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 ended March 31,
2010




or




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




For the
transition period from _____ to _____




COMMISSION
FILE NUMBER 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  xIndicate
      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  xIndicate
      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   ̈
                              
                              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.
      (Check one):Large
      accelerated filer
                             ̈
                            
                            Accelerated
      filer
                             ̈Non-Accelerated
      filer
                              (Do not check if a smaller reporting company)
                             ̈
                            
                            Smaller
      reporting company
                            xIndicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).Yes   ̈     No  xState
      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. $5,410,000Indicate
      the number of shares outstanding of each of the Registrant's classes of
      common stock, as of the latest practicable date.  11,810,788
      issued and outstanding as of June 18, 2010.DOCUMENTS INCORPORATED BY
      REFERENCE:None.







Annual
Report on Form 10-K


For
the Year Ended March 31, 2010


TABLE
OF CONTENTS





Page
                  NumbersPART
      I
                
                3ITEM
      1.
                
                Business
                
                3ITEM
      1A.
                
                Risk
      Factors
                
                10ITEM
      1B.
                
                Unresolved
      Staff Comments
                
                13ITEM
      2.
                
                Properties
                
                13ITEM
      3.
                
                Legal
      Proceedings
                
                13ITEM
      4.
                
                Reserved
                
                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))
                
                21ITEM
      9B.
                
                Other
      Information
                
                22PART
      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
                
                28ITEM
      13.
                
                Certain
      Relationships And Related Transactions, And Director
      Independence
                
                29ITEM
      14.
                
                Principal
      Accountant Fees And Services
                
                29PART
      IV
                
                
                
                31ITEM
      15.
                
                Exhibits
      and Financial Statement Schedules
                
                31SIGNATURES
                
                F-24


2




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
Celadrin,® our own 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.


3





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  42% and 15% of our net sales for the
year ended March 31, 2010 and 23%, 19%  and 17% for the year ended
March 31, 2009.





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.




4




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.





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, 2010, approximately 72% 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.





5




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 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 10% of our sales, a weight loss product which
represented approximately 13% of our sales, and a probiotic, BioGuard®, for ear,
nose and throat protection which represented approximately 5% of our sales for
the year ended March 31, 2010.





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.





6




Marketing
and Distribution.





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





•
            Continuing
      to offer our proprietary products to existing customers while seeking new
      customers, emphasizing those engaged in the 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, 2010 and 2009 were as follows:




2010
                  
                  
                  2009Domestic
      sales
                  
                  
                  76.5
                  %
                  
                  
                  98.6
                  %Foreign
      sales:Japan
                  
                  
                  15.1
                  
                  
                  
                  -India
                  
                  
                  1.3
                  
                  
                  
                  1.2United
      Kingdom
                  
                  
                  0.7
                  
                  
                  
                  0.4Canada
                  
                  
                  0.4
                  
                  
                  
                  (0.2
                  )Australia
                  
                  
                  6.0
                  
                  
                  
                  -Total
      foreign sales
                  
                  
                  23.5
                  
                  
                  
                  1.4Total
      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.




7




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®, were 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:




8


•
              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.




9




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
April 2009, we were conveyed ownership of U.S. Patent 5,569,676.  This
patent is a method for alleviating the symptoms of non-rheumatoid arthritis by
administering to the afflicted subject a therapeutically effective amount of
cetyl myristoleate either orally, topically, or parenterally.





In
November 2009 we were issued U.S. Patent 7,612,111.  This patent is
directed to compositions comprising lecithin, olive oil, esterified fatty acids
and mixed tocophenols for use in the treatment and prevention of various types
of arthritis and other inflammatory joint conditions, periodontal diseases
and  psoriasis, which avoid many of the side effects associated with
known treatments.  The compositions have the advantage of increased
stability, a reduction of arachidonic acid in cells, a reduction in eicosanoid
production and enhanced cell regulation and communication.  The
invention also discloses methods for using the compositions for treatment and
prevention.  There can be no assurance that others may not develop
compounds superior to those covered by this patent.





Employees





At March
31, 2010, we had 9 full-time employees and 7 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.





10




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 61% of our
products and which represented approximately 72% of our sales for the year ended
March 31, 2010. We will rely upon Celadrin® to expand our product lines and
revenue in the future. If our Celadrin® supplier goes out of business or elects
for any reason not to supply us with Celadrin®, we would have to find another
Celadrin® supplier or suffer a significant reduction in our
revenue.





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





Our
largest customers accounted for 42% and 15% of our net sales for the year ended
March 31, 2010 and 23%, 19%  and 17% for the year ended March 31,
2009.  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.




11




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.





As of
March 31, 2010, 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 5,549,707 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.





12




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





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





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





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




•
              A standardized risk disclosure
      document identifying the risks inherent in investment in pennystocks;
 
 •
              All
      compensation received by the broker-dealer in connection with the
      transaction;
 
 •
              Current
      quotation prices and other relevant market data;
  and
 
 •
              Monthly account statements
      reflecting the fair market value of the securities. In addition, theserules require that a broker-dealer obtain financial and other
      information from a customer, determine that transactions in penny stocks
      are suitable for such customer and deliver a written statement to such
      customer setting forth the basis for this
  determination.




ITEM
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 $11,830 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
month to month lease at a monthly rent of $3,889.  This space is
intended to meet our needs for the foreseeable future.




ITEM
3.     LEGAL PROCEEDINGS.




Sun
Research Arbitration





On
November 23, 2009, Sun Research, Inc., a sales distributor for Imagenetix,
submitted a demand for arbitration with the American Arbitration Association
related to a Regional Distributor Agreement entered into on March 31,
2008.   Sun Research asserted that under the terms of the
Agreement, it was entitled to compensation from an acceleration agreement
Imagenetix entered into with a customer.  Sun Research has demanded
damages of approximately $265,625 (excluding claims for costs, interests and
attorneys fees). The Company denied the allegations and believed the claims to
be frivolous and totally devoid of merit. In April 2010, the Company and Sun
Research agreed to settle the dispute by the Company paying $82,000 to Sun
Research over a six month period.  The $82,000 was recorded as a
charge against settlement income during the fiscal year ended March 31,
2010.





13




TriPharma
Suit





On April
30, 2010, TriPharma, Inc., a customer of Imagenetix, filed a legal action
in the United States Southern District Court of California, case number
10CV0933IEG, related to an Exclusive Marketing and Supply Agreement, as amended
on June 19, 2008.   TriPharma asserts that  Imagenetix
breached the terms of the Agreement and seeks injunctive relief and unspecified
damages.  The Company denies the allegations and believes the claims
to be frivolous and totally devoid of merit. The Company has retained litigation
counsel and intends to vigorously defend the claims. The amount, if any, of
ultimate liability with respect to the foregoing cannot be determined. Despite
the inherent uncertainties of litigation, the Company at this time does not
believe that TriPharma's claim will have a material adverse impact on its
financial condition, results of operations, or cash flows.




ITEM
4.     RESERVED.




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.





The
following table sets forth the high and low closing price for the Common Stock
for the fiscal years ended March 31, 2010 and 2009:





Closing
      PriceHigh
                  
                  
                  LowFiscal
      Year Ended March 31, 2010First
      Quarter
                  
                  $
                  0.48
                  
                  
                  $
                  0.25Second
      Quarter
                  
                  $
                  0.84
                  
                  
                  $
                  0.38Third
      Quarter
                  
                  $
                  0.80
                  
                  
                  $
                  0.34Fourth
      Quarter
                  
                  $
                  0.59
                  
                  
                  $
                  0.36Fiscal
      Year Ended March 31, 2009First
      Quarter
                  
                  $
                  1.00
                  
                  
                  $
                  0.60Second
      Quarter
                  
                  $
                  0.83
                  
                  
                  $
                  0.35Third
      Quarter
                  
                  $
                  0.60
                  
                  
                  $
                  0.25Fourth
      Quarter
                  
                  $
                  0.50
                  
                  
                  $
                  0.16





We
had approximately 300 shareholders of record as of June 18, 2010. 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.





