UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
DC 20549
  FORM
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, 2008
   ̈
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   ̈
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.   See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 
 Large
      accelerated filer  ̈
              Accelerated
      filer   ̈
              Non-accelerated
      filer  x
              Smaller
      Reporting Company  ̈
 
 Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
 Yes  ̈     No    x
 Indicate
the number of shares outstanding of Registrant's Common Stock as of the latest
practicable date.
 
 Class
                
                Outstanding at February 12,
      2009Common
      Stock, $0.005 par value per share
                
                68,059,010
      shares
  
  NUTRITION
21, INC.
 
 INDEX
 
 
 PAGEPART
      I
                                                                                      FINANCIAL
      INFORMATIONITEM
      1
                                                                                      Financial
      Statements(a)
                                                                                      Condensed
      Consolidated Balance Sheets at December 31, 2008(unaudited)
      and June 30, 2008
                                                                                      3
      & 4(b)
                                                                                      Condensed
      Consolidated Statements of Operations for the threeand
      six month periods ended December 31, 2008 and 2007(unaudited)
                                                                                      5(c)
                                                                                      Condensed
      Consolidated Statement of Stockholders’ Equity forthe
      six month period ended December 31, 2008 (unaudited)
                                                                                      6(d)
                                                                                      Condensed
      Consolidated Statements of Cash Flows for the sixmonth
      periods ended December 31, 2008 and 2007 (unaudited)
                                                                                      7(e)
                                                                                      Notes
      to Condensed Consolidated Financial Statements (unaudited)
                                                                                      8ITEM
      2
                                                                                      Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
                                                                                      14ITEM
      3
                                                                                      Quantitative
      and Qualitative Disclosures About Market Risk
                                                                                      16ITEM
      4(T)
                                                                                      Controls
      and Procedures
                                                                                      16PART
      II
                                                                                      OTHER
      INFORMATIONITEM
      1A
                                                                                      Risk
      Factors
                                                                                      17ITEM
      4
                                                                                      Submission
      of Matters to a Vote of Security Holders
                                                                                      18ITEM
      6
                                                                                      Exhibits
                                                                                      18
  2
  NUTRITION
21, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (in
thousands, except share and per share data)
 
 December 31,
                                              2008
                                            
                                            
                                            June 30,
                                              2008(unaudited)
                                            
                                            
                                            (Note 1)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                            
                                            $
                                            3,228
                                            
                                            
                                            $
                                            4,817Accounts
      receivable (less allowances for doubtful accounts and returns of $1,190
      and $1,148 at December 31, 2008 and June 30, 2008,
      respectively)
                                            
                                            
                                            7,027
                                            
                                            
                                            
                                            2,922Other
      receivables
                                            
                                            
                                            322
                                            
                                            
                                            
                                            286Inventories
                                            
                                            
                                            1,606
                                            
                                            
                                            
                                            1,014Prepaid
      expenses and other current assets
                                            
                                            
                                            1,442
                                            
                                            
                                            
                                            1,483Total
      current assets
                                            
                                            
                                            13,625
                                            
                                            
                                            
                                            10,522Property
      and equipment, net
                                            
                                            
                                            59
                                            
                                            
                                            
                                            69Patents,
      trademarks and other amortizable intangibles (net of accumulated
      amortization of $26,198 and $25,568 at December 31, 2008 and June 30,
      2008, respectively)
                                            
                                            
                                            1,022
                                            
                                            
                                            
                                            1,540Goodwill
                                            
                                            
                                            15,605
                                            
                                            
                                            
                                            15,395Other
      intangibles with indefinite lives
                                            
                                            
                                            5,379
                                            
                                            
                                            
                                            5,379Other
      assets
                                            
                                            
                                            1,798
                                            
                                            
                                            
                                            2,981Investments
                                            
                                            
                                            —
                                            
                                            
                                            
                                            3,740TOTAL
      ASSETS
                                            
                                            $
                                            37,488
                                            
                                            
                                            $
                                            39,626
 
 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,
                                                        2008
                                                      
                                                      
                                                      June 30,
                                                        2008(unaudited)
                                                      
                                                      
                                                      (Note 1)LIABILITIES
      AND STOCKHOLDERS' EQUITYLIABILITIESCurrent
      liabilities:Short-term
      borrowings
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      3,000Accounts
      payable
                                                      
                                                      
                                                      4,075
                                                      
                                                      
                                                      
                                                      4,221Accrued
      expenses
                                                      
                                                      
                                                      2,361
                                                      
                                                      
                                                      
                                                      2,575Deferred
      income
                                                      
                                                      
                                                      794
                                                      
                                                      
                                                      
                                                      1,2286%
      Series I convertible preferred stock subject to mandatory redemption
      (redemption value $3,594 at December 31, 2008 and June 30,
      2008)
                                                      
                                                      
                                                      3,486
                                                      
                                                      
                                                      
                                                      3,270Current
      portion of long-term debt
                                                      
                                                      
                                                      2,451
                                                      
                                                      
                                                      
                                                      —Total
      current liabilities
                                                      
                                                      
                                                      13,167
                                                      
                                                      
                                                      
                                                      14,294Long-term
      debt
                                                      
                                                      
                                                      781
                                                      
                                                      
                                                      
                                                      4,185Deferred
      income taxes
                                                      
                                                      
                                                      2,152
                                                      
                                                      
                                                      
                                                      2,1528%
      Series J convertible preferred stock subject to mandatory redemption
      (redemption value $17,750 at December 31, 2008 and June 30,
      2008)
                                                      
                                                      
                                                      12,379
                                                      
                                                      
                                                      
                                                      11,594Total
      liabilities
                                                      
                                                      
                                                      28,479
                                                      
                                                      
                                                      
