix,
Inc.


San
Diego, California





We have
audited the accompanying consolidated balance sheets of Imagenetix, Inc. and
subsidiary as of March 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended March 31, 2009.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these 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 financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 financial position of Imagenetix, Inc. and
subsidiary as of March 31, 2009 and 2008, and the results of their operations
and their cash flows for each of the two years in the period ended March 31,
2009, in conformity with U.S. generally accepted accounting
principles.





We were
not engaged to examine management's assessment of the effectiveness of
Imagenetix, Inc.'s internal control over financial reporting as of March 31,
2009, included in the accompanying Form 10-K and, accordingly, we do not express
an opinion thereon.





HJ
Associates & Consultants, LLP


Salt Lake
City, Utah


June 11,
2009


F-2





Imagenetix,
Inc.


Consolidated
Balance Sheets





March 31,
                          
                          2009
                          
                          
                          2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          1,225,723
                          
                          
                          $
                          1,022,555Accounts
      receivable, net
                          
                          
                          1,095,946
                          
                          
                          
                          765,492Inventories,
      net
                          
                          
                          1,337,241
                          
                          
                          
                          1,109,845Prepaid
      expenses and other current assets
                          
                          
                          109,028
                          
                          
                          
                          252,138Deferred
      tax asset
                          
                          
                          535,200
                          
                          
                          
                          862,497Total
      current assets
                          
                          
                          4,303,138
                          
                          
                          
                          4,012,527Property and equipment,net
                          
                          
                          115,918
                          
                          
                          
                          112,190Long-term
      prepaid expenses
                          
                          
                          30,000
                          
                          
                          
                          42,000Other
      assets
                          
                          
                          134,356
                          
                          
                          
                          218,155Total
      Assets
                          
                          $
                          4,583,412
                          
                          
                          $
                          4,384,872LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                          
                          $
                          274,311
                          
                          
                          $
                          713,324Accrued
      liabilities
                          
                          
                          80,696
                          
                          
                          
                          72,301Income
      tax payable
                          
                          
                          69,803
                          
                          
                          
                          -Customer
      deposits
                          
                          
                          58,850
                          
                          
                          
                          63,216Contract
      payable
                          
                          
                          43,645
                          
                          
                          
                          46,200Short
      term license payable
                          
                          
                          2,980
                          
                          
                          
                          34,259Total
      current liabilities
                          
                          
                          530,285
                          
                          
                          
                          929,300Long
      term license payable
                          
                          
                          -
                          
                          
                          
                          2,980Total
      Liabilities
                          
                          
                          530,285
                          
                          
                          
                          932,280Stockholders'
      equityPreferred
      stock, $.001 par value; 5,000,000 sharesauthorized:
      none outstanding
                          
                          
                          -
                          
                          
                          
                          -Common
      stock, $.001par value; 50,000,000 sharesauthorized:
      11,010,788 and 10,960,788 issued and outstanding atMarch
      31, 2009 and 2008, respectively
                          
                          
                          11,010
                          
                          
                          
                          10,960Capital
      in excess of par value
                          
                          
                          12,651,936
                          
                          
                          
                          12,481,407Accumulated
      deficit
                          
                          
                          (8,609,819
                          )
                          
                          
                          (9,039,775
                          )Total
      stockholders' equity
                          
                          
                          4,053,127
                          
                          
                          
                          3,452,592Total
      Liabilities and Stockholders' Equity
                          
                          $
                          4,583,412
                          
                          
                          $
                          4,384,872





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 Operations





Years Ended March
      31,
                      
                      2009
                      
                      
                      2008Net
      sales
                      
                      $
                      7,460,872
                      
                      
                      $
                      5,569,593Cost
      of sales
                      
                      
                      4,003,303
                      
                      
                      
                      3,344,034Gross
      profit
                      
                      
                      3,457,569
                      
                      
                      
                      2,225,559Operating
      expenses:General
      and administrative
                      
                      
                      2,240,988
                      
                      
                      