14




Recent
Sale of Unregistered Securities




In May
2010 we issued common stock and common stock purchase warrants as
follows:





Common
Stock





Date
      Stock
                      
                      
                      
                      
                      Price
      perStockholder
                      
                      Issued
                      
                      Number
      of Shares
                      
                      
                      Share
                      
                      ConsiderationLake
      Street Fund LP
                      
                      5/28/2010
                      
                      
                      500,000
                      
                      
                      $
                      0.50
                      
                      CashMidSouth
      Investor Fund LP
                      
                      5/28/2010
                      
                      
                      300,000
                      
                      
                      $
                      0.50
                      
                      Cash





Common
Stock Purchase Warrants





Name
                    
                    Date of Issuance
                    
                    Number
      of Shares
                    
                    
                    Exercise
      Price
                    
                    Expiraton
      DateJames
      & Josephine Zolin
                    
                    5/27/2010
                    
                    
                    50,000
                    
                    
                    $
                    0.50
                    
                    5/27/2015Anthony
      W. & Barbara Opperman
                    
                    5/27/2010
                    
                    
                    100,000
                    
                    
                    $
                    0.50
                    
                    5/27/2015Kim
      Vanderlinden
                    
                    5/27/2010
                    
                    
                    12,500
                    
                    
                    $
                    0.50
                    
                    5/27/2015Chris
      Lahiji
                    
                    5/27/2010
                    
                    
                    5,000
                    
                    
                    $
                    0.50
                    
                    5/27/2015Kleeman
      Family 2004 Revocable Trust
                    
                    5/27/2010
                    
                    
                    25,000
                    
                    
                    $
                    0.50
                    
                    5/27/2015Olivier
      Morin
                    
                    5/27/2010
                    
                    
                    12,500
                    
                    
                    $
                    0.50
                    
                    5/27/2015





With
respect to the above securities issuances, the Registrant relied on exemptions
provided by Section 4(2) of the Securities Act of 1933, as amended (the
“Securities Act”) and Rule 506 under the Securities Act. No advertising or
general solicitation was employed in offering the securities. The securities
were issued to a limited number of persons all of whom were accredited investors
as that term is defined in Rule 501 of Regulation D under the
Securities Act. All were capable of analyzing the merits and risks of their
investment, acknowledged in writing that they were acquiring the securities for
investment and not with a view toward distribution or resale, and understood the
speculative nature of their investment. All securities issued contained a
restrictive legend prohibiting transfer of the shares except in accordance with
federal securities laws.





The
proceeds received from the issuance of the above securities will be used for
working capital purposes.




ITEM
6.     SELECTED FINANCIAL
DATA.





Not
Applicable




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
our own branded product, Celadrin®, 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 nine 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 Accounting Standards Codification ("ASC") No.
360.  Under ASC No. 360, 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 ASC No. 360
as discussed above.





6. Stock
Based Compensation


We
adopted ASC Nos.718 and 505, which require 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) and ASC No.
605.  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. ASC No. 605 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 ASC No. 605, 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 ASC No. 605 are recorded as sales and marketing expense.
Vendor considerations recorded as a reduction of sales were $1,185,000 and
$261,000 for the years ended March 31, 2010 and 2009.




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 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.   We periodically
assess the adequacy of this policy and record a liability as
necessary.   For the year ended March 31, 2010, we recorded a
reserve of $86,000 for potential returns, allowances and product buy
backs.




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.





17




8.   Income
Taxes




We
account for income taxes in accordance with ASC No. 740.  This
statement requires an asset and liability approach for accounting for income
taxes and 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.  ASC No. 740 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.





9.   Research
and Development




We incur
expenses to further develop our products and formulas, commission entities to
perform clinical trials and evaluate potential products to expand our
portfolio.  In addition, we recently received a new patent for a drug
candidate which, if successful, will address periodontal diseases.  We
have started the initial new drug process and have completed several animal
studies.  During the years ended March 31, 2010 and 2009 we incurred
research and development expenses of $127,540 and $69,667,
respectively.




Selected
Financial Information




Results
of Operations




Year
Ended March 31, 2010 Compared to Year Ended March 31, 2009





Year
      EndedIncrease3/31/10
                
                
                3/31/09
                
                
                (Decrease)
                
                
                %Statements
      of OperationsNet
      sales
                
                $
                6,596,071
                
                
                $
                7,460,872
                
                
                $
                (864,801
                )
                
                
                -11.6
                %Cost
      of goods sold
                
                
                3,732,252
                
                
                
                4,003,303
                
                
                
                (271,051
                )
                
                
                -6.8
                %%
      of net sales
                
                
                56.6
                %
                
                
                53.7
                %
                
                
                2.9
                %
                
                
                5.5
                %Gross
      profit
                
                
                2,863,819
                
                
                
                3,457,569
                
                
                
                (593,750
                )
                
                
                -17.2
                %%
      of net sales
                
                
                43.4
                %
                
                
                46.3
                %
                
                
                -2.9
                %
                
                
                -6.3
                %Operating
      expensesGeneral
      and administrative
                
                
                2,571,080
                
                
                
                2,240,988
                
                
                
                330,092
                
                
                
                14.7
                %Payroll
      expense
                
                
                1,089,597
                
                
                
                1,076,473
                
                
                
                13,124
                
                
                
                1.2
                %Consulting
      expense
                
                
                1,481,331
                
                
                
                1,059,309
                
                
                
                422,022
                
                
                
                39.8
                %Total
      operating expenses
                
                
                5,142,008
                
                
                
                4,376,770
                
                
                
                765,238
                
                
                
                17.5
                %Interest
      expense
                
                
                (2,405
                )
                
                
                (1,741
                )
                
                
                664
                
                
                
                38.1
                %Settlement
      income
                
                
                1,168,000
                
                
                
                1,785,000
                
                
                
                (617,000
                )
                
                
                -34.6
                %Other
      income
                
                
                7,790
                
                
                
                25,012
                
                
                
                (17,222
                )
                
                
                -68.9
                %Income
      tax (expense) benefit
                
                
                407,700
                
                
                
                (459,114
                )
                
                
                866,814
                
                
                NMNet
      income (loss)
                
                
                (697,104
                )
                
                
                429,956
                
                
                
                1,127,060
                
                
                NMNet
      income (loss) per share basic and diluted
                
                
                (0.06
                )
                
                
                0.04
                
                
                
                (0.10
                )
                
                NM


18




Net
Sales




Net sales
for the year ended March 31, 2010 decreased $864,801, 11.6%, to $6,596,071
compared to $7,460,872 for the year ended March 31, 2009.  Net sales
to distributors and wholesalers decreased by approximately $2,040,000 and to our
weight loss customers by approximately $530,000.  These decreases were
partially offset by a $1,840,000 increase in net sales to the mass
market.  We anticipate the sales increases to the mass market to
continue during our next fiscal year as a result of an expanding customer base
and our continuing marketing and advertising campaigns.




Cost of Goods
Sold




Cost of
goods sold as a percentage of net sales increased from 54% for the year ended
March 31, 2009 to 57% for the year ended March 31, 2010.  This
increase was primarily due to an increase in mass market customer allowances and
promotions which are reduced from revenue and negatively impact cost of goods
sold as a percentage of net sales.




General and
Administrative




General
and administrative expenses increased by $330,092, a 14.7% increase, to
$2,571,080 for the year ended March 31, 2010 from $2,240,988 for the year ended
March 31, 2009.  The primary reasons for the increase were an
approximate increase of $158,000 of marketing costs related to introducing
Celadrin® into the mass market, $63,000 increase in research and development
expenses related to clinical studies and advancement of the periodontal drug
candidate, and a $112,000 increase in facility, insurance and travel
expenses.




Payroll
Expense




Payroll
expense increased to $1,089,597 for the year ended March 31, 2010, an increase
of 1.2% or $13,124, compared to $1,076,473 for the year ended March 31,
2009.   This increase was a result of  normal salary
and bonus increases during the current fiscal year.




Consulting
Expenses




Consulting
expenses increased to $1,481,331 for the year ended March 31, 2010, an increase
of 39.8% or $422,022, compared to $1,059,309 for the year ended March 31,
2009.  This increase was a result of  an increase of
$390,000 for product demonstrations at mass market stores, an increase of
$63,000 for investor relations activities, partially offset by a decrease in
legal expenses of $43,000.




Other
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 provided Celadrin® for
use in their products.  During the year ended March 31, 2010, we
received an additional $1,250,000 from this customer as a result of accelerating
and terminating the supply agreement which was partially offset by an $82,000
settlement with a sales distributor involved in this transaction.




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 $407,700 for the
year ended March 31, 2010 when we incurred a taxable loss.