                                                      32,225Commitments
      and contingenciesSTOCKHOLDERS’
      EQUITY:Preferred
      stock, $0.01 par value, authorized 5,000,000 shares, 100,000 shares
      designated as Series H, none issued and outstanding, 9,600 shares
      designated as Series I convertible preferred stock, 9,600 shares issued
      and 3,594 shares outstanding at December 31, 2008 and June 30, 2008(see
      liabilities above); 17,750 shares designated as Series J convertible
      preferred stock issued and outstanding at December 31, 2008 and June 30,
      2008(see liabilities above)
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Common
      stock, $0.005 par value, authorized 150,000,000 shares; 65,891,732 shares
      and 63,583,205 issued and outstanding at December 31, 2008 and June 30,
      2008, respectively
                                                      
                                                      
                                                      327
                                                      
                                                      
                                                      
                                                      315Additional
      paid-in capital
                                                      
                                                      
                                                      116,741
                                                      
                                                      
                                                      
                                                      115,721Accumulated
      deficit
                                                      
                                                      
                                                      (108,059
                                                      )
                                                      
                                                      
                                                      (108,375
                                                      )Accumulated
      other comprehensive loss
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      (260
                                                      )Total
      stockholders’ equity
                                                      
                                                      
                                                      9,009
                                                      
                                                      
                                                      
                                                      7,401TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                                      
                                                      $
                                                      37,488
                                                      
                                                      
                                                      $
                                                      39,626
  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
                        Ended
                      
                      
                      Six Months
                        EndedDecember 31,
                      
                      
                      December 31,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Net
      sales
                      
                      $
                      12,797
                      
                      
                      $
                      12,734
                      
                      
                      $
                      25,406
                      
                      
                      $
                      24,566Other
      revenues
                      
                      
                      77
                      
                      
                      
                      275
                      
                      
                      
                      128
                      
                      
                      
                      640TOTAL
      REVENUES
                      
                      
                      12,874
                      
                      
                      
                      13,009
                      
                      
                      
                      25,534
                      
                      
                      
                      25,206COSTS
      AND EXPENSESCost
      of revenues
                      
                      
                      5,528
                      
                      
                      
                      3,977
                      
                      
                      
                      10,273
                      
                      
                      
                      7,992Advertising
      and promotion expenses
                      
                      
                      4,806
                      
                      
                      
                      9,705
                      
                      
                      
                      10,168
                      
                      
                      
                      19,709General
      and administrative expenses
                      
                      
                      961
                      
                      
                      
                      1,324
                      
                      
                      
                      1,759
                      
                      
                      
                      2,409Research
      and development expenses
                      
                      
                      93
                      
                      
                      
                      205
                      
                      
                      
                      173
                      
                      
                      
                      514Depreciation
      and amortization
                      
                      
                      283
                      
                      
                      
                      563
                      
                      
                      
                      646
                      
                      
                      
                      1,104TOTAL
      COSTS AND EXPENSES
                      
                      
                      11,671
                      
                      
                      
                      15,774
                      
                      
                      
                      23,019
                      
                      
                      
                      31,728OPERATING
      PROFIT (LOSS)
                      
                      
                      1,203
                      
                      
                      
                      (2,765
                      )
                      
                      
                      2,515
                      
                      
                      
                      (6,522
                      )Interest
      income
                      
                      
                      34
                      
                      
                      
                      113
                      
                      
                      
                      78
                      
                      
                      
                      146Interest
      expense
                      
                      
                      (1,135
                      )
                      
                      
                      (1,164
                      )
                      
                      
                      (2,277
                      )
                      
                      
                      (1,490
                      )INCOME
      (LOSS) BEFORE INCOME TAXES
                      
                      
                      102
                      
                      
                      
                      (3,816
                      )
                      
                      
                      316
                      
                      
                      
                      (7,866
                      )Income
      taxes
                      
                      
                      —
                      
                      
                      
                      1
                      
                      
                      
                      —
                      
                      
                      
                      6NET
      INCOME (LOSS)
                      
                      $
                      102
                      
                      
                      $
                      (3,817
                      )
                      
                      $
                      316
                      
                      
                      $
                      (7,872
                      )Basic
      and diluted income (loss) per common share
                      
                      $
                      0.00
                      
                      
                      $
                      (0.06
                      )
                      
                      $
                      0.00
                      
                      
                      $
                      (0.13
                      )Weighted
      average number of common shares – basic and diluted
                      
                      
                      65,379,399
                      
                      
                      
                      62,061,943
                      
                      
                      
                      64,949,221
                      
                      
                      
                      61,758,216
 
 See
accompanying notes to condensed consolidated financial
statements.
  5
  NUTRITION
21, INC.
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 (in
thousands, except share data)
 (unaudited)
 
 Common Stock
                                        
                                        
                                        Additional
                                          Paid-In
                                          Capital
                                        
                                        
                                        Accumulated
                                          Deficit
                                        
                                        
                                        Accumulated
                                          Other
                                          Comprehensive
                                          Loss
                                        
                                        
                                        TotalShares
                                        
                                        
                                        $
                                        
                                        
                                        $
                                        
                                        
                                        $
                                        
                                        
                                        $
                                        
                                        
                                        $Balance
      at June 30, 2008
                                        
                                        
                                        63,583,205
                                        
                                        
                                        
                                        315
                                        
                                        
                                        
                                        115,721
                                        
                                        
                                        
                                        (108,375
                                        )
                                        
                                        
                                        (260
                                        )
                                        
                                        
                                        7,401Issuance
      of common stock for dividends on Series I preferred stock
                                        
                                        
                                        357,420
                                        
                                        
                                        
                                        2
                                        
                                        
                                        
                                        106
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        108Issuance
      of common stock for dividends onSeries
      J preferred stock
                                        
