UNITED STATES
                                                  SECURITIES
      AND EXCHANGE COMMISSIONWASHINGTON, DC 20549FORM
      10-Q





x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
quarterly period ended December 31, 2009




o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
transition period from _________________ to
________________________.




Commission
File Number 0-14983




NUTRITION 21,
INC.


(Exact
Name of Registrant as Specified in its Charter)





New
      York
              11-2653613(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)





4
      Manhattanville RoadPurchase,
      New York
              10577-2197(Address
      of Principal Executive Offices)
              (Zip
      Code)





(914)
701-4500


(Registrant's
telephone number, including Area Code)





None


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve (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 ninety (90) days


Yes    x       No   o





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 o     No    o





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





Large
accelerated filer o   Accelerated
filer  o   Non-accelerated
filer  o   Smaller
Reporting Company x





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


Yes o     No    x





Indicate
the number of shares outstanding of Registrant's Common Stock as of the latest
practicable date.





Class
                Outstanding at February 12,
      2010Common
      Stock, $0.005 par value per share
                83,241,563
      shares





NUTRITION
21, INC.





INDEX





PAGEPART
      I
                              FINANCIAL
      INFORMATIONITEM
      1
                              Financial
      Statements(a)
                              Condensed
      Consolidated Balance Sheets at December 31, 2009 (unaudited) and June 30,
      2009
                              3(b)
                              Condensed
      Consolidated Statements of Operations for the three and six month periods
      ended December 31, 2009 and 2008 (unaudited)
                              5(c)
                              Condensed
      Consolidated Statement of Stockholders’ Deficit for the six month period
      ended December 31, 2009 (unaudited)
                              6(d)
                              Condensed
      Consolidated Statements of Cash Flows for the six month periods ended
      December 31, 2009 and 2008 (unaudited)
                              7(e)
                              Notes
      to Condensed Consolidated Financial Statements (unaudited)
                              8ITEM
      2
                              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                              12ITEM
      3
                              Quantitative
      and Qualitative Disclosures About Market Risk
                              14ITEM
      4(T)
                              Controls
      and Procedures
                              15PART
      II
                              OTHER
      INFORMATIONITEM
      4
                              Submission
      of Matters to a Vote of Security Holders
                              16ITEM
      6
                              Exhibits
                              16




2


NUTRITION
21, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(in
thousands, except share and per share data)





December31,
                      2009
                    
                    
                    June 30,
                      2009(unaudited)
                    
                    
                    (Note 1)ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    164
                    
                    
                    $
                    1,373Restricted
      cash
                    
                    
                    100
                    
                    
                    
                    —Accounts
      receivable (less allowances for doubtful accounts and returns of $1,697
      and $327 at December 31, 2009 and June 30, 2009,
    respectively)
                    
                    
                    1,214
                    
                    
                    
                    2,752Other
      receivables
                    
                    
                    119
                    
                    
                    
                    516Inventories
                    
                    
                    171
                    
                    
                    
                    3,878Prepaid
      expenses and other current assets
                    
                    
                    208
                    
                    
                    
                    467Total
      current assets
                    
                    
                    1,976
                    
                    
                    
                    8,986Property
      and equipment, net
                    
                    
                    41
                    
                    
                    
                    46Patents,
      trademarks and other amortizable intangibles (net of accumulated
      amortization of $26,800 and $26,643 at December 31, 2009 and June 30,
      2009, respectively)
                    
                    
                    720
                    
                    
                    
                    766Goodwill
                    
                    
                    —
                    
                    
                    
                    636Other
      intangibles with indefinite lives
                    
                    
                    —
                    
                    
                    
                    3,000Other
      assets
                    
                    
                    541
                    
                    
                    
                    1,389TOTAL
      ASSETS
                    
                    $
                    3,278
                    
                    
                    $
                    14,823





See accompanying notes to condensed
consolidated financial statements.


3


NUTRITION
21, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(in
thousands, except share and per share data)





December 31,
                                    2009
                                  
                                  
                                  June 30,
                                    2009(unaudited)
                                  
                                  
                                  (Note 1)LIABILITIES AND STOCKHOLDERS’ DEFICITLIABILITIESCurrent
      liabilities:Short-term
      borrowings
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  4,457Accounts
      payable
                                  
                                  
                                  884
                                  
                                  
                                  
                                  4,439Accrued
      expenses
                                  
                                  
                                  1,458
                                  
                                  
                                  
                                  2,218Deferred
      income
                                  
                                  
                                  —
                                  
                                  
                                  
                                  361Total
      current liabilities
                                  
                                  
                                  2,342
                                  
                                  
                                  
                                  11,475Deferred
      income taxes
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,2008%
      Series J convertible preferred stock subject to mandatory redemption
      (redemption value $17,750 at December 31, 2009 and June 30,
      2009)
                                  
                                  
                                  14,113
                                  
                                  
                                  
                                  13,218Total
      liabilities
                                  
                                  
                                  16,455
                                  
                                  
                                  
                                  25,893Commitments
      and contingenciesSTOCKHOLDERS’
      DEFICIT:Preferred
      stock, $0.01 par value, authorized 5,000,000 shares, 100,000 shares
      designated as Series H, none issued and outstanding; 17,750 shares
      designated as Series J convertible preferred stock issued and outstanding
      at December 31, 2009 and June 30, 2009 (see liabilities
    above)
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Common
      stock, $0.005 par value, authorized 150,000,000 shares; 75,142,091 shares
      and 71,231,450 issued and outstanding at December 31, 2009 and June 30,
      2009, respectively
                                  