19




Capital
Resources





Year
      EndedIncrease3/31/10
                      
                      
                      3/31/09
                      
                      
                      (Decrease)Working
      CapitalCurrent
      assets
                      
                      $
                      4,464,088
                      
                      
                      $
                      4,303,138
                      
                      
                      $
                      160,950Current
      liabilities
                      
                      
                      1,190,565
                      
                      
                      
                      530,285
                      
                      
                      
                      660,280Working
      capital
                      
                      $
                      3,273,523
                      
                      
                      $
                      3,772,853
                      
                      
                      $
                      (499,330
                      )Long-term
      debt
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Stockholders'
      equity
                      
                      $
                      3,505,258
                      
                      
                      $
                      4,053,127
                      
                      
                      $
                      (547,869
                      )Statements
      of Cash Flows Select InformationNet
      cash provided (used) by:Operating
      activities
                      
                      $
                      (277,059
                      )
                      
                      $
                      274,547
                      
                      
                      $
                      (551,606
                      )Investing
      activities
                      
                      $
                      (6,501
                      )
                      
                      $
                      (41,839
                      )
                      
                      $
                      35,338Financing
      activities
                      
                      $
                      39,347
                      
                      
                      $
                      (29,540
                      )
                      
                      $
                      68,887Balance
      Sheet Select InformationCash
      and cash equivalents
                      
                      $
                      981,510
                      
                      
                      $
                      1,225,723
                      
                      
                      $
                      (244,213
                      )Accounts
      receivable, net
                      
                      $
                      1,049,047
                      
                      
                      $
                      1,095,946
                      
                      
                      $
                      (46,899
                      )Inventory,
      net
                      
                      $
                      1,350,041
                      
                      
                      $
                      1,337,241
                      
                      
                      $
                      12,800Accounts
      payable and accrued expenses
                      
                      $
                      1,079,219
                      
                      
                      $
                      355,007
                      
                      
                      $
                      724,212





Liquidity





We have
historically financed our operations internally and through debt and equity
financings. At March 31, 2010, we had cash holdings of $981,510, a decrease of
$244,213 compared to March 31, 2009. Our net working capital position at March
31, 2010, was $3,273,523 compared to $3,772,853 as of March 31,
2009.  This decrease was primarily the result of operating losses
incurred during the year.  In May 2010, we issued common stock to two
institutional investors for $400,000 and issued bridge debentures to a group of
six individuals for $410,000.  The proceeds from these debt and equity
financings will be used to meet working capital needs particularly an increase
in inventories, accounts receivable and advertising with respect to an increased
level of sales activity to our mass market customers.  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 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Codification No. 105, FASB Accounting Standards and the
Hierarchy of Generally Accepted Accounting Principles(“ASC 105”). ASC
105 replaces SFAS 162 and establishes the FASB Accounting Standards Codification
(“Codification”) as the single source of authoritative U.S. generally accepted
accounting principles (“GAAP”) recognized by the FASB to be applied by
nongovernmental entities, except for rules and interpretive releases by the
Securities and Exchange Commission (“SEC”) which are sources of authoritative
GAAP for SEC registrants. ASC 105 and the Codification was effective for interim
and annual periods ending after September 15, 2009. We adopted ASC 105 on
July 1, 2009, and all references made to GAAP within our consolidated financial
statements now use the new Codification numbering system. The Codification does
not change or alter existing GAAP and, therefore, the adoption of ASC 105 did
not have an impact on our financial position, results of operations or cash
flows.





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





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.


21





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, 2010, 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.


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.


22




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, 2010:





Name
                  
                  Age
                  
                  PositionWilliam
      P. Spencer
                  
                  57
                  
                  Chief
      Executive Officer, President and DirectorDebra
      L. Spencer
                  
                  58
                  
                  Secretary,
      Treasurer and DirectorLowell
      W. Giffhorn
                  
                  63
                  
                  Chief
      Financial OfficerDerek
      C. Boosey
                  
                  67
                  
                  Vice
      President—InternationalJeffrey
      G. McGonegal
                  
                  59
                  
                  DirectorRobert
      Burg
                  
                  53
                  
                  DirectorBarry
      S. King
                  
                  64
                  
                  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.





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
devotes approximately 50% of his time to our affairs.


23





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 2009, Mr. Burg is the president of CMC Golf, a
worldwide leader, manufacturer, and distributor of fine golf accessories. 
Since 1998, Mr. Burg has been the owner of The Burg Group, a national sales and
marketing agency specializing in the golf 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 Great Western University in 1977.





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




Committees
of the Board of Directors





Compensation
Committee.Our Compensation Committee is currently comprised of the
following, each of whom is independent as defined under applicable NASDAQ and
SEC rules: Jeffrey G. McGonegal (Committee Chair), Robert Burg, and Barry King.
The Compensation Committee was formed in November 2010 and has not did hold any
formal meetings during the current fiscal year.





The
Compensation Committee was formed to review and recommend to the Board the
salaries, bonuses and perquisites of our executive officers. The Compensation
Committee also will review and recommend to the Board any new compensation or
retirement plans and will administer our 2000 Stock Option Plan.  The
Compensation Committee will also review and approve corporate goals and
objectives relevant to the compensation of our executive officers and evaluate
their performance in light of these goals and objectives.  The Compensation
Committee will present a charter at its first formal meeting.  The initial
charter and any changes to the charter will be recommended by the Compensation
Committee and must be approved by the Board.




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
2010, is composed of one employee director and one other director, who was
determined by the Board to be an independent director. During fiscal year 2010,
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
2010.




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, 2010 and 2009.




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
                              
                              2010
                              
                              $
                              190,846
                              
                              
                              $
                              56,400
                              
                              
                              $
                              30,450
                              
                              
                              $
                              10,802
                              
                              
                              $
                              288,498President,
      CEO and Director
                              
                              2009
                              
                              $
                              212,341
                              
                              
                              $
                              50,400
                              
                              
                              $
                              10,800
                              
                              
                              $
                              10,802
                              
                              
                              $
                              284,3432008
                              
                              $
                              178,956
                              
                              
                              $
                              30,500
                              
                              
                              $
                              20,000
                              
                              
                              $
                              9,903
                              
                              
                              $
                              239,359Debra
      L. Spencer
                              
                              2010
                              
                              $
                              98,920
                              
                              
                              $
                              22,400
                              
                              
                              $
                              12,050
                              
                              
                              $
                              10,802
                              
                              
                              $
                              144,172Secretary
      and Director
                              
                              2009
                              
                              $
                              97,032
                              
                              
                              $
                              -
                              
                              
                              $
                              7,200
                              
                              
                              $
                              10,802
                              
                              
                              $
                              115,034Derek
      Boosey
                              
                              2010
                              
                              $
                              98,492
                              
                              
                              $
                              3,000
                              
                              
                              $
                              5,700
                              
                              
                              $
                              10,802
                              
                              
                              $
                              117,994Vice
      President
                              
                              2009
                              
                              $
                              129,934
                              
                              
                              $
                              -
                              
                              
                              $
                              10,800
                              
                              
                              $
                              10,802
                              
                              
                              $
                              151,536Lowell
      W. Giffhorn
                              
                              2010
                              
                              $
                              106,700
                              
                              
                              $
                              -
                              
                              
                              $
                              5,700
                              
                              
                              $
                              -
                              
                              
                              $
                              112,400





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


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, 201230,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    0.65
                                                    
                                                    June
      25, 201315,000
                                                    
                                                    
                                                    
                                                    15,000
                                                    
                                                    
                                                    $
                                                    0.31
                                                    
                                                    June
      8, 201475,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    0.70
                                                    
                                                    November
      17, 2014Debra
      L. Spencer
                                                    
                                                    
                                                    25,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    2.00
                                                    
                                                    Aug.
      21, 2010Secretary
      and
                                                    
                                                    
                                                    18,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    1.95
                                                    
                                                    July
      1, 2010Director
                                                    
                                                    
                                                    25,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    1.30
                                                    
                                                    May
      8, 201220,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    0.65
                                                    
                                                    June
      25, 201310,000
                                                    
                                                    
                                                    
                                                    10,000
                                                    
                                                    
                                                    $
                                                    0.31
                                                    
                                                    June
      8, 201425,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    0.70
                                                    
                                                    November
      17, 2014Lowell
      W. Giffhorn
                                                    
                                                    
                                                    15,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    1.95
                                                    
                                                    July
      1, 2010CFO
                                                    
                                                    
                                                    25,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    1.30
                                                    
                                                    May
      8, 201240,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    0.65
                                                    
                                                    June
      25, 201315,000
                                                    
                                                    
                                                    
                                                    15,000
                                                    
                                                    
                                                    $
                                                    0.31
                                                    
                                                    June
      8, 2014Derek
      Boosey
                                                    
                                                    
                                                    115,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    2.00
                                                    
                                                    Aug.
      21, 2010Vice
      President
                                                    
                                                    
                                                    30,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    1.95
                                                    
                                                    July
      1, 201030,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    1.30
                                                    
                                                    May
      8, 201230,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    0.65
                                                    
                                                    June
      25, 201315,000
                                                    
                                                    
                                                    
                                                    15,000
                                                    
                                                    
                                                    $
                                                    0.31
                                                    
                                                    June
      8,
2014





Employment
Contracts





Effective
as of August 7, 2009, we entered into employment agreements with Mr. and
Mrs. Spencer and Mr. Giffhorn to serve as our President and Chief Executive
Officer, Secretary, and Chief Financial Officer, respectively (the
Employees).  These employment agreements have 24 month terms with automatic
24 month renewals. The employment agreements provide that the Employees may
voluntarily terminate their employment with a thirty day written notice to
us.  The employment agreements also provide that if the Employees are
involuntarily terminated (excluding for cause), we will pay the Employees
twenty-four months’ salary as severance pay.