                                        
                                        1,941,107
                                        
                                        
                                        
                                        10
                                        
                                        
                                        
                                        700
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        710Exercise
      of stock options
                                        
                                        
                                        10,000
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        4
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        4Stock-based
      compensation expense
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        210
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        210Reversal
      of temporary impairment oninvestments
      in auction rate securities
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        260
                                        
                                        
                                        
                                        260Net
      income for the period
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        316
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        316Balance
      at December 31, 2008
                                        
                                        
                                        65,891,732
                                        
                                        
                                        $
                                        327
                                        
                                        
                                        $
                                        116,741
                                        
                                        
                                        $
                                        (108,059
                                        )
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        9,009
 
 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
      31,2008
                                    
                                    
                                    2007Cash
      flows from operating activities:Net
      income (loss)
                                    
                                    $
                                    316
                                    
                                    
                                    $
                                    (7,872
                                    )Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Depreciation
      of property and equipment
                                    
                                    
                                    16
                                    
                                    
                                    
                                    19Amortization
      of intangibles
                                    
                                    
                                    630
                                    
                                    
                                    
                                    1,085Accretion
      of preferred stock and amortization of deferred financing
      costs
                                    
                                    
                                    1,184
                                    
                                    
                                    
                                    595Accretion
      on note payable to Iceland Health
                                    
                                    
                                    36
                                    
                                    
                                    
                                    36Convertible
      preferred stock dividend paid in common stock charged as
                                      interest
      expense
                                    
                                    
                                    818
                                    
                                    
                                    
                                    108Stock-based
      compensation expense
                                    
                                    
                                    210
                                    
                                    
                                    
                                    365Changes
      in operating assets and liabilities:Accounts
      receivable
                                    
                                    
                                    (4,105
                                    )
                                    
                                    
                                    (3,558
                                    )Other
      receivables
                                    
                                    
                                    (36
                                    )
                                    
                                    
                                    (105
                                    )Inventories
                                    
                                    
                                    (592
                                    )
                                    
                                    
                                    (208
                                    )Prepaid
      expenses and other current assets
                                    
                                    
                                    41
                                    
                                    
                                    
                                    (315
                                    )Accounts
      payable
                                    
                                    
                                    (127
                                    )
                                    
                                    
                                    (2,331
                                    )Accrued
      expenses
                                    
                                    
                                    (214
                                    )
                                    
                                    
                                    117Deferred
      income
                                    
                                    
                                    (434
                                    )
                                    
                                    
                                    16Net
      cash used in operating activities
                                    
                                    
                                    (2,257
                                    )
                                    
                                    
                                    (12,048
                                    )Cash
      flows from investing activities:Contingent
      payments for acquisitions, allocated to goodwill and patents and
      trademarks
                                    
                                    
                                    (246
                                    )
                                    
                                    
                                    (112
                                    )Purchases
      of property and equipment
                                    
                                    
                                    (6
                                    )
                                    
                                    
                                    (43
                                    )Payments
      for patents and trademarks
                                    
                                    
                                    (96
                                    )
                                    
                                    
                                    (186
                                    )Redemption
      of long-term  investment
                                    
                                    
                                    1,000
                                    
                                    
                                    
                                    —Proceeds
      from sale of auction rate securities
                                    
                                    
                                    4,000
                                    
                                    
                                    
                                    —Net
      cash provided by (used in) provided by investing
activities
                                    
                                    
                                    4,652
                                    
                                    
                                    
                                    (341
                                    )Cash
      flows from financing activities:Proceeds
      from stock option exercises
                                    
                                    
                                    5
                                    
                                    
                                    
                                    41Proceeds
      from private placement of 8% Series J convertible preferred stock,
      net
                                      of
      issuance costs
                                    
                                    
                                    —
                                    
                                    
                                    
                                    16,680(Repayments)
      proceeds from short-term borrowings and long-term debt
                                    
                                    
                                    (989
                                    )
                                    
                                    
                                    1,747Repayment
      of short-term borrowings
                                    
                                    
                                    (3,000
                                    )
                                    
                                    
                                    —Net
      cash (used in) provided by financing activities
                                    
                                    
                                    (3,984
                                    )
                                    
                                    
                                    18,468Net
      (decrease) increase in cash and cash equivalents
                                    
                                    
                                    (1,589
                                    )
                                    
                                    
                                    6,079Cash
      and cash equivalents at beginning of period
                                    
                                    
                                    4,817
                                    
                                    
                                    
                                    2,417Cash
      and cash equivalents at end of period
                                    
                                    $
                                    3,228
                                    
                                    
                                    $
                                    8,496
 
 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, 2008 included in the Company’s Annual Report on Form
      10-K filed on September 29, 2008 as amended in the Report on Form 10-K/A
      filed on October 3, 2008 (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, 2008 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,
      2008 are not necessarily indicative of the results that may be expected
      for the fiscal year ending June 30,
2009.
 
 We
      have used significant cash in our operations and we may need to raise
      additional funds.  During the fiscal year ended June 30, 2008
      cash used in operations was $14.8 million, and during the six-month period
      from July 1, 2008 through December 31, 2008 cash used in operations was
      $2.2 million.  To fund our cash flows and to support the
      marketing and other expenses we envision, we may need to raise
      funds.  There is no assurance that additional funds will be
      available on terms favorable to the Company and its stockholders, or at
      all.  The Series J preferred stock limits our ability to incur
      indebtedness and to issue additional preferred
  stock.
 
 Note
      2
              INVESTMENTS
 
 At
      June 30, 2008, the Company reported its auction rate securities (“ARS”) at
      fair value.  All of the Company’s ARSs were collateralized by
      student loan portfolios (substantially all of which are guaranteed by the
      United States Government).  During the quarter ended December
      31, 2008, the Company’s ARS were sold at face value plus accrued and
      unpaid interest.
 