                                  
                                  373
                                  
                                  
                                  
                                  353Additional
      paid-in capital
                                  
                                  
                                  118,456
                                  
                                  
                                  
                                  117,761Accumulated
      deficit
                                  
                                  
                                  (132,006
                                  )
                                  
                                  
                                  (129,184
                                  )Total
      stockholders’ deficit
                                  
                                  
                                  (13,177
                                  )
                                  
                                  
                                  (11,070
                                  )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
                                  
                                  $
                                  3,278
                                  
                                  
                                  $
                                  14,823





See accompanying notes to condensed
consolidated financial statements.


4


NUTRITION
21, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(in
thousands, except share and per share data)


(unaudited)





Three Months
                                                                            
                                                                            
                                                                            Six MonthsEnded
                                                                            
                                                                            
                                                                            EndedDecember 31,
                                                                            
                                                                            
                                                                            December 31,2009
                                                                            
                                                                            
                                                                            2008
                                                                            
                                                                            
                                                                            2009
                                                                            
                                                                            
                                                                            2008Net
      sales
                                                                            
                                                                            $
                                                                            1,977
                                                                            
                                                                            
                                                                            $
                                                                            1,491
                                                                            
                                                                            
                                                                            $
                                                                            4,194
                                                                            
                                                                            
                                                                            $
                                                                            3,341Other
      revenues
                                                                            
                                                                            
                                                                            81
                                                                            
                                                                            
                                                                            
                                                                            77
                                                                            
                                                                            
                                                                            
                                                                            176
                                                                            
                                                                            
                                                                            
                                                                            128TOTAL
      REVENUES
                                                                            
                                                                            
                                                                            2,058
                                                                            
                                                                            
                                                                            
                                                                            1,568
                                                                            
                                                                            
                                                                            
                                                                            4,370
                                                                            
                                                                            
                                                                            
                                                                            3,469COSTS
      AND EXPENSESCost
      of revenues
                                                                            
                                                                            
                                                                            431
                                                                            
                                                                            
                                                                            
                                                                            403
                                                                            
                                                                            
                                                                            
                                                                            955
                                                                            
                                                                            
                                                                            
                                                                            821Advertising
      and promotion expenses
                                                                            
                                                                            
                                                                            185
                                                                            
                                                                            
                                                                            
                                                                            140
                                                                            
                                                                            
                                                                            
                                                                            351
                                                                            
                                                                            
                                                                            
                                                                            279General
      and administrative expenses
                                                                            
                                                                            
                                                                            882
                                                                            
                                                                            
                                                                            
                                                                            961
                                                                            
                                                                            
                                                                            
                                                                            1,862
                                                                            
                                                                            
                                                                            
                                                                            1,759Research
      and development expenses
                                                                            
                                                                            
                                                                            102
                                                                            
                                                                            
                                                                            
                                                                            92
                                                                            
                                                                            
                                                                            
                                                                            181
                                                                            
                                                                            
                                                                            
                                                                            173Depreciation
      and amortization
                                                                            
                                                                            
                                                                            59
                                                                            
                                                                            
                                                                            
                                                                            284
                                                                            
                                                                            
                                                                            
                                                                            164
                                                                            
                                                                            
                                                                            
                                                                            646TOTAL
      COSTS AND EXPENSES
                                                                            
                                                                            
                                                                            1,659
                                                                            
                                                                            
                                                                            
                                                                            1,880
                                                                            
                                                                            
                                                                            
                                                                            3,513
                                                                            
                                                                            
                                                                            
                                                                            3,678OPERATING
      INCOME (LOSS)
                                                                            
                                                                            
                                                                            399
                                                                            
                                                                            
                                                                            
                                                                            (312
                                                                            )
                                                                            
                                                                            
                                                                            857
                                                                            
                                                                            
                                                                            
                                                                            (209
                                                                            )Interest
      income
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            34
                                                                            
                                                                            
                                                                            
                                                                            2
                                                                            
                                                                            
                                                                            
                                                                            78Interest
      expense
                                                                            
                                                                            
                                                                            (939
                                                                            )
                                                                            
                                                                            
                                                                            (1,135
                                                                            )
                                                                            
                                                                            
                                                                            (1,940
                                                                            )
                                                                            
                                                                            
                                                                            (2,277
                                                                            )LOSS
      FROM CONTINUING OPERATIONS
                                                                            
                                                                            
                                                                            (540
                                                                            )
                                                                            
                                                                            
                                                                            (1,413
                                                                            )
                                                                            
                                                                            
                                                                            (1,081
                                                                            )
                                                                            
                                                                            
                                                                            (2,408
                                                                            )Income
      taxes
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —LOSS
      FROM CONTINUING OPERATIONS
                                                                            
                                                                            
                                                                            (540
                                                                            )
                                                                            
                                                                            
                                                                            (1,413
                                                                            )
                                                                            
                                                                            
                                                                            (1,081
                                                                            )
                                                                            
                                                                            
                                                                            (2,408
                                                                            )DISCONTINUED
      OPERATIONSLoss
      on sale of discontinued operations net of tax
                                                                            