The
employment agreements contain change of control provisions that provide
severance pay and other benefits in the event of a change of control. The
Agreements provide for severance payments of three times the executive’s annual
base salary in the event the executive’s employment is terminated, either
voluntarily with “good reason” or involuntarily, during the one-year period
following a change in control. Severance payments to the Employees under the
change of control provisions would be in lieu of any severance otherwise due
them under their employment agreements discussed above.


26





DIRECTOR
COMPENSATION





Name
                  
                  Fees
                  
                  
                  Option
                  
                  
                  TotalEarned
                  
                  
                  Awards
                  
                  
                  ($)or
                  
                  
                  ($)Paid InCash($)[a]
                  
                  [b]
                  
                  
                  (d)
                  
                  
                  [h]Jeffrey
      McGonegal
                  
                  $
                  10,000
                  
                  
                  $
                  950
                  
                  
                  $
                  10,950Barry
      King
                  
                  $
                  4,800
                  
                  
                  $
                  950
                  
                  
                  $
                  5,750Robert
      Burg
                  
                  $
                  7,500
                  
                  
                  $
                  950
                  
                  
                  $
                  8,450





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, 2010: dividend yield of zero percent; expected volatility
of 73% to 78%, risk-free interest rates of 2.19% to 2.95%; 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;





•
            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.


27





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 18, 2010, by (1) each person who is known by us to be the
beneficial owner of more than five percent of our common stock; (2) each of our
executive officers and directors; and (3) all of our directors and executive
officers as a group. The address of each such stockholder is in care of us at
10845 Rancho Bernardo Road, Suite 105, San Diego, California 92127.




Amount of Benefical
                  
                  
                  Percent ofName of Beneficial Owner
                  
                  Ownership (1)(2)
                  
                  
                  OwnershipWilliam
      P.and Debra L. Spencer (3)
                  
                  
                  3,083,000
                  
                  
                  
                  27.1
                  %Gary
      J. McAdam (4)
                  
                  
                  2,904,483
                  
                  
                  
                  23.3
                  %Estate
      of James Scibelli (5)
                  
                  
                  818,000
                  
                  
                  
                  7.1
                  %Barry
      S. King (6)
                  
                  
                  39,000
                  
                  
                  
                  *Robert
      Burg (7)
                  
                  
                  85,000
                  
                  
                  
                  *Jeffrey
      G. McGonegal (7)
                  
                  
                  85,000
                  
                  
                  
                  *Lowell
      W. Giffhorn (8)
                  
                  
                  130,000
                  
                  
                  
                  1.1
                  %Derek
      C. Boosey (9)
                  
                  
                  285,000
                  
                  
                  
                  2.5
                  %All
      officers and directors as a group (7 persons) (10)
                  
                  
                  3,697,000
                  
                  
                  
                  31.0
                  %


*
            Represents less than
      1%





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


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


(3)
            Comprised
      of 2,705,000 shares and 378,000 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 1,468,926 common stock purchase warrants, all of
      which are owned by entities controlled by Mr.
  McAdam.


(5)
            Includes
      370,000 shares and 448,000 common stock purchase warrants, all of which
      are owned by entities controlled by the estate of Mr.
      Scibelli.


(6)
            Comprised
      of 39,000 stock options.


(7)
            Comprised
      of 85,000 stock options.


(8)
            Comprised
      of 10,000 shares and 120,000 stock
options.


(9)
            Comprised
      of 50,000 shares and 235,000 stock
options.


(10)
            Comprised
      of 2,765,000 shares and 932,000 stock
options.


28




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
      compensation plans approved by security holders
                  
                  
                  1,589,000
                  
                  
                  $
                  1.26
                  
                  
                  
                  401,000Equity
      compensation plans not approved by security holders
                  
                  
                  3,960,707
                  
                  
                  $
                  1.15
                  
                  
                  
                  -Total
                  
                  
                  5,549,707
                  
                  
                  $
                  1.18
                  
                  
                  
                  401,000




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.




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 2009, 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 ACCOUNTANT FEES
AND SERVICES





The
following is a summary of the fees billed to Imagenetix by its principal
accountants for the fiscal years ended March 31, 2010 and 2009:


29





HJ Associates &Consultants LLPFee category
                    
                    2010
                    
                    
                    2009Audit
      fees
                    
                    $
                    49,100
                    
                    
                    $
                    51,000Audit-related
      fees
                    
                    $
                    -
                    
                    
                    $
                    -Tax
      fees
                    
                    $
                    1,368
                    
                    
                    $
                    5,891All
      other fees
                    
                    $
                    -
                    
                    
                    $
                    -Total
      fees
                    
                    $
                    50,468
                    
                    
                    $
                    56,891





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 2010.





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, 2010
filed with the Securities and Exchange Commission.


30




PART
IV




ITEM 15.   
 EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES.




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





1.
            Financial
      Statements. The following consolidated financial statements and Report of
      Independent
      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, 2010 and 2009





Consolidated
Statements of Operation- Years Ended March 31, 2010 and 2009





Consolidated
Statement of Stockholders' Equity- Years Ended March 31, 2010 and
2009





Consolidated
Statements of Cash Flows- Years Ended March 31, 2010 and 2009





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)3.04
                  
                  By
      laws, as amended (7)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)10.23
                  
                  Employment
      Agreement with William P. Spencer dated August 7, 2009
  (7)10.24
                  
                  Employment
      Agreement with Debra L. Spencer dated August 7, 2009
  (7)


31





10.25
                  
                  Engagement
      Agreement with Lowell W. Giffhorn dated August 7, 2009
  (7)14
                  
                  Code
      of Ethics (3)31.1
                  
                  302
      Certification of William P. Spencer31.2
                  
                  302
      Certification of Lowell W. Giffhorn32.1
                  
                  906
      Certification of William P. Spencer32.2
                  
                  906
      Certification of Lowell W.
Giffhorn







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





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





(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.





(7)
            Incorporated
      by reference to our Quarterly Report on Form 10-Q for the quarter ended
      June 30,  2009.


32





Index to Consolidated
Financial Statements





Report
      of Independent Registered Public Accounting Firm
                F-2Consolidated
      Balance Sheets, March 31, 2010 and 2009
                F-3Consolidated
      Statements of Operations, for the years ended March 31, 2010 and
      2009
                F-4Consolidated
      Statement of Stockholders' Equity, for the years ended March 31, 2010 and
      2009
                F-5Consolidated
      Statements of Cash Flows, for the years ended March 31, 2010 and
      2009
                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, 2010 and 2009, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended March 31, 2010.  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, 2010 and 2009, and the results of their operations
and their cash flows for each of the two years in the period ended March 31,
2010, 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,
2010, 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 18,
2010


F-2





Imagenetix,
Inc.