 Note
      3
                STOCK-BASED
      COMPENSATION
 
 The
      Company accounts for its stock-based compensation arrangements in
      accordance with the provisions of revised Statement of Financial
      Accounting Standards No. 123 (“SFAS 123R”) “Share-Based
      Payments”.  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 of SFAS 123R apply to new awards and to awards that were
      outstanding on the effective date and subsequently modified or
      cancelled.
 
 The
      Company granted 1.2 million stock options during the six-month period
      ended December 31, 2008 with an exercise price equal to the market price
      at the date of grant with a fair value of $0.4 million 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 months ended December 31, 2008 were
      expected option life of 5.0 years, volatility factor of 99% and risk-free
      interest rate of 1.9%.  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.
  8
  NUTRITION
21, INC.
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 ($ in
thousands, except share data)
 (unaudited)
 
 Note
      3
                STOCK-BASED
      COMPENSATION
(continued)
 
 Stock-based
      compensation expense recognized in the condensed consolidated statements
      of operations for the six-month period ended December 31, 2008 is based on
      awards ultimately expected to vest, and is reduced for estimated
      forfeitures.  SFAS 123R requires forfeitures to be 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 16%, based on historical
      experience.
 
 The
      Company recorded $0.2 million and $0.4 million in stock-based compensation
      expense for stock options and restricted stock in each of the six-month
      periods ended December 31, 2008 and 2007,
      respectively.  Stock-based compensation expense is recorded in
      general and administrative
expenses.
 
 The
      following is a summary of option activity for the six-month period ended
      December 31, 2008.
 
 Options
                      
                      Shares
                        (000)
                      
                      
                      Weighted-
                        Average
                        Exercise Price
                      
                      
                      Weighted–
                        Average
                        Remaining
                        Contractual
                        Term (Yrs.)
                      
                      
                      Aggregate
                        Intrinsic Value
                        ($000)Outstanding
      at July 1, 2008
                      
                      
                      3,511
                      
                      
                      $
                      0.91Granted
                      
                      
                      1,175
                      
                      
                      $
                      0.34Exercised
                      
                      
                      (10
                      )
                      
                      $
                      0.38Forfeited
      or expired
                      
                      
                      (227
                      )
                      
                      $
                      1.14Outstanding
      at December 31, 2008
                      
                      
                      4,449
                      
                      
                      $
                      0.75
                      
                      
                      
                      6.4
                      
                      
                      $
                      0Exercisable
      at December 31, 2008
                      
                      
                      2,991
                      
                      
                      $
                      0.87
                      
                      
                      
                      5.0
                      
                      
                      $
                      0
 
 The
following is a summary of restricted stock activity for the six-month period
ended December 31, 2008.
 
 Restricted Stock
                    
                    Shares
                      (000)
                    
                    
                    Weighted-
                      Average
                      Exercise Price
                    
                    
                    Weighted–
                      Average
                      Remaining
                      Contractual
                      Term (Yrs.)
                    
                    
                    Aggregate
                      Intrinsic Value
                      ($000’s)Outstanding
      at July 1, 2008
                    
                    
                    329
                    
                    
                    $
                    1.57Granted
                    
                    
                    —
                    
                    
                    
                    —Exercised
                    
                    
                    —
                    
                    
                    
                    —Forfeited
      / expired or cancelled
                    
                    
                    —
                    
                    
                    
                    —Outstanding
      at December 31, 2008
                    
                    
                    329
                    
                    
                    $
                    1.57
                    
                    
                    
                    2.1
                    
                    
                    $
                    —Exercisable
      at December 31, 2008
                    
                    
                    159
                    
                    
                    $
                    0.77
                    
                    
                    
                    —
                    
                    
                    
                    —
 
 At
December 31, 2008, there was $0.4 million of unrecognized compensation costs
related to nonvested options and restricted stock awards. The costs are expected
to be recognized over a weighted average period of 2.2 years
  9
  NUTRITION
21, INC.
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 ($ in
thousands, except share data)
 (unaudited)
 
 Note
      4
              RECENTLY ISSUED
      ACCOUNTING PRONOUNCEMENTS
 
 In
September 2006, the Financial Accounting Standards Board issued Statement
(“FASB”) of Financial Accounting Standards (“SFAS”) No. 157 (“SFAS 157”), “Fair
Value Measurements.”  Among other requirements, SFAS 157 defines fair
value and establishes a framework for measuring fair value and also expands
disclosure about the use of fair value to measure assets and
liabilities.  SFAS 157 is effective beginning the first fiscal year
that begins after November 15, 2007.  The effect of the adoption of
SFAS 157 was not material on our condensed consolidated financial statements. In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115” (“SFAS 159”).  SFAS 159 permits companies to choose
to measure certain financial instruments and certain other items at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent
reporting date.  SFAS 159 is effective for the Company’s interim
financial statements issued after April 1, 2008.  The effect of the
adoption of SFAS 159 was not material on our condensed consolidated financial
statements as the Company did not elect the fair value option for any of its
assets and liabilities.
  In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations”, (“SFAS 141R”) SFAS 141R replaces SFAS 141.  SFAS 141R
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquiree and the
goodwill acquired.  SFAS 141R also establishes disclosure requirements
which will enable users to evaluate the nature and financial effects of the
business combination.  SFAS 141R is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  SFAS 141R will have an impact on future
acquisitions.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an Amendment of Accounting Research
bulleting No. 51.”  SFAS No. 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated.  This Statement also establishes reporting
requirements that provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners.  This Statement is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December
15, 2008.  The Company does not expect the adoption of this Statement
to have a material impact, if any, on the Company’s consolidated financial
statements.
 
 Note
      5
              ACQUISITION OF ICELAND
      HEALTH, INC.
 