                      2,456,192Payroll
      expense
                      
                      
                      1,076,473
                      
                      
                      
                      1,037,775Consulting
      expense
                      
                      
                      1,059,309
                      
                      
                      
                      961,349Operating
      expenses
                      
                      
                      4,376,770
                      
                      
                      
                      4,455,316Operating
      (loss)
                      
                      
                      (919,201
                      )
                      
                      
                      (2,229,757
                      )Other
      income (expense):Other
      income
                      
                      
                      25,012
                      
                      
                      
                      32,182Settlement
      income
                      
                      
                      1,785,000
                      
                      
                      
                      -Interest
      expense
                      
                      
                      (1,741
                      )
                      
                      
                      (4,367
                      )Other
      income
                      
                      
                      1,808,271
                      
                      
                      
                      27,815Income
      (loss) before income taxes
                      
                      
                      889,070
                      
                      
                      
                      (2,201,942
                      )Provision
      for (benefits from) income taxes
                      
                      
                      459,114
                      
                      
                      
                      (425,300
                      )Net
      income (loss)
                      
                      $
                      429,956
                      
                      
                      $
                      (1,776,642
                      )Basic
      and diluted income (loss) per share
                      
                      $
                      0.04
                      
                      
                      $
                      (0.16
                      )





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





Common
      Stock
                  
                  
                  Capital
      in excess
                  
                  
                  Retained
      Earnings
                  
                  
                  Stockholders'Years Ended March 31, 2009 and
      2008
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  of
      Par Value
                  
                  
                  (Deficit)
                  
                  
                  EquityBalance
      April 1, 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
                  )
                  
                  $
                  3,452,592Common
      stock issued for services at $0.50 per share
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  24,950
                  
                  
                  
                  -
                  
                  
                  
                  25,000Value
      of stock options and warrants issued
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  145,579
                  
                  
                  
                  -
                  
                  
                  
                  145,579Net
      income for the year ended March 3l, 2009
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  429,956
                  
                  
                  
                  429,956Balance
      March 31, 2009
                  
                  
                  11,010,788
                  
                  
                  $
                  11,010
                  
                  
                  $
                  12,651,936
                  
                  
                  $
                  (8,609,819
                  )
                  
                  $
                  4,053,127




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,
                      
                      2009
                      
                      
                      2008Operating
      activities:Net
      income (loss)
                      
                      $
                      429,956
                      
                      
                      $
                      (1,776,642
                      )Adjustments
      to reconcile net income (loss)to
      cash provided (used) by operating activities:Amortization
      and depreciation
                      
                      
                      45,067
                      
                      
                      
                      50,334Provision
      for doubtful accounts
                      
                      
                      (44,000
                      )
                      
                      
                      15,000Provision
      for inventory obsolescence
                      
                      
                      (1,960
                      )
                      
                      
                      15,454Non
      cash expense related to issuance of warrants and stock
    options
                      
                      
                      145,579
                      
                      
                      
                      410,048Stock
      issued for services
                      
                      
                      25,000
                      
                      
                      
                      -Loss
      on sale of property and equipment
                      
                      
                      3,643
                      
                      
                      
                      -Change
      in deferred taxes
                      
                      
                      400,497
                      
                      
                      
                      (425,300
                      )Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                      
                      
                      (286,454
                      )
                      
                      
                      796,149(Increase)
      decrease in employee receivable
                      
                      
                      2,409
                      
                      
                      
                      3,177(Increase)
      decrease in inventory
                      
                      
                      (225,436
                      )
                      
                      
                      159,159(Increase)
      decrease in other assets
                      
                      
                      152,701
                      
                      
                      
                      86,904Increase
      (decrease) in accounts payable
                      
                      
                      (446,287
                      )
                      
                      
                      345,234Increase
      (decrease) in accrued liabilities
                      
                      
                      8,395
                      
                      
                      
                      8,036Increase
      (decrease) in income taxes payable
                      
                      
                      69,803
                      
                      
                      
                      -Increase
      (decrease) in customer deposits
                      
                      
                      (4,366
                      )
                      