Consolidated
Balance Sheets





March 31,
                                  
                                  2010
                                  
                                  
                                  2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                                  
                                  $
                                  981,510
                                  
                                  
                                  $
                                  1,225,723Accounts
      receivable, net
                                  
                                  
                                  1,049,047
                                  
                                  
                                  
                                  1,095,946Inventories,
      net
                                  
                                  
                                  1,350,041
                                  
                                  
                                  
                                  1,337,241Prepaid
      expenses and other current assets
                                  
                                  
                                  150,690
                                  
                                  
                                  
                                  109,028Deferred tax asset
                                  
                                  
                                  932,800
                                  
                                  
                                  
                                  535,200Total
      current assets
                                  
                                  
                                  4,464,088
                                  
                                  
                                  
                                  4,303,138Property and equipment,net
                                  
                                  
                                  89,137
                                  
                                  
                                  
                                  115,918Long-term
      prepaid expenses
                                  
                                  
                                  18,000
                                  
                                  
                                  
                                  30,000Other
      assets
                                  
                                  
                                  124,598
                                  
                                  
                                  
                                  134,356Total Assets
                                  
                                  $
                                  4,695,823
                                  
                                  
                                  $
                                  4,583,412LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                                  
                                  $
                                  996,827
                                  
                                  
                                  $
                                  274,311Accrued
      liabilities
                                  
                                  
                                  82,392
                                  
                                  
                                  
                                  80,696Income
      tax payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  69,803Customer
      deposits
                                  
                                  
                                  25,374
                                  
                                  
                                  
                                  58,850Contract
      payable
                                  
                                  
                                  85,972
                                  
                                  
                                  
                                  43,645Short term license payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,980Total
      current liabilities
                                  
                                  
                                  1,190,565
                                  
                                  
                                  
                                  530,285Stockholders'
      equityPreferred
      stock, $.001 par value; 5,000,000 shares authorized: none
      outstanding
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Common
      stock, $.001 par value; 50,000,000 shares authorized: 11,010,788 issued
      and outstanding at March 31, 2010 and 2009
                                  
                                  
                                  11,010
                                  
                                  
                                  
                                  11,010Capital
      in excess of par value
                                  
                                  
                                  12,801,171
                                  
                                  
                                  
                                  12,651,936Accumulated deficit
                                  
                                  
                                  (9,306,923
                                  )
                                  
                                  
                                  (8,609,819
                                  )Total stockholders' equity
                                  
                                  
                                  3,505,258
                                  
                                  
                                  
                                  4,053,127Total Liabilities and Stockholders'
      Equity
                                  
                                  $
                                  4,695,823
                                  
                                  
                                  $
                                  4,583,412




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,
                                    
                                    2010
                                    
                                    
                                    2009Net
      sales
                                    
                                    $
                                    6,596,071
                                    
                                    
                                    $
                                    7,460,872Cost of sales
                                    
                                    
                                    3,732,252
                                    
                                    
                                    
                                    4,003,303Gross
      profit
                                    
                                    
                                    2,863,819
                                    
                                    
                                    
                                    3,457,569Operating
      expenses:General
      and administrative
                                    
                                    
                                    2,571,080
                                    
                                    
                                    
                                    2,240,988Payroll
      expense
                                    
                                    
                                    1,089,597
                                    
                                    
                                    
                                    1,076,473Consulting expense
                                    
                                    
                                    1,481,331
                                    
                                    
                                    
                                    1,059,309Operating expenses
                                    
                                    
                                    5,142,008
                                    
                                    
                                    
                                    4,376,770Operating (loss)
                                    
                                    
                                    (2,278,189
                                    )
                                    
                                    
                                    (919,201
                                    )Other
      income (expense):Other
      income
                                    
                                    
                                    7,790
                                    
                                    
                                    
                                    25,012Settlement
      income
                                    
                                    
                                    1,168,000
                                    
                                    
                                    
                                    1,785,000Interest expense
                                    
                                    
                                    (2,405
                                    )
                                    
                                    
                                    (1,741
                                    )Other income
                                    
                                    
                                    1,173,385
                                    
                                    
                                    
                                    1,808,271Income (loss) before income
      taxes
                                    
                                    
                                    (1,104,804
                                    )
                                    
                                    
                                    889,070Provision for (benefits from) income
      taxes
                                    
                                    
                                    (407,700
                                    )
                                    
                                    
                                    459,114Net income (loss)
                                    
                                    $
                                    (697,104
                                    )
                                    
                                    $
                                    429,956Basic and diluted income (loss) per
      share
                                    
                                    $
                                    (0.06
                                    )
                                    
                                    $
                                    0.04





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


F-4





Imagenetix,
Inc.


Consolidated
Statements of Stockholders' Equity


Years Ended March 31, 2010 and 2009Common Stock
                                
                                
                                Capital
                                  in excess
                                
                                
                                Retained
                                  Earnings
                                
                                
                                Stockholders'Shares
                                
                                
                                Amount
                                
                                
                                of Par Value
                                
                                
                                (Deficit)
                                
                                
                                EquityBalance
      April 1, 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 endedMarch 3l,
      2009
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                429,956
                                
                                
                                
                                429,956Balance
      March 31, 2009
                                
                                
                                11,010,788
                                
                                
                                
                                11,010
                                
                                
                                
                                12,651,936
                                
                                
                                
                                (8,609,819
                                )
                                
                                
                                4,053,127Value
      of stock options and warrants issued
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                149,235
                                
                                
                                
                                -
                                
                                
                                
                                149,235Net
      (loss) for the year endedMarch 3l,
      2010
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (697,104
                                )
                                
                                
                                (697,104
                                )Balance March 31, 2010
                                
                                
                                11,010,788
                                
                                
                                $
                                11,010
                                
                                
                                $
                                12,801,171
                                
                                
                                $
                                (9,306,923
                                )
                                
                                $
                                3,505,258





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,
                                
                                2010
                                
                                
                                2009Operating
      activities:Net
      income (loss)
                                
                                $
                                (697,104
                                )
                                
                                $
                                429,956Adjustments
      to reconcile net income (loss) to cash provided (used) by operating
      activities:Amortization
      and depreciation
                                
                                
                                53,140
                                
                                
                                
                                45,067Provision
      for doubtful accounts, returns and discounts
                                
                                
                                75,000
                                
                                
                                
                                (44,000
                                )Provision
      for inventory obsolescence
                                
                                
                                1,423
                                
                                
                                
                                (1,960
                                )Non
      cash expense related to issuance of warrants and stock
    options
                                
                                
                                149,235
                                
                                
                                
                                145,579Stock
      issued for services
                                
                                
                                -
                                
                                
                                
                                25,000Loss
      on sale of property and equipment
                                
                                
                                -
                                
                                
                                
                                3,643Change
      in deferred taxes
                                
                                
                                (407,700
                                )
                                
                                
                                400,497Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                                
                                
                                (28,101
                                )
                                
                                
                                (286,454
                                )(Increase)
      decrease in employee receivable
                                
                                
                                -
                                
                                
                                
                                2,409(Increase)
      decrease in inventory
                                
                                
                                (14,223
                                )
                                
                                
                                (225,436
                                )(Increase)
      decrease in other assets
                                
                                
                                (29,662
                                )
                                
                                
                                152,701Increase
      (decrease) in accounts payable
                                
                                
                                722,516
                                
                                
                                
                                (446,287
                                )Increase
      (decrease) in accrued liabilities
                                
                                
                                1,696
                                
                                
                                
                                8,395Increase
      (decrease) in income taxes payable
                                
                                
                                (69,803
                                )
                                
                                
                                69,803Increase (decrease) in customer
      deposits
                                
                                
                                (33,476
                                )
                                
                                
                                (4,366
                                )Net cash provided by (used in) operating
      activities
                                
                                
                                (277,059
                                )
                                
                                
                                274,547Investing
      activities:Purchases
      of property and equipment
                                
                                
                                (6,501
                                )
                                
                                
                                (43,464
                                )Proceeds from disposal of property and
      equipment
                                
                                
                                -
                                
                                
                                
                                1,625Net cash used in investing
      activities
                                
                                
                                (6,501
                                )
                                
                                
                                (41,839
                                )Financing
      activities:Proceeds
      from contracts payable
                                
                                
                                141,849
                                
                                
                                
                                92,219Payments
      on contracts payable
                                
                                
                                (99,522
                                )
                                
                                
                                (87,500
                                )Payments on patent license
      financed
                                
                                
                                (2,980
                                )
                                
                                
                                (34,259
                                )Net cash provided by (used in) financing
      activities
                                
                                
                                39,347
                                
                                
                                
                                (29,540
                                )Net
      increase (decrease) in cash
                                
                                
                                (244,213
                                )
                                
                                
                                203,168Cash and cash
      equivalents, beginning of
      year
                                
                                
                                1,225,723
                                
                                
                                
                                1,022,555Cash and cash
      equivalents,end of
      year
                                
                                $
                                981,510
                                
                                
                                $
                                1,225,723Supplemental
      Disclosure of Cash Flow Information:Cash
      paid during the period for:Interest
                                
                                $
                                2,405
                                
                                
                                $
                                1,741Income
      taxes
                                
                                $
                                69,803
                                
                                
                                $
                                -Non
      Cash Investing and Financing Activities:Common
      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,
2010 and 2009





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,
2010 and 2009





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 Accounting Standards Codification ("ASC") No.
360.  Under ASC No. 360, 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 ASC No. 360
as discussed above.