 In
accordance with SFAS No. 141, “Business Combinations”, acquisitions are
accounted for under the purchase method of accounting.  Under the
purchase method of accounting, identifiable assets acquired and liabilities
assumed are recorded at their estimated fair values.  Goodwill is
recorded to the extent the purchase price consideration, including certain
acquisition and closing costs, exceeds the fair value of the net identifiable
tangible and intangible assets acquired at the date of the
acquisition.  The results of operations of the acquired company are
consolidated beginning as of the date of acquisition.
 
 Effective
August 26, 2006, the Company acquired all of the issued and outstanding common
stock of Iceland Health, Inc. (“IH”).   The Company initially
delivered or paid to the former stockholders 8.0 million shares of the Company’s
common stock with a fair value of $15.5 million; $1.0 million in cash; and $2.5
million in 5% notes that are due on August 25, 2009.  The notes have
been discounted based on a market interest rate and are secured with IH’s trade
names and trademarks and the goodwill with respect to these names and
marks.  The Company also agreed to pay to the former stockholders up
to $2.5 million in earn out payments based on 3% of the amount by which Net
Sales of Eligible Products (each as defined) in successive one-year periods
after the Closing exceed $10.0 million.  Earn-out payments disbursed
are required to be recorded as an additional element of the cost of the
acquisition, in accordance with accounting principles generally accepted in the
United States of America.  Earn-out payments totaled $210 thousand for
the six months ended December 31, 2008 and were recorded as additional
goodwill.
  10


NUTRITION
21, INC.


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


($ in
thousands, except share data)


(unaudited)





Note
      5
            ACQUISITION OF ICELAND
      HEALTH, INC. (continued)





In
September 2007, the Company issued to the former stockholders 1.5 million
additional shares of the Company’s common stock as the volume weighted average
price of the Company’s common stock during the 30 trading days immediately
preceding the first anniversary of the closing was less than $2 per
share.  The Company recorded the par value of the shares of $8
thousand and reduced additional paid-in capital by the same amount, but was not
required to record any related adjustment to the purchase price.





The
purchase price allocation (as adjusted for earn-out payments) has been
determined as follows:





Assets purchased:





Net
      identifiable tangible assets
                        
                        $
                        181Other
      intangibles with indefinite lives
                        
                        
                        5,379Customer
      relationships
                        
                        
                        924Non-compete
      agreements
                        
                        
                        375Goodwill
                        
                        
                        15,605Deferred
      tax liability
                        
                        
                        (2,152
                        )Purchase
      Price
                        
                        $
                        20,312





Note
      6
            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.  The
Company continues to maintain a provision for inventory obsolescence of $1.4
million.





Note
      7
            EARNINGS PER COMMON
      SHARE





Diluted
earnings per common share for the three and six month periods ended December 31,
2008 and 2007 does not reflect the total of any incremental shares related to
the assumed conversion or exercise of preferred stock, stock options, and
warrants (29,195,899 and 30,461,935 shares for the three-months ended December
31, 2008 and 2007, respectively, and 29,202,572 and 30,140,988, for the
six-month periods ended December 31, 2008 and 2007, respectively), as the effect
of such inclusion would be anti-dilutive.  In addition, unvested
restricted stock of 328,540 and 500,750, and 328,540 and 492,875, respectively,
for the three and six month periods ended December 31, 2008 and 2007, was not
included as the effect of such inclusion would be anti-dilutive.





Note
      8
            SUPPLEMENTAL CASH FLOW
      INFORMATION





Six months ended
                          December 31,2008
                        
                        
                        2007Supplemental
      disclosure of cash flow information:Cash
      paid for income taxes
                        
                        $
                        —
                        
                        
                        $
                        —Cash
      paid for interest
                        
                        
                        135
                        
                        
                        
                        —Supplemental
      schedule of non-cash financing activities:Increase
      in obligation for Nutrition 21 contingent payments
                        
                        $
                        77
                        
                        
                        $
                        81


11


NUTRITION
21, INC.


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


($ in
thousands, except share data)


(unaudited)





Note
      9
            6% SERIES I
      CONVERTIBLE PREFERRED STOCK





As
further explained in Note 10 in the Form 10-K/A, the Company must redeem its 6%
Series I convertible preferred stock at the original issue price plus accrued
dividends on March 31, 2009 and, accordingly, the carrying values of the
preferred stock is included in current liabilities in the consolidated balance
sheets. The agreement also provides for early redemption of the preferred stock
on the occurrence of certain default events.





Cumulative
dividends of 6% 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 of the 20 VWAPs (daily volume
weighted average price of the Company’s common stock) immediately prior to the
dividend payment date. For the six month period ended December 31, 2008, the
Company issued 357,420 shares of common stock with a fair value of $108 thousand
in lieu of a cash dividend.  At December 31, 2008, the outstanding
Series I preferred stock was convertible into 2,956,078 shares of common
stock.





Note
      10
            8% SERIES J
      CONVERTIBLE PREFERRED STOCK





As
further explained in Note 11, 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, 2008, the
Company issued 1,941,107 shares of common stock with a fair value of $0.4
million in lieu of a cash dividend.  At December 31, 2008, the
outstanding Series J preferred stock was convertible into 14,599,441 shares of
common stock.





Note
      11
            SHORT-TERM BORROWINGS
      AND LONG-TERM DEBT





The
Company and JP Morgan Chase Bank, NA (“Chase”) entered into a loan agreement
that expired on January 7, 2009 whereby the Company borrowed $3.0 million at
LIBOR +0.50 percentage points.  During the quarter ended December 31,
2008, the Company repaid the loan and the loan agreement was
cancelled.