                      
                      (73,429
                      )Increase
      (decrease) in income taxes payable
                      
                      
                      -
                      
                      
                      
                      269,140Net
      cash provided by (used in) operating activities
                      
                      
                      274,547
                      
                      
                      
                      (116,736
                      )Investing
      activities:Purchases
      of property and equipment
                      
                      
                      (43,464
                      )
                      
                      
                      (19,014
                      )Proceeds
      from disposal of property and equipment
                      
                      
                      1,625
                      
                      
                      
                      -Purchases
      of trademarks and patents
                      
                      
                      -
                      
                      
                      
                      (11,612
                      )Net
      cash used in investing activities
                      
                      
                      (41,839
                      )
                      
                      
                      (30,626
                      )Financing
      activities:Proceeds
      from extension of warrants
                      
                      
                      -
                      
                      
                      
                      155,536Proceeds
      from exercise of warrants
                      
                      
                      -
                      
                      
                      
                      90,888Proceeds
      from contracts payable
                      
                      
                      92,219
                      
                      
                      
                      95,605Payments
      on contracts payable
                      
                      
                      (87,500
                      )
                      
                      
                      (99,375
                      )Payments
      on patent license financed
                      
                      
                      (34,259
                      )
                      
                      
                      (31,633
                      )Net
      cash provided by (used in) financing activities
                      
                      
                      (29,540
                      )
                      
                      
                      211,021Net
      increase in cash
                      
                      
                      203,168
                      
                      
                      
                      63,659Cash and cash
      equivalents, beginning of year
                      
                      
                      1,022,555
                      
                      
                      
                      958,896Cash and cash
      equivalents, end of year
                      
                      $
                      1,225,723
                      
                      
                      $
                      1,022,555Supplemental
      Disclosure of Cash Flow Information:Cash
      paid during the period for:Interest
                      
                      $
                      1,741
                      
                      
                      $
                      4,367Income
      taxes
                      
                      $
                      -
                      
                      
                      $
                      -Non
      Cash Investing and Financing Activities:Non-cash
      dividend issued to certain warrant holders
                      
                      $
                      -
                      
                      
                      $
                      1,090,079Common
      stock issued for services
                      
                      $
                      25,000
                      
                      
                      $
                      -





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,
2009 and 2008





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 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. 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,
2009 and 2008





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.





Inventories





Inventories
are 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 17 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





We
adopted SFAS No.123R, 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.


F-8


IMAGENETIX,
INC.


Notes to
the Consolidated Financial Statements (Continued)


March 31,
2009 and 2008





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 $261,000 and
$893,000 for the years ended March 31, 2009 and 2008.




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, 2009,
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,
2009 there were no returns that would suggest a liability needed to be
recorded.


F-9


IMAGENETIX,
INC.


Notes to
the Consolidated Financial Statements (Continued)


March 31,
2009 and 2008




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.  We have 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.  (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 June
2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own
Stock.  EITF No. 07-5 provides that an entity should use a two
step approach to evaluate whether equity-linked financial instrument (embedded
feature) is indexed to its own stock, including evaluating the instrument’s
contingent exercise and settlement provisions. It also clarifies on the impact
of foreign currency denominated strike prices and market-based employee stock
option valuation instruments on the evaluation.  EITF No. 07-5 is
effective for years beginning after December 15, 2008.  The Company
does not expect that the adoption of EITF No. 07-5 will have a material effect
on its consolidated financial statements.





In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements.  This FSP also amends APB
Opinion No. 28, Interim Financial Reporting, to require those disclosures in
summarized financial information at interim reporting periods. The Company will
comply with the additional disclosure requirements beginning in the first
quarter of fiscal 2010.


F-10


IMAGENETIX,
INC.


Notes to
the Consolidated Financial Statements (Continued)


March 31,
2009 and 2008





In April
2009, the FASB issued FSP No. SFAS 115-2 and SFAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments. This FSP amends the
other-than-temporary impairment guidance in U.S. GAAP for debt and equity
securities in the financial statements. This FSP does not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. This FSP shall be effective for interim and annual
reporting periods ending after June 15, 2009. The Company currently does not
have any financial assets that are other-than-temporary impaired.