Stock Based
Compensation





We
adopted ASC Nos.718 and 505, which require 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,
2010 and 2009
 
 Revenue
Recognition
  We
recognize revenue in accordance with the SEC’s Staff Accounting Bulletin
No. 104, “Revenue Recognition in Financial Statements” (SAB104) and ASC No.
605.  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. ASC No. 605 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 ASC No. 605, 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 ASC No. 605 are recorded as sales and marketing expense.
Vendor considerations recorded as a reduction of sales were $1,185,000 and
$261,000 for the years ended March 31, 2010 and 2009.
  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
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.   We periodically assess
the adequacy of this policy and record a liability as necessary.   For
the year ended March 31, 2010, we recorded a reserve of $86,000 for potential
returns, allowances and product buy backs.
  F-9
  IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2010 and 2009
  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 ASC No. 740.  This statement
requires an asset and liability approach for accounting for income taxes and
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.  ASC No. 740
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.
  Research and
Development
 
 We incur
expenses to further develop our products and formulas, commission entities to
perform clinical trials and evaluate potential products to expand our
portfolio.  In addition, we recently received a new patent for a drug
candidate which, if successful, will address periodontal diseases.  We have
started the initial new drug process and have completed several animal
studies.  During the years ended March 31, 2010 and 2009 we incurred
research and development expenses of $127,540 and $69,667,
respectively.
  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 ASC No. 260
(See Note 11).
 
 New Accounting
Pronouncements
 
 In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Codification No. 105, FASB Accounting Standards and the
Hierarchy of Generally Accepted Accounting Principles(“ASC 105”). ASC
105 replaces SFAS 162 and establishes the FASB Accounting Standards Codification
(“Codification”) as the single source of authoritative U.S. generally accepted
accounting principles (“GAAP”) recognized by the FASB to be applied by
nongovernmental entities, except for rules and interpretive releases by the
Securities and Exchange Commission (“SEC”) which are sources of authoritative
GAAP for SEC registrants. ASC 105 and the Codification was effective for interim
and annual periods ending after September 15, 2009. We adopted ASC 105 on
July 1, 2009, and all references made to GAAP within our consolidated financial
statements now use the new Codification numbering system. The Codification does
not change or alter existing GAAP and, therefore, the adoption of ASC 105 did
not have an impact on our financial position, results of operations or cash
flows.
  F-10
  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 31,2010
                              
                              
                              2009Accounts
      receivable - trade
                              
                              $
                              1,185,047
                              
                              
                              $
                              1,156,946Allowance
      for doubtful accounts
                              
                              
                              (50,000
                              )
                              
                              
                              (61,000
                              )Allowance
      for returns and discounts
                              
                              
                              (86,000
                              )
                              
                              
                              -Accounts
      receivable, net
                              
                              $
                              1,049,047
                              
                              
                              $
                              1,095,946
 
 NOTE 3
–   INVENTORY
 
 Inventory
consisted of the following:
 
 March 31,2010
                        
                        
                        2009Raw
      materials
                        
                        $
                        1,032,817
                        
                        
                        $
                        802,117Finished
      products
                        
                        
                        216,099
                        
                        
                        
                        417,024Boxes,
      labels, tubes & bottles
                        
                        
                        251,130
                        
                        
                        
                        266,6821,500,046
                        
                        
                        
                        1,485,823Reserve
      for obsolescence
                        
                        
                        (150,005
                        )
                        
                        
                        (148,582
                        )$
                        1,350,041
                        
                        
                        $
                        1,337,241
 
 NOTE 4
-  PROPERTY AND EQUIPMENT
 
 The
following is a summary of equipment, at cost, less accumulated
depreciation:
 
 March 31,2010
                                
                                
                                2009Office
      equipment
                                
                                $
                                72,632
                                
                                
                                $
                                72,632Lease-hold
      improvements
                                
                                
                                180,480
                                
                                
                                
                                173,979253,112
                                
                                
                                
                                246,611Less
      accumulated depreciation
                                
                                
                                163,975
                                
                                
                                
                                130,693$
                                89,137
                                
                                
                                $
                                115,918
  F-11
  IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2010 and 2009
 
 Depreciation
expense for the year ended March 31, 2010 and 2009 was $33,281 and $34,468,
respectively.
 
 NOTE 5
–   OTHER ASSETS
 
 The
following is a summary of other assets included on the face of the balance
sheet:
 March 31,2010
                        
                        
                        2009Trademarks
                        
                        $
                        13,032
                        
                        
                        $
                        13,032Patent
                        
                        
                        172,965
                        
                        
                        
                        172,965Deferred
      tax asset
                        
                        
                        24,600
                        
                        
                        
                        14,500210,597
                        
                        
                        
                        200,497Less
      accumulated amortization
                        
                        
                        85,999
                        
                        
                        
                        66,141$
                        124,598
                        
                        
                        $
                        134,356
 
 For the
year ended March 31, 2010 and 2009 amortization expense was $19,858 and $10,599,
respectively. The estimated future amortization expense related to intangible
assets as of March 31, 2010 is as follows:
 
 Year
      Ended March 31.
                      
                      Amount2011
                      
                      
                      19,7572012
                      
                      
                      18,9552013
                      
                      
                      12,6372014
                      
                      
                      2,9982015
      and thereafter
                      
                      
                      25,792
 
 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
provided for payments of $3,000 per month from May, 2005 through April, 2009, at
which time EHP Products, Inc. conveyed ownership in the product to
us.
 
 As of
March 31, 2010 and 2009, the following obligation was outstanding related to
this license:
  F-12
  IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2010 and 2009
 
 As of March 31,2010
                      
                      
                      2009Patent
      License and Royalty Payable
                      
                      $
                      -
                      
                      
                      $
                      2,980Less
      current portion
                      
                      
                      -
                      
                      
                      
                      2,980Long
      term license payable
                      
                      $
                      -
                      
                      
                      $
                      -
 
 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
2010.  Lease expense for the years ended March 31, 2010 and 2009 amounted
to $161,592 and $165,782, respectively. The following is a schedule of minimum
annual rental payments for the next five years.
 
 Years
      ending March 31,2011
                                
                                
                                143,2062012
                                
                                
                                148,2182013
                                
                                
                                114,056Thereafter
                                
                                
                                -Total
      minimum lease payments
                                
                                $
                                405,480
 
 NOTE 8
–  COMMITMENTS AND CONTINGINCIES
 
 Sun
Research Arbitration
 
 On
November 23, 2009, Sun Research, Inc., a sales distributor for Imagenetix,
submitted a demand for arbitration with the American Arbitration Association
related to a Regional Distributor Agreement entered into on March 31,
2008.   Sun Research asserted that under the terms of the Agreement,
it was entitled to compensation from an acceleration agreement Imagenetix
entered into with a customer.  Sun Research has demanded damages of
approximately $265,625 (excluding claims for costs, interests and attorneys
fees). The Company denied the allegations and believed the claims to be
frivolous and totally devoid of merit. In April 2010, the Company and Sun
Research agreed to settle the dispute by the Company paying $82,000 to Sun
Research over a six month period.  The $82,000 was recorded as a charge
against settlement income during the fiscal year ended March 31,
2010.
  F-13
  IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2010 and 2009
 
 TriPharma
Suit
 
 On April
30, 2010, TriPharma, Inc., a customer of Imagenetix, filed a legal action
in the United States Southern District Court of California, case number
10CV0933IEG, related to an Exclusive Marketing and Supply Agreement, as amended
on June 19, 2008.   TriPharma asserts that  Imagenetix breached
the terms of the Agreement and seeks injunctive relief and unspecified
damages.  The Company denies the allegations and believes the claims to be
frivolous and totally devoid of merit. The Company has retained litigation
counsel and intends to vigorously defend the claims. The amount, if any, of
ultimate liability with respect to the foregoing cannot be determined. Despite
the inherent uncertainties of litigation, the Company at this time does not
believe that TriPharma's claim will have a material adverse impact on its
financial condition, results of operations, or cash flows.
 