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,
up to a maximum of $5,000,000 at any time.  Borrowings bear interest
at the prime rate plus 3% 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.  The term of the
agreement expires on June 29, 2009, or earlier on certain defaults, including
the breach of any designated financial covenants.  The termination
date shall be automatically extended for successive periods of one (1) year each
unless the Company has provided Lender with written notice of termination at
least sixty (60) days prior to the expiration of the termination
date.





In the
agreement, the Company covenanted among other thingsthat
without Lender’s consent it will not (i) borrow (other than from Lender) more
than $2 million at any time outstanding, (ii) declare or pay dividends on its
common stock or
repurchase its common stock, or (iii) enter into any merger or purchase or sale
of stock or assets or joint venture transaction,
or into any similar transaction, unless the effective purchase price
or capital or  other contribution is valued at not more than $15
million.  As of December 31, 2008 and 2007, the Company had net
borrowings outstanding of $0.8 million and $1.7 million, respectively, from the
Lender.





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 due on
August 25, 2009.  At December 31, 2008, the carrying value of the note
was $2.4 million.


12


NUTRITION
21, INC.


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


($ in
thousands, except share data)


(unaudited)





Note
      12
            SEGMENT
      REPORTING





The
Company’s business segments are based on the organization structure used by the
Company’s chief operating decision maker for making operating and investment
decisions and for assessing performance.  As a result, the Company
operates in two business segments:  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).





The
Company evaluates the performance of its operating segments based solely on its
operating results before income taxes; therefore assets of the Company are not
allocated by segment.  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
                            
                            
                            Six Months
                              EndedDecember 31,
                            
                            
                            December 31,
                            
                            
                            December 31,
                            
                            
                            December 31,2008
                            
                            
                            2007
                            
                            
                            2008
                            
                            
                            2007Net salesIngredients Products
    Group
                            
                            $
                            1,491
                            
                            
                            $
                            1,809
                            
                            
                            $
                            3,340
                            
                            
                            $
                            3,696Branded Products Group
                            
                            
                            11,306
                            
                            
                            
                            10,925
                            
                            
                            
                            22,066
                            
                            
                            
                            20,870Sales to external
    customers
                            
                            
                            12,797
                            
                            
                            
                            12,734
                            
                            
                            
                            25,406
                            
                            
                            
                            24,566Other revenues
                            
                            
                            77
                            
                            
                            
                            275
                            
                            
                            
                            128
                            
                            
                            
                            640Total revenues
                            
                            $
                            12,874
                            
                            
                            $
                            13,009
                            
                            
                            $
                            25,534
                            
                            
                            $
                            25,206Income (loss) before income
      taxesIngredients Products
    Group
                            
                            $
                            948
                            
                            
                            $
                            1,142
                            
                            
                            
                            1,978
                            
                            
                            $
                            1,989Branded Products Group
                            
                            
                            1,516
                            
                            
                            
                            (2,090
                            )
                            
                            
                            2,987
                            
                            
                            
                            (5,123
                            )Unallocated corporate
      expenses
                            
                            
                            (2,362
                            )
                            
                            
                            (2,868
                            )
                            
                            
                            (4,649
                            )
                            
                            
                            (4,732
                            )Income (loss) before income
      taxes
                            
                            $
                            102
                            
                            
                            $
                            (3,816
                            )
                            
                            $
                            316
                            
                            
                            $
                            (7,866
                            )Unallocated corporate
      assets
                            
                            $
                            37,488
                            
                            
                            $
                            45,324


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





Note
      13
            COMPREHENSIVE INCOME
      (LOSS)





Comprehensive
income (loss) includes unrealized losses on our ARS that were classified as
available-for-sale securities. Comprehensive income (loss) for each of these
periods are as follows (dollars are in thousands):




Three
      Months Ended
                                                
                                                
                                                Six Months EndedDecember 31,
                                                
                                                
                                                December 31,2008
                                                
                                                2007
                                                
                                                
                                                2008
                                                
                                                
                                                2007Net
      income (loss)
                                                
                                                $
                                                102
                                                
                                                $
                                                (3,817
                                                )
                                                
                                                $
                                                316
                                                
                                                
                                                $
                                                (7,872
                                                )Other
      comprehensive income:Change
      in unrealized losses onavailable-for-sale
      securities
                                                
                                                
                                                260
                                                
                                                
                                                —
                                                
                                                
                                                
                                                260
                                                
                                                
                                                
                                                —Comprehensive
      income (loss)
                                                
                                                $
                                                362
                                                
                                                $
                                                (3,817
                                                )
                                                
                                                $
                                                576
                                                
                                                
                                                $
                                                (7,872
                                                )


13


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 because of factors such as those set forth under “Risk
Factors” in Form 10-K/A filed with the Securities and Exchange Commission on
October 3, 2008 and this Form 10-Q.





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.





General





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.





Revenues
from the Branded Products Group are principally derived from the sale of branded
products to food, drug and mass retailers.  Revenue, net of an
estimate for returns, is recognized when the products are received by the
retailers or, if the retailer has the right to return all unsold product,
revenue is recognized when the end user takes possession of the
product.  Upon shipment by the Company, amounts billed to customers
with the right to return all unsold product 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.





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
of the Ingredient Products Group were $1.5 million and $1.8 million for the
three month periods ended December 31, 2008 and 2007,
respectively.  Sales of chromium picolinate in the quarter were less
than the comparable quarter a year ago.





Net sales
of the Ingredient Products Group were $3.3 million and $3.7 million for the six
months ended December 31, 2008 and 2007, respectively.  Sales of
chromium picolinate were lower than the comparable period a year
ago.