In April
2009, the SEC released SAB No. 111 ("SAB 111"), which amends SAB Topic 5-M. SAB
111 notes that SFAS No. 115-2 and SFAS 124-2 were scoped to debt securities
only, and the FSP referred readers to SEC SAB Topic 5-M for factors to consider
with respect to other-than-temporary impairments for equity securities. With the
amendments in SAB 111, debt securities are excluded from the scope of Topic 5-M,
but the SEC staff's views on equity securities are still included within the
topic. The Company currently does not have any financial assets that are
other-than-temporary impaired.





A variety
of proposed or otherwise potential accounting standards are currently under
study by standard-setting organizations and various regulatory
agencies.  Because of the tentative and preliminary nature of these
proposed standards, management has not determined whether implementation of such
proposed standards would be material to the Company’s consolidated financials
statements.





NOTE 2
–  ACCOUNTS RECEIVABLE





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





March
      31,2009
                  
                  
                  2008Accounts
      receivable - trade
                  
                  $
                  1,156,946
                  
                  
                  $
                  870,492Allowance
      for doubtful accounts
                  
                  
                  (61,000
                  )
                  
                  
                  (105,000
                  )Accounts
      receivable, net
                  
                  $
                  1,095,946
                  
                  
                  $
                  765,492


F-11




IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2009 and 2008




NOTE 3
–  INVENTORY





Inventory
consisted of the following:




March
      31,2009
                      
                      
                      2008Raw
      materials
                      
                      $
                      802,117
                      
                      
                      $
                      824,807Finished
      products
                      
                      
                      417,024
                      
                      
                      
                      295,615Boxes,
      labels, tubes & bottles
                      
                      
                      266,682
                      
                      
                      
                      139,9651,485,823
                      
                      
                      
                      1,260,387Reserve
      for obsolescence
                      
                      
                      (148,582
                      )
                      
                      
                      (150,542
                      )$
                      1,337,241
                      
                      
                      $
                      1,109,845





NOTE 4
-   PROPERTY AND EQUIPMENT





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





March
      31,2009
                    
                    
                    2008Office
      equipment
                    
                    $
                    72,632
                    
                    
                    $
                    72,632Lease-hold
      improvements
                    
                    
                    173,979
                    
                    
                    
                    139,191246,611
                    
                    
                    
                    211,823Less
      accumulated depreciation
                    
                    
                    130,693
                    
                    
                    
                    99,633$
                    115,918
                    
                    
                    $
                    112,190





Depreciation
expense for the year ended March 31, 2009 and 2008 was $34,468 and $32,280,
respectively.





NOTE 5
–  OTHER ASSETS





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





March
      31,2009
                    
                    
                    2008Trademarks
                    
                    $
                    13,032
                    
                    
                    $
                    13,032Patent
                    
                    
                    172,965
                    
                    
                    
                    172,965Deferred
      tax asset
                    
                    
                    14,500
                    
                    
                    
                    87,700200,497
                    
                    
                    
                    273,697Less
      accumulated amortization
                    
                    
                    66,141
                    
                    
                    
                    55,542$
                    134,356
                    
                    
                    $
                    218,155


F-12


IMAGENETIX,
INC.


Notes to
the Consolidated Financial Statements (Continued)


March 31,
2009 and 2008





For the
year ended March 31, 2009 and 2008 amortization expense was $10,599 and $18,054,
respectively. The estimated future amortization expense related to intangible
assets as of March 31, 2009 is as follows:





Year
      Ended March 31.
                  
                  Amount2010
                  
                  
                  19,8582011
                  
                  
                  19,8582012
                  
                  
                  19,7572013
                  
                  
                  18,9552014
      and thereafter
                  
                  
                  41,427





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.