 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, 2010 and 2009.
 
 Common
Stock
 
 The
Company has authorized 50,000,000 shares of common stock at $.001 par value. At
March 31, 2010 and 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.
  F-14
  IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2010 and 2009
 
 Warrants
 
 A summary
of the status of the warrants granted under various agreements at March 31, 2010
and 2009, and changes during the years then ended is presented
below:
 
 WarrantsWeighted
                                                                  
                                                                  
                                                                  WeightedAverage
                                                                  
                                                                  
                                                                  AverageExercise
                                                                  
                                                                  
                                                                  FairShares
                                                                  
                                                                  
                                                                  Price
                                                                  
                                                                  
                                                                  ValueOutstanding,
      April 1, 2008
                                                                  
                                                                  
                                                                  3,902,957
                                                                  
                                                                  
                                                                  
                                                                  1.18Granted
                                                                  
                                                                  
                                                                  175,000
                                                                  
                                                                  
                                                                  
                                                                  1.04
                                                                  
                                                                  
                                                                  $
                                                                  0.23Exercised
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -Outstanding,
      March 31, 2009
                                                                  
                                                                  
                                                                  4,077,957
                                                                  
                                                                  
                                                                  $
                                                                  1.18Granted
                                                                  
                                                                  
                                                                  300,000
                                                                  
                                                                  
                                                                  
                                                                  0.70
                                                                  
                                                                  
                                                                  $
                                                                  0.39Expired
                                                                  
                                                                  
                                                                  (417,250
                                                                  )
                                                                  
                                                                  
                                                                  1.08Exercised
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -Outstanding,
      March 31, 2010
                                                                  
                                                                  
                                                                  3,960,707
                                                                  
                                                                  
                                                                  $
                                                                  1.15Exercisable,
      March 31, 2009
                                                                  
                                                                  
                                                                  4,077,957
                                                                  
                                                                  
                                                                  $
                                                                  1.18Exercisable,
      March 31, 2010
                                                                  
                                                                  
                                                                  3,960,707
                                                                  
                                                                  
                                                                  $
                                                                  1.15
 
 During
the year ended March 31, 2010, we issued warrants to three individuals for
services valued at $117,947 of which we expensed $63,033 to general and
administrative expenses during the current fiscal year and we will amortize the
balance over the remaining term of the service contracts. 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, 2010: dividend yield of zero percent; expected
volatility of 78%, risk-free interest rates ranging from 2.16% to 2.20%; and
expected lives of 5 years.
 
 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 during the fiscal year ended
March 31, 2009. 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 of 56% to 61%, risk-free interest
rates ranging from  3.12% to 3.36%; and expected lives of 5
years.
 
 A summary
of the status of the warrants granted under the various agreements at March 31,
2010, are presented in the table below:
  F-15
  IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2010 and 2009
 
 Outstanding
                            
                            
                            ExercisableWeightedAverage
                            
                            
                            Weighted
                            
                            
                            
                            
                            
                            WeightedRange
      of
                            
                            
                            
                            
                            
                            Remaining
                            
                            
                            Average
                            
                            
                            
                            
                            
                            AverageExercise
                            
                            
                            Number
                            
                            
                            Contractual
                            
                            
                            Exercise
                            
                            
                            Number
                            
                            
                            ExercisePrices
                            
                            
                            Outstanding
                            
                            
                            Life
                            
                            
                            Price
                            
                            
                            Exercisable
                            
                            
                            PriceWarrants$
                            0.65-0.95
                            
                            
                            
                            1,418,210
                            
                            
                            
                            1.51
                            
                            
                            $
                            0.83
                            
                            
                            
                            1,418,210
                            
                            
                            $
                            0.83$
                            1.00-1.05
                            
                            
                            
                            1,530,000
                            
                            
                            
                            0.56
                            
                            
                            $
                            1.05
                            
                            
                            
                            1,530,000
                            
                            
                            $
                            1.05$
                            1.20-1.70
                            
                            
                            
                            480,000
                            
                            
                            
                            1.76
                            
                            
                            $
                            1.39
                            
                            
                            
                            480,000
                            
                            
                            $
                            1.39$
                            1.95
                            
                            
                            
                            457,500
                            
                            
                            
                            0.53
                            
                            
                            $
                            1.95
                            
                            
                            
                            457,500
                            
                            
                            $
                            1.95$
                            2.33-3.45
                            
                            
                            
                            74,997
                            
                            
                            
                            0.17
                            
                            
                            $
                            2.85
                            
                            
                            
                            74,997
                            
                            
                            $
                            2.853,960,707
                            
                            
                            
                            1.04
                            
                            
                            $
                            1.15
                            
                            
                            
                            3,960,707
                            
                            
                            $
                            1.15
 
 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 2.0 million shares underlying stock options for
issuance, of which 1,599,000 options have been granted to executive officers,
employees and consultants at prices ranging from $0.31 to $2.35 per share. The
Plan is administered by the Compensation Committee, who determines which
individuals shall receive stock options, the time period during which the stock
options may be exercised, the number of shares of common stock that may be
purchased under each stock option and the stock option price.
  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.
  F-16
  IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2010 and 2009
  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, 2010 and 2009
there were options granted to purchase up to 340,000 and 305,000, 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
at March 31, 2010 and 2009, and changes during the years then ended is presented
below:
 
 OptionsWeighted
                                              
                                              
                                              WeightedAverage
                                              
                                              
                                              AverageExercise
                                              
                                              
                                              FairShares
                                              
                                              
                                              Price
                                              
                                              
                                              ValueOutstanding,
      April 1, 2008
                                              
                                              
                                              944,000
                                              
                                              
                                              $
                                              1.76Granted
                                              
                                              
                                              305,000
                                              
                                              
                                              $
                                              0.65
                                              
                                              
                                              $
                                              0.36Cancelled
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Exercised
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Outstanding,
      March 31, 2009
                                              
                                              
                                              1,249,000
                                              
                                              
                                              $
                                              1.49Granted
                                              
                                              
                                              340,000
                                              
                                              
                                              $
                                              0.42
                                              
                                              
                                              $
                                              0.23Cancelled
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Exercised
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Outstanding,
      March 31, 2010
                                              
                                              
                                              1,589,000
                                              
                                              
                                              $
                                              1.26Exercisable,
      March 31, 2009
                                              
                                              
                                              1,096,500
                                              
                                              
                                              $
                                              1.61Exercisable,
      March 31, 2010
                                              
                                              
                                              1,469,000
                                              
                                              
                                              $
                                              1.34
 
 A summary
of the status of the options granted under the stock option plan at March 31,
2010, are presented in the table below:
  F-17
  IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2010 and 2009
 
 Outstanding
                            
                            
                            ExercisableWeightedAverage
                            
                            
                            Weighted
                            
                            
                            
                            
                            
                            WeightedRange
      of
                            
                            
                            
                            
                            
                            Remaining
                            
                            
                            Average
                            
                            
                            
                            
                            
                            AverageExercise
                            
                            
                            Number
                            
                            
                            Contractual
                            
                            
                            Exercise
                            
                            
                            Number
                            
                            
                            ExercisePrices
                            
                            
                            Outstanding
                            
                            
                            Life
                            
                            
                            Price
                            
                            
                            Exercisable
                            
                            
                            PriceOptions$
                            0.31
                            
                            
                            
                            240,000
                            
                            
                            
                            4.19
                            
                            
                            $
                            0.31
                            
                            
                            
                            120,000
                            
                            
                            $
                            0.31$
                            0.65-0.70
                            
                            
                            
                            405,000
                            
                            
                            
                            3.58
                            
                            
                            $
                            0.66
                            
                            
                            
                            405,000
                            
                            
                            $
                            0.66$
                            1.30
                            
                            
                            
                            350,000
                            
                            
                            
                            2.09
                            
                            
                            $
                            1.30
                            
                            
                            
                            350,000
                            
                            
                            $
                            1.30$
                            1.95
                            
                            
                            
                            249,000
                            
                            
                            
                            0.25
                            
                            
                            $
                            1.95
                            
                            
                            
                            249,000
                            
                            
                            $
                            1.95$
                            2.00-
      2.35
                            
                            
                            
                            345,000
                            
                            
                            
                            0.41
                            
                            
                            $
                            2.10
                            
                            
                            
                            345,000
                            
                            
                            $
                            2.10
 
 NOTE 10
-  INCOME TAXES
 
 At March
31, 2010 and 2009, the total of all deferred tax assets was approximately
$957,400 and $549,700, respectively. There are no deferred tax liabilities for
either year.
 