Net
product sales of the Branded Products Group for the three months ended December
31, 2008 were $11.3 million compared to $10.9 million in the comparable period a
year ago. Net product sales through the direct response channel were $5.9
million compared to $7.2 million in the comparable period a year
ago.  Limiting advertising while the Company continues to better match
its costs with revenues is the primary cause of the
decline.  Offsetting this decline was an improvement in net product
sales made through the retail channel.  Net product sales through the
retail channel were $5.4 million compared to $3.7 million in the comparable
period a year ago.  Increased distribution, customer awareness and
continued acceptance of our products was the primary reason for this
improvement.





Net
product sales of the Branded Products Group were $22.1 million for the six
months ended December 31, 2008 compared to $20.9 million in the comparable
period a year ago.  Net product sales through the direct response
channel were $12.1 million compared to $16.0 million in the same period a year
ago.  The Company’s continued fine tuning of its costs versus revenues
resulted in lower product sales.  Offsetting the decline were net
product sales through the retail channel of $10.0 million compared to $4.9
million in the comparable period a year ago.  Increased distribution
to traditional retailers, as well as continued acceptance of our brands, were
the primary reasons for the increase.


14


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





Other
revenues were $77 thousand and $0.3 million in the three month periods ended
December 31, 2008 and 2007, respectively.





Other
revenues were $0.1 and $0.6 million in the six month periods ended December 31,
2008 and 2007, respectively.





Cost of
revenues





Cost of
revenues for the Ingredients Products Group were $0.4 million for both of the
three month periods ended December 31, 2008 and 2007, respectively.





Cost of
revenues for the Ingredients Products Group for each of the six month periods
ended December 31, 2008 and 2007, was $0.9 million.





Cost of
revenues for the Branded Products Group were $5.1 million for the three month
period ended December 31, 2008 compared to $3.6 million in the same period a
year ago.  The increase is due to expenditures for product purchases
associated with the increased sales through the retail channel ($1.8
million).  The increase was partially offset by lower cost of branded
products sold through the direct response channel ($0.3 million).





Cost of
revenues for the Branded Products Group were $5.7 million for the six months
ended December 31, 2008 compared to $2.2 million for the six months ended
December 31, 2007.  The cost of products sold through the retail
channel was $5.7 million, an increase of $3.5 million when compared to the six
months ended December 31, 2007, due primarily to expanded products, increases in
net product sales and product mix.  The cost of products sold through
the direct response channel was $3.7 million compared to $4.9 million in the
year ago period.





Advertising and Promotion
Expenses (“Advertising”)





Advertising
expenses for the Branded Products Group for the three months ended December 31,
2008 were $4.8 million compared to $9.7 million in the comparable period a year
ago.  Advertising spending to support our retail products decreased
$3.9 million to $1.0 million when compared to the same period a year ago.
Advertising to support direct response was $3.8 million compared to $4.6 million
in the comparable period a year ago.  The decline in spend was due to
our efforts to refocus our direct response spend versus revenues.





Advertising
expense for the Branded Products Group for the six months ended December 31,
2008 was $9.9 million compared to $19.2 million in the same period a year
ago.  Advertising expenditures to support our consumer health brands
declined $7.1 million to $1.7 million when compared to the same period a year
ago.  In addition, advertising through the direct response channel
declined $2.2 million to $8.2 million when compared to the same period a year
ago.  Continued refocusing and target-specific advertising were the
primary reasons for the improvement.





Fluctuations
in the Ingredients Product Group for advertising in the three and six month
periods were not material.





Unallocated Corporate
Expenses





Unallocated
corporate expenses for the three month period ended December 31, 2008 were $2.4
million compared to $2.9 million in the comparable period a year
ago.  The decrease is primarily due to a reduction in overall
operating expenses.





Unallocated
corporate expenses for the six months ended December 31, 2008 were $4.6 million
compared to $4.7 million in the same period a year ago.  The decrease
is primarily due to lower operating expenses ($0.4 million) and lower
amortization of intangibles ($0.5 million) partially offset by increased costs
associated with our financings ($0.8 million).





Net Income
(Loss)





Net
income for the three month period ended December 31, 2008 was $0.1 million
compared to a net loss of $3.8 million in the comparable period a year
ago.  Lower advertising and promotion expenditures account for the
majority of the improvement.


15


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





Net
income for the six months ended December 31, 2008 was $0.3 million compared to a
net loss of $7.9 million in the comparable period a year
ago.  Improvement in revenues combined with reduced advertising and
promotion expenditures were the primary reasons.





Liquidity and Capital
Resources





Cash,
cash equivalents and short-term investments at December 31, 2008 were $3.2
million compared to $4.8 million at June 30, 2008.





During
the six month period ended December 31, 2008, net cash of $2.2 million was used
in operating activities, compared to $12.0 million in the comparable period a
year ago.  Improvement in operating results from a net loss of $7.9
million to a net income of $0.3 million, combined with an improvement in
operating assets and liabilities account for the majority of the
increase.





During
the six month period ended December 31, 2008, net cash provided by investing
activities was $4.6 million compared to $0.3 million of cash used in investing
activities in the comparable period a year ago.  During the quarter,
the Company redeemed $1.0 million of its investment in long-term securities and
sold its auction rate securities at face value of $4.0 million.





During
the six month period ended December 31, 2008, net cash used in financing
activities was $4.0 million. During the quarter, the Company used $3.0 million
of the proceeds from the sale of the ARS to repay its debt with Chase
Bank.





Our
liquidity is affected by many factors, some based on the normal ongoing
operations of the business and others related to the uncertainties of the
industries in which we compete. Our liquidity may also be adversely
affected by the current economic conditions, including consumer spending rates,
the ability to collect on our accounts receivable and our ability to obtain
working capital due to the tightening of global credit markets. Although our
cash requirements will fluctuate based on the timing and extent of these
factors, we believe that, going forward, cash generated from operations,
together with our current cash balance and borrowing capability should be
sufficient to satisfy our cash requirements for the next twelve
months.  Long-term liquidity is dependent upon achieving consistent
profitability or raising additional financing.