As of
March 31, 2009 and 2008, the following obligations were outstanding related to
this license:





As
      of March 31,2009
                  
                  
                  2008Patent
      License and Royalty Payable
                  
                  $
                  2,980
                  
                  
                  $
                  37,239Less
      current portion
                  
                  
                  2,980
                  
                  
                  
                  34,259Long
      term license payable
                  
                  $
                  -
                  
                  
                  $
                  2,980





NOTE 7
–  LEASES OBLIGATIONS





Operating
Leases





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, 2009 and 2008
amounted to $165,782 and $165,207, respectively. The following is a schedule of
minimum annual rental payments for the next five years.


F-13


IMAGENETIX,
INC.


Notes to
the Consolidated Financial Statements (Continued)


March 31,
2009 and 2008





Years
      ending March 31,2010
                              
                              
                              158,9932011
                              
                              
                              143,2062012
                              
                              
                              148,2182013
                              
                              
                              114,056Thereafter
                              
                              -Total
      minimum lease payments
                              $
                              564,473





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.





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, 2009.





Common
Stock





The
Company has authorized 50,000,000 shares of common stock at $.001 par value. At
March 31, 2009, the Company had 11,010,788 shares of common stock issued and
outstanding.





During
the year ended March 31, 2009, we recorded $25,000 as non-cash general and
administrative expenses as a result of issuing 50,000 restricted shares of
common stock to an individual who had met certain sales levels under a marketing
and sales agreement.





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.


F-14


IMAGENETIX,
INC.


Notes to
the Consolidated Financial Statements (Continued)


March 31,
2009 and 2008





Warrants





A summary
of the status of the warrants granted under various agreements at March 31, 2009
and 2008, and changes during the years then ended is presented
below:





WarrantsWeighted
                                                                        
                                                                        
                                                                        WeightedAverage
                                                                        
                                                                        
                                                                        AverageExercise
                                                                        
                                                                        
                                                                        FairShares
                                                                        
                                                                        
                                                                        Price
                                                                        
                                                                        
                                                                        ValueOutstanding,
      April 1, 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
                                                                        
                                                                        
                                                                        $
                                                                        1.18Granted
                                                                        
                                                                        
                                                                        175,000
                                                                        
                                                                        
                                                                        
                                                                        1.04
                                                                        
                                                                        
                                                                        $
                                                                        0.23Exercised
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -Outstanding,
      March 31, 2009
                                                                        
                                                                        
                                                                        4,077,957
                                                                        
                                                                        
                                                                        $
                                                                        1.18Exercisable,
      March 31, 2008
                                                                        
                                                                        
                                                                        3,902,957
                                                                        
                                                                        
                                                                        $
                                                                        1.18Exercisable,
      March 31, 2009
                                                                        
                                                                        
                                                                        4,077,957
                                                                        
                                                                        
                                                                        $
                                                                        1.18





During
the year ended March 31, 2009, we issued warrants to four individuals for
services valued at $38,378 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, 2009: dividend yield of zero
percent; expected volatility ranging from 56% to 61%, risk-free interest rates
ranging from 3.12% to 3.36%; and expected lives of 5 years.





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.


F-15


IMAGENETIX,
INC.


Notes to
the Consolidated Financial Statements (Continued)


March 31,
2009 and 2008





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.





A summary
of the status of the warrants granted under the various agreements at March 31,
2009, are presented in the table below:





Outstanding
                  
                  
                  ExercisableWeightedAverage
                  
                  
                  Weighted
                  
                  
                  
                  
                  
                  WeightedRange
      of
                  
                  
                  
                  
                  
                  Remaining
                  
                  
                  Average
                  
                  
                  
                  
                  
                  AverageExercise
                  
                  
                  Number
                  
                  
                  Contractual
                  
                  
                  Exercise
                  
                  
                  Number
                  
                  
                  ExercisePrices
                  
                  
                  Outstanding
                  
                  
                  Life
                  
                  
                  Price
                  
                  
                  Exercisable
                  
                  
                  PriceWarrants$
                  0.65-0.95
                  
                  
                  
                  1,118,210
                  
                  
                  