                                                                            
                                                                            (2,140
                                                                            )
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            (2,140
                                                                            )
                                                                            
                                                                            
                                                                            —Income
      from discontinued operations net of tax
                                                                            
                                                                            
                                                                            501
                                                                            
                                                                            
                                                                            
                                                                            1,515
                                                                            
                                                                            
                                                                            
                                                                            399
                                                                            
                                                                            
                                                                            
                                                                            2,724(Loss)
      income from discontinued operations
                                                                            
                                                                            
                                                                            (1,639
                                                                            )
                                                                            
                                                                            
                                                                            1,515
                                                                            
                                                                            
                                                                            
                                                                            (1,741
                                                                            )
                                                                            
                                                                            
                                                                            2,724NET
      (LOSS) INCOME
                                                                            
                                                                            $
                                                                            (2,179
                                                                            )
                                                                            
                                                                            $
                                                                            102
                                                                            
                                                                            
                                                                            $
                                                                            (2,822
                                                                            )
                                                                            
                                                                            $
                                                                            316Loss
      per common share: continuing operations
                                                                            
                                                                            $
                                                                            (0.01
                                                                            )
                                                                            
                                                                            $
                                                                            (0.02
                                                                            )
                                                                            
                                                                            $
                                                                            (0.02
                                                                            )
                                                                            
                                                                            $
                                                                            (0.04
                                                                            )(Loss)
      income per common share: discontinued
    operations
                                                                            
                                                                            $
                                                                            (0.02
                                                                            )
                                                                            
                                                                            $
                                                                            0.02
                                                                            
                                                                            
                                                                            $
                                                                            (0.02
                                                                            )
                                                                            
                                                                            $
                                                                            0.04Net
      (loss) income per common share
                                                                            
                                                                            $
                                                                            (0.03
                                                                            )
                                                                            
                                                                            $
                                                                            0.00
                                                                            
                                                                            
                                                                            $
                                                                            (0.04
                                                                            )
                                                                            
                                                                            $
                                                                            0.00Weighted
      average number of common shares – basic and diluted
                                                                            
                                                                            
                                                                            75,022,746
                                                                            
                                                                            
                                                                            
                                                                            65,379,399
                                                                            
                                                                            
                                                                            
                                                                            74,389,404
                                                                            
                                                                            
                                                                            
                                                                            64,949,221





See accompanying notes to condensed
consolidated financial statements.


5


NUTRITION
21, INC.


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT


(in
thousands, except share data)


(unaudited)





Common Stock
                                                                    
                                                                    Additional
                                                                      Paid-In
                                                                      Capital
                                                                    
                                                                    Accumulated
                                                                      Deficit
                                                                    
                                                                    
                                                                    TotalShares
                                                                    
                                                                    
                                                                    $
                                                                    
                                                                    $
                                                                    
                                                                    $
                                                                    
                                                                    
                                                                    $ ­Balance
      at June 30, 2009
                                                                    
                                                                    
                                                                    71,231,450
                                                                    
                                                                    
                                                                    
                                                                    353
                                                                    
                                                                    
                                                                    117,761
                                                                    
                                                                    
                                                                    (129,184
                                                                    )
                                                                    
                                                                    
                                                                    (11,070
                                                                    )Issuance
      of common stock for dividends on Series J preferred stock
                                                                    
                                                                    
                                                                    3,950,000
                                                                    
                                                                    
                                                                    
                                                                    20
                                                                    
                                                                    
                                                                    690
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    710Stock-based
      compensation expense
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    5
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    5Cancellation
      of restricted stock
                                                                    
                                                                    
                                                                    (39,359
                                                                    )
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —Net
      loss for the period
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    (2,822
                                                                    )
                                                                    
                                                                    
                                                                    (2,822
                                                                    )Balance
      at December 31, 2009
                                                                    
                                                                    
                                                                    75,142,091
                                                                    
                                                                    
                                                                    $
                                                                    373
                                                                    
                                                                    $
                                                                    118,456
                                                                    
                                                                    $
                                                                    (132,006
                                                                    )
                                                                    
                                                                    $
                                                                    (13,177
                                                                    )





See accompanying notes to condensed
consolidated financial statements.




6





NUTRITION
21, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
thousands)


(unaudited)





Six Months Ended
                                  December 31,2009
                                
                                
                                2008Cash
      flows from operating activities:Net
      (loss) income
                                
                                $
                                (2,822
                                )
                                
                                $
                                316Adjustments
      to reconcile net (loss) income to net cash provided by (used in) operating
      activities:Depreciation
      of property and equipment
                                
                                
                                8
                                
                                
                                
                                16Amortization
      of intangibles
                                
                                
                                156
                                
                                
                                
                                630Accretion
      of preferred stock and amortization of deferred financing
      costs
                                
                                
                                1,244
                                
                                
                                
                                1,184Accretion
      on note payable to Iceland Health
                                
                                
                                —
                                
                                
                                
                                36Convertible
      preferred stock dividends paid in common stock charged as
                                  interest
      expense
                                
                                
                                710
                                
                                
                                
                                818Stock-based
      compensation expense
                                
                                
                                5
                                
                                
                                
                                210Loss
      on sale of discontinued operations
                                
                                
                                2,140
                                
                                
                                
                                —Changes
      in operating assets and liabilities:Accounts
      receivable
                                
                                
                                1,189
                                
                                
                                