 The
temporary differences gave rise to the following deferred tax
asset:
 
 March 31,2010
                      
                      
                      2009Excess
      of financial accounting over tax depreciation
                      
                      $
                      24,600
                      
                      
                      $
                      14,500State
      income tax benefits
                      
                      
                      293,000
                      
                      
                      
                      213,100Net
      operating loss carryforward
                      
                      
                      435,300
                      
                      
                      
                      143,800Allowance
      for obsolete inventory
                      
                      
                      59,700
                      
                      
                      
                      59,200Allowance
      for bad debts, returns and discounts
                      
                      
                      54,200
                      
                      
                      
                      24,300Research
      and development credit carryforwards
                      
                      
                      73,900
                      
                      
                      
                      70,100Charitable
      contribution carryforwards
                      
                      
                      6,900
                      
                      
                      
                      15,700Vacation
      accrual
                      
                      
                      9,800
                      
                      
                      
                      9,000Net
      deferred tax asset
                      
                      $
                      957,400
                      
                      
                      $
                      549,700
 
 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:
  F-18
  IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2010 and 2009
 
 March 31,
                    
                    2010
                    
                    
                    2009Federal
      income tax expense (benefit) computed at the Federal statutory
      rate
                    
                    $
                    (375,600
                    )
                    
                    $
                    302,284State
      income tax expense (benefit) net of Federal benefit
                    
                    
                    (83,300
                    )
                    
                    
                    58,617Other-
      permanent differences
                    
                    
                    51,200
                    
                    
                    
                    98,213Income
      tax expense (benefit)
                    
                    $
                    (407,700
                    )
                    
                    $
                    459,114
 
 The
components of federal income tax (benefit) expense from continuing operations
consisted of the following for the year ended:
 
 March 31,2010
                    
                    
                    2009Current
      income tax expense (benefit):Federal
                    
                    $
                    -
                    
                    
                    $
                    (11,186
                    )State
                    
                    
                    -
                    
                    
                    
                    69,803Net
      current tax expense (benefit)
                    
                    $
                    -
                    
                    
                    $
                    58,617Deferred
      tax expense (benefit) resulted from:Difference
      between financial accounting and tax
depreciation
                    
                    $
                    (10,127
                    )
                    
                    $
                    3,298State
      income tax benefits
                    
                    
                    (77,585
                    )
                    
                    
                    (5,640
                    )Net
      operating (loss) income
                    
                    
                    (278,057
                    )
                    
                    
                    393,289Research
      and development credits
                    
                    
                    (3,785
                    )
                    
                    
                    -Allowance
      for obsolete inventory
                    
                    
                    (567
                    )
                    
                    
                    781Charitable
      contributions
                    
                    
                    (6,937
                    )
                    
                    
                    (7,443
                    )Vacation
      accrual
                    
                    
                    (769
                    )
                    
                    
                    (1,313
                    )Allowance
      for bad debts, returns and discounts
                    
                    
                    (29,873
                    )
                    
                    
                    17,525Net
      deferred tax expense (benefit)
                    
                    $
                    (407,700
                    )
                    
                    $
                    400,497$
                    (407,700
                    )
                    
                    $
                    459,114
 
 Deferred
income tax expense (benefit) results primarily from the reversal of temporary
timing differences between tax and financial statement income.
 
 At March
31, 2010, the Company has net operating loss carry forwards for income tax
reporting purposes of approximately $1,280,000 and $3,231,782 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, 2017. 
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
taxable income for the year ended March 31, 2009, we paid $69,803 of state
income tax expense.
  F-19
  IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2010 and 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, 2010, 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 likely
that its deferred tax assets would be realized and has not recorded a valuation
allowance associated with its deferred tax assets.
  The
Company has adopted ASC No. 740.  This statement requires an asset and
liability approach for accounting for income taxes and 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.  ASC No. 740 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 ASC No. 740, 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, 2010.  The following table summarizes
the open tax years for each major jurisdiction:
 
 Jurisdiction
                        
                        Open Tax
                          YearsFederal
                        
                        2007
      – 2010California
                        
                        2007
      – 2010
 
 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-20
  IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2010 and 2009
 
 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 31,2010
                      
                      
                      2009Income
      (loss) available to common shareholders (Numerator)
                      
                      $
                      (697,104
                      )
                      
                      $
                      429,956Weighted
      average number of common shares outstanding used in basic income per share
      during the period (Denominator)
                      
                      
                      11,010,788
                      
                      
                      
                      10,991,473Weighted
      average number of common shares outstanding used in diluted income per
      share during the period (Denominator)
                      
                      
                      11,010,788
                      
                      
                      
                      11,009,841
 
 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, 2010, we had two significant customers which accounted
for 42% and 15% of sales.
 
 During
the year ended March 31, 2009, we had three significant customers which
accounted for 23%, 19% and 17% 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 account for
approximately 72% of our sales.  The interruption of raw materials provided
by this supplier or the loss of a significant customer would adversely affect
our business and financial condition.
  F-21
  IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2010 and 2009
 
 During
the year ended March 31, 2010, we had three significant vendors who accounted
for 13%, 12% and 10% of cost of sales.
 
 During
the year ended March 31, 2009, we had two significant vendors who accounted for
39% and 23% of cost of sales.
 
 Accounts
Receivable
 
 At March
31, 2010, we had three customers which accounted for 48%, 21%, and 10% of our
accounts receivable balances.
 
 At March
31, 2009, we had four customers which accounted for 29%, 26%, 17% and 15% 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.
 
 In September 2009, we entered into an
agreement with the company whereby they bought out the remaining order
commitments under the supply agreement.  As part of the buyout agreement,
we agreed to a one time payment of $1,250,000 to satisfy their purchase
commitments which were scheduled to continue through May 2013.  Also, as
part of the agreement, we were not required to ship any product.  The
negotiated amount was reflected as other income during the year ended March 31,
2010.In April
2010, the Company settled a dispute with a sales distributor involved in this
transaction by agreeing to pay $82,000 to the distributor over a six month
period.  The $82,000 was recorded as a charge against settlement income
during the fiscal year ended March 31, 2010.
 
 NOTE 14 –
SUBSEQUENT EVENTS AND FINANCIAL STATEMENT DISCLOSURES
 
 In May
2010, we entered into convertible bridge debentures with attached warrants with
a group of six individuals for an aggregated amount of $410,000.  Under the
terms of the debentures, the debenture holders will receive 7% interest payable
in cash quarterly, we have the right to call the notes through November 25, 2010
conditioned on us paying a premium of 7% cash. The debenture holders have
the right to convert the notes into common stock at a conversion price of $.050
per share if the notes are not called previous to November 25, 2010. The
debenture holders received initial five year warrants equal to one-half warrant
for each dollar invested and, if the debentures are not called previous to
November 25, 2010, will receive an additional like number of warrant shares each
with an exercise price of $0.50 per warrant share.
 
 In May
2010, we issued 800,000 shares of restricted common stock to two institutional
investors for an aggregated amount of $400,000, or $0.50 per
share.
  F-22
  IMAGENETIX,
INC.
 Notes to
the Consolidated Financial Statements (Continued)
 March 31,
2010 and 2009
  We have
evaluated subsequent events under the provisions of ASC 855.  Based upon
this evaluation, we have determined that no material subsequent events occurred
that require recognition or disclosure in the financial statements other than
those already disclosed above or in note 8 to our consolidated financial
statements titled, “Commitments and Contingencies.”
  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
      18, 2010William
      P. Spencer
                      
                      President
      and Director/s/ DEBRA L. SPENCER
                      
                      Secretary,
      Treasurer, and Director
                      
                      June
      18, 2010Debra
      L. Spencer/s/ BARRY S. KING
                      
                      Director
                      
                      June
      18, 2010Barry
      S. King/s/ JEFFREY G. MC GONEGAL
                      
                      Director
                      
                      June
      18, 2010Jeffrey
      McGonegal/s/ ROBERT BURG
                      
                      Director
                      
                      June
      18, 2010Robert
      Burg/s/ LOWELL W. GIFFHORN
                      
                      Chief
      Financial Officer (Principal
                      
                      June
      18, 2010Lowell
      W. Giffhorn
                      
                      Accounting
      Officer)
  F-24