                  1.69
                  
                  
                  $
                  0.87
                  
                  
                  
                  1,118,210
                  
                  
                  $
                  0.87$
                  1.00-1.05
                  
                  
                  
                  1,780,000
                  
                  
                  
                  1.46
                  
                  
                  $
                  1.04
                  
                  
                  
                  1,780,000
                  
                  
                  $
                  1.04$
                  1.20-1.70
                  
                  
                  
                  647,250
                  
                  
                  
                  2.25
                  
                  
                  $
                  1.34
                  
                  
                  
                  647,250
                  
                  
                  $
                  1.34$
                  1.95
                  
                  
                  
                  457,500
                  
                  
                  
                  1.53
                  
                  
                  $
                  1.95
                  
                  
                  
                  457,500
                  
                  
                  $
                  1.95$
                  2.33-3.45
                  
                  
                  
                  74,997
                  
                  
                  
                  1.17
                  
                  
                  $
                  2.85
                  
                  
                  
                  74,997
                  
                  
                  $
                  2.854,077,957
                  
                  
                  
                  1.65
                  
                  
                  $
                  1.18
                  
                  
                  
                  4,077,957
                  
                  
                  $
                  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
1,259,000 options have been granted to executive officers, employees and
consultants at prices ranging from $0.65 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 duringwhich 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-16


IMAGENETIX,
INC.


Notes to
the Consolidated Financial Statements (Continued)


March 31,
2009 and 2008




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, 2009 and 2008
there were options granted to purchase up to 305,000 and 350,000, 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, 2009 and 2008, and changes during the years
then ended is presented below:




F-17




IMAGENETIX,
INC.


Notes to
the Consolidated Financial Statements (Continued)


March 31,
2009 and 2008





OptionsWeighted
                    
                    
                    WeightedAverage
                    
                    
                    AverageExercise
                    
                    
                    FairShares
                    
                    
                    Price
                    
                    
                    ValueOutstanding,
      April 1, 2007
                    
                    
                    1,129,000
                    
                    
                    $
                    1.74Granted
                    
                    
                    350,000
                    
                    
                    $
                    1.30
                    
                    
                    $
                    0.80Cancelled
                    
                    
                    (535,000
                    )
                    
                    $
                    1.41Exercised
                    
                    
                    -
                    
                    
                    
                    -Outstanding,
      March 31, 2008
                    
                    
                    944,000
                    
                    
                    $
                    1.76Granted
                    
                    
                    305,000
                    
                    
                    $
                    0.65
                    
                    
                    $
                    0.36Cancelled
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -Outstanding,
      March 31, 2009
                    
                    
                    1,249,000
                    
                    
                    $
                    1.49Exercisable,
      March 31, 2008
                    
                    
                    769,000
                    
                    
                    $
                    1.87Exercisable,
      March 31, 2009
                    
                    
                    1,096,500
                    
                    
                    $
                    1.61




A summary
of the status of the options granted under the stock option plan and other
agreements at March 31, 2009, are presented in the table below:





Outstanding
                    
                    
                    ExercisableWeightedAverage
                    
                    
                    Weighted
                    
                    
                    
                    
                    
                    WeightedRange of
                    
                    
                    
                    
                    Remaining
                    
                    
                    Average
                    
                    
                    
                    
                    
                    AverageExercise
                    
                    Number
                    
                    
                    Contractual
                    
                    
                    Exercise
                    
                    
                    Number
                    
                    
                    ExercisePrices
                    
                    Outstanding
                    
                    
                    Life
                    
                    
                    Price
                    
                    
                    Exercisable
                    
                    
                    PriceOptions$                  0.65
                    
                    
                    305,000
                    
                    
                    
                    4.24
                    
                    
                    $
                    0.65
                    
                    
                    
                    152,500
                    
                    
                    $
                    0.65$                  1.30
                    
                    
                    350,000
                    
                    
                    
                    3.09
                    
                    
                    $
                    1.30
                    
                    
                    
                    350,000
                    
                    
                    $
                    1.30$                  1.95
                    
                    
                    249,000
                    
                    
                    