                                (4,105
                                )Other
      receivables
                                
                                
                                397
                                
                                
                                
                                (36
                                )Inventories
                                
                                
                                2,306
                                
                                
                                
                                (592
                                )Prepaid
      expenses and other current assets
                                
                                
                                259
                                
                                
                                
                                41Accounts
      payable
                                
                                
                                (1,131
                                )
                                
                                
                                (127
                                )Accrued
      expenses
                                
                                
                                (740
                                )
                                
                                
                                (214
                                )Deferred
      income
                                
                                
                                (361
                                )
                                
                                
                                (434
                                )Net
      cash provided by (used in) operating activities
                                
                                
                                3,360
                                
                                
                                
                                (2,257
                                )Cash
      flows from investing activities:Contingent
      payments for acquisitions, allocated to goodwill, patents and
      trademarks
                                
                                
                                (86
                                )
                                
                                
                                (246
                                )Purchases
      of property and equipment
                                
                                
                                (2
                                )
                                
                                
                                (6
                                )Payments
      for patents and trademarks
                                
                                
                                (24
                                )
                                
                                
                                (96
                                )Redemption
      of long-term  investment
                                
                                
                                —
                                
                                
                                
                                1,000Proceeds
      from sale of auction rate securities
                                
                                
                                —
                                
                                
                                
                                4,000Net
      cash (used in) provided by investing activities
                                
                                
                                (112
                                )
                                
                                
                                4,652Cash
      flows from financing activities:Proceeds
      from stock option exercises
                                
                                
                                —
                                
                                
                                
                                5Repayments
      of short-term borrowings and long-term debt
                                
                                
                                (4,457
                                )
                                
                                
                                (3,989
                                )Net
      cash used in financing activities
                                
                                
                                (4,457
                                )
                                
                                
                                (3,984
                                )Net
      decrease in cash and cash equivalents
                                
                                
                                (1,209
                                )
                                
                                
                                (1,589
                                )Cash
      and cash equivalents at beginning of period
                                
                                
                                1,373
                                
                                
                                
                                4,817Cash
      and cash equivalents at end of period
                                
                                $
                                164
                                
                                
                                $
                                3,228





See
accompanying notes to condensed consolidated financial
statements.


7


NUTRITION
21, INC.


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(in
thousands, except share data)


(unaudited)





Note
      1
              BASIS OF
      PRESENTATION





The
      accompanying unaudited condensed consolidated financial statements have
      been prepared pursuant to the rules and regulations of the Securities and
      Exchange Commission (“SEC”) for Quarterly Reports on Form 10-Q and do not
      include all of the information and note disclosures required by accounting
      principles generally accepted in the United States of
      America.  Accordingly, the unaudited condensed consolidated
      financial statements should be read in conjunction with the Company’s
      audited consolidated financial statements and notes thereto for the fiscal
      year ended June 30, 2009 included in the Company’s Annual Report on Form
      10-K/A filed on October 23, 2009 (the “Form 10-K/A”).  The
      accompanying unaudited condensed consolidated financial statements reflect
      all adjustments (consisting of normal recurring adjustments) which are, in
      the opinion of the management, considered necessary for a fair
      presentation of financial position, results of operations and cash flows
      for the interim periods.  The June 30, 2009 balance sheet has
      been derived from the audited consolidated financial statements included
      in the Form 10-K/A. Operating results for the three and six month periods
      ended December 31, 2009 are not necessarily indicative of the results that
      may be expected for the fiscal year ending June 30,
  2010.





Our
consolidated financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
the settlement of liabilities in the normal course of business and accordingly,
no adjustments have been made to recorded amounts to reflect the outcome of this
uncertainty.  For several years we have incurred significant losses,
and have relied on financing activities to supplement cash from
operations.  At December 31, 2009, we had cash and cash equivalents of
$0.2 million, a decrease of $1.2 million from June 30, 2009, and we had a
working capital deficiency of approximately $0.4 million. We have incurred
annual operating losses and, at December 31, 2009, we had an accumulated deficit
of approximately $132.0 million.





In
addition, the current economic conditions which negatively impacted our revenues
are expected to continue to negatively impact our ability to generate net
income. Our continuation as a going concern is subject to our ability to
generate or obtain sufficient cash to meet our obligations on a timely basis and
ultimately to attain profitable operations.





Note
      2
              STOCK-BASED
      COMPENSATION





Stock-based
      employee compensation cost is measured at the grant date, based on the
      estimated fair value of the award, and is recognized as expense over the
      requisite service period. The Company has no awards with market or
      performance conditions.





Stock-based
compensation expense recognized in the condensed consolidated statements of
operations for the six-month periods ended December 31, 2009 and 2008 are based
on awards ultimately expected to vest, and is reduced for estimated forfeitures.
Forfeitures are estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates.  Pre-vesting forfeitures are estimated to be approximately
10%, based on historical experience.





The
Company granted 2.2 million stock options during the six-month period ended
December 31, 2009 with an exercise price equal to the market price at the date
of grant with an  aggregate fair value of $72 thousand based on the
Black-Scholes option pricing model.