If
necessary, the Company will seek any necessary additional funding through
arrangements with corporate collaborators, through public or private sales of
its securities, including equity securities, or through bank financing. There is
no assurance that additional funds will be available on terms favorable to the
Company and its stockholders, or at all.





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.





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, 2008.  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 or in other
factors during the period ended December 31, 2008 which have materially affected
or are reasonably likely to materially affect our internal controls over
financial reporting.


16





P
ART II - OTHER INFORMATION





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





Item
1A – Risk Factors





The risk
factor listed below supplements the risk factors set forth in Item 1A to Part 1
of the Company’s Form 10-K for its fiscal year ended June 30, 2008 that the
Company filed on September 29, 2008.





Illiquidity of Auction Rate
Securities.  We owned $4.0 million of auction rate securities
that were illiquid, and borrowed $3.0 million using these securities as
collateral through January 7, 2009.  During the quarter, our auction
rate securities were repurchased for $4.0 million plus accrued interest and the
$3.0 million borrowed using these securities as collateral was
repaid.





The limited liquidity for our common
stock could affect an investor’s ability to sell our shares at a satisfactory
price. Our common stock is relatively illiquid. As of January 31, 2009,
the Company had approximately 68.1 million shares of common stock outstanding.
The average daily trading volume in the common stock during the prior 50 trading
days ending on that date was 157,708 shares. A more active public market for our
common stock, however, may not develop, which would continue to adversely affect
the trading price and liquidity of the common stock. Moreover, a thin trading
market for the common stock causes the market price for the common stock to
fluctuate significantly more than the stock market as a whole. Without a large
float, our common stock is less liquid than the stock of companies with broader
public ownership and, as a result, the trading prices of our common stock may be
more volatile.





If we are
unable to maintain a Nasdaq listing for our securities the liquidity of our
stock will be reduced and investors may be unable to sell them, or may be able
to sell them only at reduced prices. On December 26, 2007, we received written
notification from Nasdaq stating that, for the last 30 consecutive business
days, the bid price of the Company’s common stock closed below the minimum $1.00
per share requirement for continued inclusion under Nasdaq Marketplace Rule
431(c)(4) (the “Rule”).  On June 24, 2008, we received written
notification that if compliance with the Rule cannot be demonstrated by December
22, 2008, Nasdaq will provide written notification that the Company’s securities
will be delisted.  On October 22, 2008, we received written
notification that the Company has until March 26, 2009 to regain compliance with
the Rule.  On December 23, 2008, the Company received a letter from
Nasdaq that the Rule is suspended until April 20, 2009 which, according to the
Company calculation, extends the Company’s period for regaining compliance until
June 24, 2009.  At that time, if the Company receives a notification
of delisting, the Company can appeal and provide a plan to regain
compliance.  Throughout this period we can regain compliance by
maintaining a $1.00 per share bid price for a minimum of 10 consecutive business
days. Under certain circumstances, to ensure that we can sustain long-term
compliance, Nasdaq may require the closing bid price to equal or to exceed the
$1.00 minimum bid price requirement for more than 10 consecutive business days
before determining that a company complies with Nasdaq's minimum $1.00 bid price
requirement.





The
liquidity of our common stock will be reduced if our securities fail to maintain
a Nasdaq listing. Purchasers of our common stock would likely find it more
difficult to sell our common stock, and the market value of our common stock
would likely decline.





In
addition, if we fail to maintain a Nasdaq listing for our securities, and no
other exclusion from the definition of a "penny stock" under the Exchange Act is
available, then any broker engaging in a transaction in our securities would be
required to provide any customer with a risk disclosure document, disclosure of
market quotations, if any, disclosure of the compensation of the broker-dealer
and its salesperson in the transaction, and monthly account statements showing
the market values of our securities held in the customer's accounts. The bid and
offer quotation and compensation information must be provided prior to effecting
the transaction and must be contained on the customer's confirmation. If brokers
become subject to the "penny stock" rules when engaging in transactions in our
securities, they would become less willing to engage in these transactions,
which will make it more difficult for purchasers of our common stock to dispose
of their shares.





Should we
fail to maintain our Nasdaq listing and should we then or thereafter not be
listed on the Bulletin Board we may be required to redeem our Series I 6% and
Series J 8% Convertible Preferred Stock in accordance with their
terms.


17


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
November 20, 2008.  The Meeting covered the election of Directors, and
the appointment of the Corporation’s independent registered public accounting
firm for the fiscal year ending June 30, 2009.





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, PhD
                    
                    
                    43,375,801
                    
                    
                    
                    5,617,064John
      L. Cassis
                    
                    
                    43,379,801
                    
                    
                    
                    5,613,064Warren
      D. Cooper
                    
                    
                    43,379,801
                    
                    
                    
                    5,613,064John
      H. Gutfreund
                    
                    
                    43,368,851
                    
                    
                    
                    5,624,014Peter
      C. Mann
                    
                    
                    43,179,798
                    
                    
                    
                    5,813,067Michael
      A. Zeher
                    
                    
                    43,176,052
                    
                    
                    
                    5,816,813





J. H.
Cohn LLP (“Cohn”) served as the Corporation’s independent registered public
accounting firm for the fiscal year ended June 30, 2008, and Cohn’s appointment
as the Corporation’s independent registered public accounting firm for the
fiscal year ending June 30, 2009 was ratified by a vote of 47,757,756 For;
797,200 Against; and 487,910 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-Oxley  Act 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-Oxley Act of
2002.


18





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, 2009
              By:
              /s/ Michael A. ZeherMichael
      A. ZeherPresident
      andChief
      Executive Officer(Principal
      Executive Officer)


19