                    1.25
                    
                    
                    $
                    1.95
                    
                    
                    
                    249,000
                    
                    
                    $
                    1.95$         2.00-
      2.35
                    
                    
                    345,000
                    
                    
                    
                    1.41
                    
                    
                    $
                    2.10
                    
                    
                    
                    345,000
                    
                    
                    $
                    1.411,249,000
                    
                    
                    
                    2.54
                    
                    
                    $
                    1.49
                    
                    
                    
                    1,096,500
                    
                    
                    $
                    1.61




NOTE 10
-  INCOME TAXES





At March
31, 2009 and 2008, the total of all deferred tax assets was approximately
$549,700 and $950,197, respectively. There are no deferred tax liabilities for
either year.




F-18




IMAGENETIX,
INC.


Notes to
the Consolidated Financial Statements (Continued)


March 31,
2009 and 2008





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





March 31,2009
                    
                    
                    2008Excess
      of financial accountingover
      tax depreciation
                    
                    $
                    14,500
                    
                    
                    $
                    21,700State
      income tax benefits
                    
                    
                    213,100
                    
                    
                    
                    211,597Net
      operating loss carryforward
                    
                    
                    143,800
                    
                    
                    
                    541,400Allowance
      for obsolete inventory
                    
                    
                    59,200
                    
                    
                    
                    60,000Allowance
      for bad debts
                    
                    
                    24,300
                    
                    
                    
                    41,800Valuation
      of stock options and warrants
                    
                    
                    -
                    
                    
                    
                    66,000Research
      and development credit carryforwards
                    
                    
                    70,100
                    
                    
                    
                    -Charitable
      contribution carryforwards
                    
                    
                    15,700
                    
                    
                    
                    -Vacation
      accrual
                    
                    
                    9,000
                    
                    
                    
                    7,700Net
      deferred tax asset
                    
                    $
                    549,700
                    
                    
                    $
                    950,197




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,
                  
                  2009
                  
                  
                  2008Federal
      income tax expense computed at the Federal statutory rate
                  
                  $
                  302,284
                  
                  
                  $
                  (748,700
                  )State
      income tax expense net of Federal benefit
                  
                  
                  58,617
                  
                  
                  
                  (153,100
                  )Other-
      permanent differences
                  
                  
                  98,213
                  
                  
                  
                  476,500Income
      tax expense (benefit)
                  
                  $
                  459,114
                  
                  
                  $
                  (425,300
                  )





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




F-19





IMAGENETIX,
INC.


Notes to
the Consolidated Financial Statements (Continued)


March 31,
2009 and 2008





March
      31,2009
                        
                        
                        2008Current
      income tax expense (benefit):Federal
                        
                        $
                        (11,186
                        )
                        
                        $
                        -State
                        
                        
                        69,803
                        
                        
                        
                        -Net
      current tax expense (benefit)
                        
                        $
                        58,617
                        
                        
                        $
                        -Deferred
      tax expense (benefit) resulted from:Excess
      of financial accounting overtax
      depreciation
                        
                        $
                        3,298
                        
                        
                        $
                        (4,500
                        )State
      income tax benefits
                        
                        
                        (5,640
                        )
                        
                        
                        (199,200
                        )Valuation
      of stock options and warrants
                        
                        
                        -
                        
                        
                        
                        332,000Net
      operating loss
                        
                        
                        393,289
                        
                        
                        
                        (541,400
                        )Allowance
      for obsolete inventory
                        
                        
                        781
                        
                        
                        
                        (6,200
                        )Charitable
      contributions
                        
                        
                        (7,443
                        )
                        
                        
                        -Vacation
      accrual
                        
                        
                        (1,313
                        )
                        
                        
                        -Allowance
      for bad debts
                        
                        
                        17,525
                        
                        
                        
                        (6,000
                        )Net
      deferred tax expense (benefit)
                        
                        $
                        400,497
                        
                        
                        $
                        (425,300
                        )$
                        459,114
                        
                        
                        $
                        (425,300
                        )





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





At March
31, 2009, the Company has net operating loss carry forwards for income tax
reporting purposes of approximately $423,000 and $2,410,000 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.  During the
fiscal years ending March 31, 2008 and 2009, California suspended the use of the
state net operating loss carry forwards. Accordingly, based on current year
taxable income, we will pay $69,803 of state income tax expense for the year
ended March 31, 2009.