The
assumptions used in the Black- Scholes option pricing model related to stock
option grants during the six month period ended December 31, 2009 were expected
option life of 2.4 years, volatility factor of 99% and risk-free interest rate
of 1.0%. The Company has not paid, nor does it contemplate paying a dividend on
its common stock in the near future. As such a 0% dividend yield was used. The
pre-vesting forfeiture rate and the years of expected life are based on the
Company's historical option pre-vesting cancellation and employee exercise
information, respectively.





The
Company recorded $5 thousand and $0.2 million in stock-based compensation
expense for stock options and restricted stock awards during the six-month
periods ended December 31, 2009 and 2008, respectively.  Stock-based
compensation expense is recorded in general and administrative
expenses.


8


NUTRITION
21, INC.


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(in
thousands, except share data)


(unaudited)





Note
      2
              STOCK-BASED
      COMPENSATION
(continued)





The
following is a summary of option activity for the six-month period ended
December 31, 2009:





Options
                        
                        Shares
                          (000)
                        
                        
                        Weighted-
                          Average
                          Exercise Price
                        
                        
                        Weighted
                          Average
                          Remaining
                          Contractual
                          Term (Yrs.)
                        
                        
                        Aggregate
                          Intrinsic Value
                          ($000)Outstanding
      at July 1, 2009
                        
                        
                        4,799
                        
                        
                        $
                        0.67Granted
                        
                        
                        2,256
                        
                        
                        $
                        0.06Exercised
                        
                        
                        —
                        
                        
                        $
                        —Forfeited
      or expired
                        
                        
                        (1,826
                        )
                        
                        $
                        0.43Outstanding
      at December 31, 2009
                        
                        
                        5,229
                        
                        
                        $
                        0.49
                        
                        
                        
                        6.6
                        
                        
                        $
                        -Exercisable
      at December 31, 2009
                        
                        
                        5,227
                        
                        
                        $
                        0.49
                        
                        
                        
                        6.6
                        
                        
                        $
                        -





The
following is a summary of restricted stock activity for the six-month period
ended December 31, 2009:





Restricted Stock
                    
                    Shares
                      (000)
                    
                    
                    Weighted-
                      Average
                      Exercise Price
                    
                    
                    Weighted
                      Average
                      Remaining
                      Contractual
                      Term (Yrs.)
                    
                    
                    Aggregate
                      Intrinsic Value
                      ($000’s)Outstanding
      at July 1, 2009
                    
                    
                    169
                    
                    
                    $
                    1.57Granted
                    
                    
                    —
                    
                    
                    
                    —Exercised
                    
                    
                    —
                    
                    
                    
                    —Forfeited
      / expired or cancelled
                    
                    
                    (38
                    )
                    
                    
                    —Outstanding
      at December 31, 2009
                    
                    
                    131
                    
                    
                    $
                    1.49
                    
                    
                    
                    —
                    
                    
                    $
                    —Exercisable
      at December 31, 2009
                    
                    
                    131
                    
                    
                    $
                    1.49
                    
                    
                    
                    —
                    
                    
                    
                    —





At
December 31, 2009, there was $0.2 million of unrecognized compensation costs
related to nonvested options and restricted stock awards. The costs are expected
to be recognized over a weighted average period of 1.7 years.





Note
      3
            FINANCIAL
      INSTRUMENTS





The fair
value of cash, restricted cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses and short-term borrowings approximate
carrying amounts due to the short maturities of these instruments.





Note
      4
            INVENTORIES





Inventories,
which consist primarily of finished goods, are carried at the lower of cost (on
a first-in, first-out method) or estimated net realizable
value.


9


NUTRITION
21, INC.


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(in
thousands, except share data)


(unaudited)





Note
      5
            EARNINGS (LOSS) PER
      COMMON SHARE





Diluted
earnings (loss) per common share for the three and six month periods ended
December 31, 2009 and 2008 does not reflect the total of any incremental shares
related to the assumed conversion or exercise of preferred stock, stock options,
and warrants (26,534,792 and 29,207,134 shares for the three month periods ended
December 31, 2009 and 2008, respectively) as the effect of such inclusions would
be anti-dilutive.  In addition, unvested restricted stock
of 367,001 for the three and six  month periods ended December
31, 2008 was not included as the effect of such inclusion would be
anti-dilutive.





Note
      6
            SUPPLEMENTAL CASH FLOW
      INFORMATION




Six months endedDecember 31,2009
            
            
            2008Supplemental
      disclosure of cash flow information:Cash
      paid for interest
            
            $
            180
            
            
            $
            135Supplemental
      schedule of non-cash financing activities:Increase
      in obligation for Nutrition 21 contingent payments
            
            $
            —
            
            
            $
            77Issuance
      of common stock for dividends on Series J preferred stock
            
            $
            710
            
            
            $
            818




Note
      7
            8% SERIES J
      CONVERTIBLE PREFERRED STOCK





As
further explained in Note 12 in the Form 10-K/A, the Company must redeem its 8%
Series J convertible preferred stock at the original issue price plus accrued
dividends on September 11, 2011 and, accordingly, the carrying value of the
preferred stock is included in non-current liabilities in the condensed
consolidated balance sheets.  The agreement also provides for early
redemption of the preferred stock on the occurrence of certain default
events.





Cumulative dividends of 8% of the
stated value per share per annum may be paid in cash or common stock at the sole
election of the Company.  Common stock dividends are valued at 90% of
the average 20 VWAPs (daily volume average price of the Company’s common stock)
immediately prior to the dividend payment date.   For the
six-month period ended December 31, 2009, the Company issued 3,950,000 shares of
common stock with a fair value of $0.7 million in lieu of a cash
dividend.  At December 31, 2009, the outstanding Series J preferred
stock was convertible into 14,599,441 shares of common
stock.





Note
      8
            SHORT-TERM
      BORROWINGS





On July
27, 2007, the Company entered into a loan and security agreement with Gerber
Finance, Inc. (“Lender”).  Under the agreement, the Company may, on a
revolving basis and at Lender’s discretion, borrow from Lender, against eligible
receivables and eligible inventory under a formula set forth in the agreement
amended February 8, 2008, up to a maximum of $2,000,000 at any
time.  Borrowings bear interest at the prime rate plus 3.75% and are
secured by a security interest in all of the assets of the
Company.  The agreement also provides for various fees and expenses
payable by the Company to Lender.





As of
June 30, 2009, the Company had outstanding borrowings of $1.9 million. In August
2009, the Lender declared that our fiscal year 2009 fourth quarter loss
constituted a breach of a financial covenant. The Lender waived the breach and
agreed to the Company repaying the borrowings by November 15, 2009. At December
31, 2009, the Company had repaid its total borrowings outstanding with Gerber
Finance, Inc. and the Loan and Security Agreement had been
terminated.





As a
result of the acquisition of Iceland Health, Inc. on August 26, 2006, the
Company delivered to the former stockholders a $2.5 million 5% note that was due
on August 25, 2009. As of December 31, 2009, the notes were paid in
full.


10


NUTRITION
21, INC.


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(in
thousands, except share data)


(unaudited)





Note
      9
            SEGMENT
      REPORTING





The
Company had two reportable business segments during fiscal year 2009 and 2008,
as a supplier of essential minerals, most notably chromium picolinate
(Ingredients Products Group), and as a supplier of finished goods to food, drug
and mass retailers (Branded Products Group). With the sale of the Branded
Products Group on December 31, 2009, the Company classified the Branded Products
Group as discontinued operations, see Note 10.





Unallocated
corporate expenses include executive salaries, research and development
expenditures, depreciation, amortization, interest expense, net and external
professional fees, such as accounting, legal and investor relations
costs.





Financial
data by segment was as follows (000’s):




Three
      Months
              Ended
              December
      31,
            
            
            Six
      Months
              Ended
              December
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      salesIngredients
      Products Group
            
            $
            1,977
            
            
            $
            1,491
            
            
            $
            4,194
            
            
            $
            3,,341Sales
      to external customers
            
            
            1,977
            
            
            
            1,491
            
            
            
            4,194
            
            
            
            3,341Other
      revenues
            
            
            81
            
            
            
            77
            
            
            
            176
            
            
            
            128Total
      revenues
            
            $
            2,058
            
            
            $
            1,568
            
            
            $
            4,370
            
            
            $
            3,469Income
      (loss) before income taxesIngredients
      Products Group
            
            $
            1,361
            
            
            $
            948
            
            
            $
            2,888
            
            
            
            2,241Branded
      Products Group (discontinued operations)
            
            
            501
            
            
            
            1,515
            
            
            
            399
            
            
            
            2,724Unallocated
      corporate expenses
            
            
            (1,901
            )
            
            
            (2,361
            )
            
            
            (3,969
            )
            
            
            (4,649
            )Other
            
            
            (2,140
            )
            
            
            -
            
            
            
            (2,140
            )
            
            
            —(Loss)
      income before income taxes
            
            $
            (2,179
            )
            
            $
            102
            
            
            $
            (2,822
            )
            
            $
            316Unallocated
      corporate assets
            
            $
            3,278
            
            
            $
            14,823




Substantially all of the Company’s
revenues are generated in the United States.





Note
      10
            DISCONTINUED
      OPERATIONS





The
Company decided to refocus its energies and capital on its more profitable core
business, Ingredients. As a result, on December 31, 2009, the Company sold the
assets of its direct response and retail businesses to Nature’s Products, Inc.
and its affiliates. The purchase price was $3.2 million plus the assumption of
certain liabilities. The transaction resulted in a loss of $2.1 million, which
has been recorded in the condensed consolidated statement of operations as a
loss on sale of discontinued operations. Pursuant to the Purchase Agreement,
$0.1 million was deposited into an escrow account to be held to satisfy certain
indemnification claims that may arise, and has been recorded as restricted cash
in the condensed consolidated balance sheets. For the six month period ended
December 31, 2009, revenues from discontinued operations were $4.5 million and
losses from discontinued operations were $ 1.7 million compared with revenues of
$22 million and income from discontinued operations of $2.7 million in the
comparable period a year ago.


11





Item
2 – Management’s Discussion and Analysis of Financial Condition and Results of
Operations





The
following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes thereto of the Company
included elsewhere herein.





Forward-Looking
Statements and Risk Factors





This
quarterly report and the documents incorporated by reference contain
forward-looking statements which are intended to fall within the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933, and Section 21E of the Securities Act of
1934.  Words such as “anticipates”, “expects”, “intends”, “plans”,
“believes”, “seeks”, and “estimates” and similar expressions identify
forward-looking statements.  Statements that are “forward-looking
statements” are based on current expectations and assumptions that are subject
to risks and uncertainties.  Actual performance and results could
differ materially.