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, 2009, based on the weight of available evidence, including current year
taxable income and expectations of future taxable income, the Company determined
that it was  more ikely that its deferred tax assets would be realized
and has not recorded a valuation allowance associated with its deferred tax
assets.




F-20




IMAGENETIX,
INC.


Notes to
the Consolidated Financial Statements (Continued)


March 31,
2009 and 2008




The
Company has 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, 2009. The following table summarizes the open tax years for each major
jurisdiction:





Jurisdiction
                          
                          Open
      Tax
                            YearsFederal
                          
                          2006
      – 2008California
                          
                          2006
      –
2008





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.




F-21




IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2009 and 2008




NOTE 11
–   EARNINGS PER SHARE





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




For
      the Year EndedMarch
      31,2009
                                  
                                  
                                  2008Income
      (loss) available to commonshareholders
      (Numerator)
                                  
                                  $
                                  429,956
                                  
                                  
                                  $
                                  (1,776,642
                                  )Weighted
      average number of commonshares
      outstanding used in basic incomeper
      share during the period(Denominator)
                                  
                                  
                                  10,991,473
                                  
                                  
                                  
                                  10,936,657Weighted
      average number of commonshares
      outstanding used in diluted incomeper
      share during the period(Denominator)
                                  
                                  
                                  11,009,841
                                  
                                  
                                  
                                  10,936,657




Basic
income (loss) per common share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding during each
period.  Diluted income per share is computed by dividing net income
by the weighted-average number of common shares and common equivalent shares
outstanding during each period.  Common equivalent shares include
stock options and warrants using the treasury stock method.  For
periods which include a loss, the computation of diluted income (loss) per share
excludes the impact of stock options and warrants because they would be
antidilutive and diluted income (loss) per share is therefore the same as basic
loss per share.




NOTE 12
–    CONCENTRATIONS





Sales





During
the year ended March 31, 2009, we had three significant customers which
accounted for 23%, 19% and 17% of sales.





During
the year ended March 31, 2008, we had two significant customers which accounted
for 29% and 16% 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. During the year ended March 31, 2009, we
negotiated with the supplier an elimination of a minimum quarterly order
quantity which had been part of a previous supply agreement.  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-22




IMAGENETIX,
INC.


Notes to
the Consolidated Financial Statements (Continued)


March 31,
2009 and 2008





During
the year ended March 31, 2009, we had two significant vendors who accounted for
39% and 23% of cost of sales.





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





Accounts
Receivable





At March
31, 2009, we had four customers which accounted for 29%, 26%, 17% and 15% of our
accounts receivable balances.




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





NOTE 13
–    LITIGATION SETTLEMENT





In May
2008, we received $2,100,000 ($1,785,000 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 provide Celadrin for use in their
products.




F-23




SIGNATURES




Pursuant
to the requirements of  Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.





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
      17, 2009William
      P. Spencer
                  
                  President
      and Director/s/ DEBRA L. SPENCER
                  
                  Secretary,
      Treasurer, and Director
                  
                  June
      17, 2009Debra
      L. Spencer/s/ BARRY S. KING
                  
                  Director
                  
                  June
      17, 2009Barry
      S. King/s/ JEFFREY G. MC GONEGAL
                  
                  Director
                  
                  June
      17, 2009Jeffrey
      McGonegal/s/ ROBERT BURG
                  
                  Director
                  
                  June
      17, 2009Robert
      Burg/s/ LOWELL W. GIFFHORN
                  
                  Chief
      Financial Officer (Principal
                  
                  June
      17, 2009Lowell
      W. Giffhorn
                  
                  Accounting
      Officer)


32