We
undertake no obligation to update or review any guidance or other
forward-looking information, whether as a result of new information, future
developments or otherwise.





Critical Accounting Policies
and Estimates





The
preparation of the consolidated financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities and expenses.  On an on-going basis, the Company evaluates
its estimates, including those related to uncollectible accounts receivable,
inventories, intangibles and other long-lived assets.  The Company
bases its estimates on historical experience and on 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.





The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:





·
              The
      Company maintains allowances for uncollectible accounts receivable for
      estimated losses resulting from the inability of its customers to make
      required payments.  If the financial condition of the Company’s
      customers were to deteriorate, resulting in an impairment of their ability
      to make payments, additional allowances may be
  required.





·
              The
      Company carries inventories at the lower of cost or estimated net
      realizable value.  If actual market conditions are less
      favorable than those projected by management write-downs may be
      required.





·
              Property,
      plant and equipment, patents, trademarks and other intangible assets owned
      by the Company are depreciated or amortized, over their estimated useful
      lives.  Useful lives are based on management’s estimates over
      the period that such assets will generate revenue.  Intangible
      assets with definite lives are reviewed for impairment whenever events or
      changes in circumstances indicate that the carrying value of an asset may
      not be recoverable.  Future adverse changes in market conditions
      or poor operating results of underlying capital investments or intangible
      assets could result in losses or an inability to recover the carrying
      value of such assets, thereby possibly requiring an impairment charge in
      the future.





When
      customers have guaranteed rights to return products, the Company defers
      revenue recognition until its customer sells the product to the end
      user.  Upon shipment by the Company, amounts billed to customers
      with rights to product returns are included as accounts receivable,
      inventory is relieved, the sale is deferred and the gross profit is
      reflected as a current liability until the product is sold to the end
      user.


12





Item
2 – Management’s Discussion and Analysis of Financial Condition and Results of
Operations (continued)





·
              The
      Company accounts for its stock-based compensation arrangements in
      accordance with the provisions of ASC 718, Compensation-Stock
      Compensation. Stock-based employee compensation cost is measured at
      the grant date, based on the estimated fair value of the award, and is
      recognized as expense over the requisite service period. The Company has
      no awards with market or performance conditions. The valuation
      provisions  apply to new awards and to awards that were outstanding
      on the effective date and subsequently modified or
    cancelled.





General





The
Company had two reportable business segments during fiscal year 2009 and 2008,
as a supplier of essential minerals, most notably chromium picolinate
(Ingredients Products Group), and as a supplier of finished goods to food, drug
and mass retailers (Branded Products Group). On December 31, 2009, the Company
sold the assets of its Branded Products Group, and the Company classified the
Branded Products Group as discontinued operations, see Note 10.





Revenues
from the Ingredient Products Group are primarily derived from the sale of
proprietary ingredients together with the grant of patent licenses to use the
ingredients, to manufacturers of vitamin and mineral supplements. The fees for
the licenses are bundled on an undifferentiated basis with the price that the
Company charges for its ingredients, since licenses are not sold
separately.





Cost of
revenues includes both direct and indirect manufacturing
costs.  Research and development expenses include internal
expenditures as well as expenses associated with third party
providers.  Advertising and promotion expenses include fees and
expenses directly related to the selling of the Company’s products including the
cost of advertising, promotional expenses and third party
fees.  General and administrative expenses include salaries and
overhead, third party fees and expenses, and costs associated with the
operations of the Company.  The Company capitalizes patent costs and
intangible assets with finite lives, and amortizes them over periods not to
exceed seventeen years.





Results
of Operations





Revenues





Net sales
were $2.0 million for the three month period ended December 31, 2009, compared
to $1.5 million in the comparable period a year ago.  An increase in
chromium picolinate sales for human consumption was the primary reason for the
improvement.





Net sales
of $4.2 million were $0.9 million greater for the six months ended December 31,
2009, when compared to the $3.3 million in the comparable period a year ago.
Sales of chromium picolinate for human consumption were $0.3 million greater in
the current period. In addition, sales of $0.6 million into a new market segment
account for the remainder of the increase.





Cost of
revenues





Cost of
revenues were $0.4 million and $0.9 million, for the three and six month periods
ended December 31, 2009 and 2008, respectively.





Advertising and Promotion
Expenses (“Advertising”)





Advertising
in the three and six month periods ended December 31, 2009 and 2008,
respectively, were $0.2 million and $0.3 million.





Unallocated Corporate
Expenses





Unallocated
corporate expenses were $1.9 million for the three month period ended December
31, 2009 compared to $2.4 million for the same period a year ago.  The
decrease is primarily due to a reduction in overall interest expense ($0.2
million) as well as a decline in general and administrative expenses ($0.1
million).  Unallocated corporate expenses
were $4.0 million for the six month period ended December 31, 2009 compared to
$4.6 million in the comparable
period a year ago.





A
reduction in interest expense ($0.3 million) and amortization of intangibles
($0.5 million) were partially offset by an increase in legal fees ($0.1 million)
associated with the sale of the discontinued operations.





13




Item
2 – Management’s Discussion and Analysis of Financial Condition and Results of
Operations (continued)





Net
Loss





Net loss
for the three month period ended December 31, 2009 was $2.2 million compared to
net income of $0.1 million in the comparable period a year ago for the reasons
noted above.




Net loss
for the six month period ended December 31, 2009 was $2.8 million compared to
net income of $0.3 million in the comparable period a year ago for the reasons
noted above.





Liquidity and Capital
Resources





Cash and
cash equivalents at December 31, 2009 were $0.2 million compared to $1.4 million
at June 30, 2009.





During
the six month period ended December 31, 2009, net cash of $3.4 million was
provided by operating activities, compared to net cash used in operating
activities of $2.3 million in the comparable period a year ago. The net effect
of the sale of discontinued operations was the primary reason for the
improvement.





During
the six month period ended December 31, 2009, net cash used in investing
activities was $0.1 million compared to net cash provided by investing
activities of $4.7 million in the comparable period a year
ago.  Proceeds from the sale of the auction rate securities in the
prior year was the primary reason.





During
the six month period ended December 31, 2009, net cash used in financing
activities was $4.4 million compared to $4.0 million in the comparable period a
year ago. Repayment of the Company’s short-term borrowings and notes payable
were the primary purpose  for the use of funds.





Our
consolidated financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
the settlement of liabilities in the normal course of business. For several
years we have incurred significant losses, and have relied on financing
activities to supplement cash from operations.  At December 31, 2009,
we had cash and cash equivalents of $0.2 million, a decrease of $1.2 million
from June 30, 2009, and we had a working capital deficiency of approximately
$0.4 million. We have incurred annual operating losses and, at December 31,
2009, we had an accumulated deficit of approximately $132.0
million.





In
addition, the current economic conditions which negatively impacted our revenues
are expected to continue to negatively impact our ability to generate net
income. Our continuation as a going concern is subject to our ability to
generate or obtain sufficient cash to meet our obligations on a timely basis and
ultimately to attain profitable operations.





During
the quarter ended December 31, 2009, the Company completed the sale of its
retail and direct response businesses. For the six month period ended December
31, 2009, revenues from discontinued operations were $4.5 million and losses
from discontinued operations were $ 1.7 million compared with revenues of $22
million and income from discontinued operations of $2.7 million in the
comparable period a year ago. The net loss from continuing operations for the
six month period ended December 31, 2009 was $1.1 million compared to $2.4
million for the comparable period a year ago. The improvement in continuing
operations is due primarily to the Company’s continuing emphasis on cost control
and strong Chromium Picolinate sales for human consumption. The Company expects
liquidity to improve as a result of the sale of the Branded Products
Group.





Item
3 – Quantitative and Qualitative Disclosures about Market Risk





Market
risk represents the risk of changes in value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices.  The Company has no financial
instruments that give it exposure to foreign exchange rates or equity
prices.


14





Item
4 (T) – Controls and Procedures





We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in reports filed under the Securities Exchange Act of
1934, as amended (“Exchange Act”), is recorded, processed, summarized and
reported within the specified time periods and accumulated and communicated to
our management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure.





Our
management, with the participation of the Chief Executive Officer (CEO) and our
Chief Financial Officer (CFO), evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated
under the Exchange Act) as of December 31, 2009.  Based on that
evaluation, our CEO and CFO concluded that, as of that date, our disclosure
controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15
or 15d-15 were effective.





There
were no changes in our internal controls over financial reporting during the
period ended December 31, 2009 which have materially affected or are reasonably
likely to materially affect our internal controls


over
financial reporting.


15


PART
II - OTHER INFORMATION





Items 1, 1A, 2, 3 and 5 and are not
applicable and have been omitted.





Item
4 – Submission of Matters to a Vote of Security Holders





The
Annual Meeting of shareholders of Nutrition 21, Inc. (the “Company”) was held on
December 3, 2009. The Meeting covered the election of Directors, and the
appointment of the Company’s independent registered public accounting firm for
the fiscal year ending June 30, 2010.





Each of
the following nominees for director was currently serving as a director, and
each was elected by the votes indicated.





Votes
      For
              WithheldP.
      George Benson,
              43,997,533
              11,138,999Warren
      D. Cooper
              45,455,836
              9,680,696John
      H. Gutfreund
              43,949,343
              11,177,189Peter
      C. Mann
              45,033,112
              10,103,420Michael
      A. Zeher
              43,711,652
              11,429,879





J. H.
Cohn LLP (“Cohn”) served  as the Company’s independent registered
public accounting firm for the fiscal year ending June 30, 2009, and Cohn’s
appointment as the Company’s independent registered public accounting firm for
the fiscal year ending June 30, 2010 was ratified by a vote of 46,852,150 For;
3,847,724 Against; and 4,436,658 Abstentions.





Item
6 - Exhibits





(a)
              Exhibits





31.1
              Certifications
      of the President and Chief Executive Officer pursuant to Section 302 of
      the Sarbanes-Oxley Act of
2002.


31.2
              Certifications
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-OxleyAct
      of 2002.


32.1
              Certifications
      of the President and Chief Executive Officer pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002.


32.2
              Certification
      of the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-OxleyAct
      of 2002.


16





NUTRITION
21, INC.





SIGNATURES





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





NUTRITION 21, INC.Registrant





Date:February
12, 2010


By:
                                                              /s/
      Michael A. ZeherMichael
      A. ZeherPresident
      andChief
      Executive Officer(Principal
      Executive
Officer)




17