UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549


FORM
10-Q





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




For the
quarterly period ended March 31, 2010




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




For the
transition period from _________________ to
________________________.




Commission
File Number 0-14983




NUTRITION 21,
INC.


(Exact
Name of Registrant as Specified in its Charter)





New
      York
              11-2653613(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)4
      Manhattanville RoadPurchase,
      New York
              10577-2197(Address
      of Principal Executive Offices)
              (Zip
      Code)




(914)
701-4500


(Registrant's
telephone number, including Area Code)





None


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





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve (12) months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90)
days                                                                                                                                      Yes    x       No   o





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


Yes o     No    o





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





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




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


Yes o     No    x





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




Class
                  Outstanding at May 14,
  2010Common
      Stock, $0.005 par value per share
                  96,225,520
      shares









NUTRITION
21, INC.





INDEX





PAGEPART I
                                                                            FINANCIAL INFORMATIONITEM
      1
                                                                            Financial
      Statements(a)
                                                                            Condensed
      Consolidated Balance Sheets at March 31, 2010(unaudited)
      and June 30, 2009
                                                                            
                                                                            3(b)
                                                                            Condensed
      Consolidated Statements of Operations for the threeand
      nine-month periods ended March 31, 2010 and 2009(unaudited)
                                                                            
                                                                            5(c)
                                                                            Condensed
      Consolidated Statement of Stockholders’ Deficit forthe
      nine-month period ended March 31, 2010 (unaudited)
                                                                            
                                                                            6(d)
                                                                            Condensed
      Consolidated Statements of Cash Flows for the nine-month
      periods ended March 31, 2010 and 2009 (unaudited)
                                                                            
                                                                            7(e)
                                                                            Notes
      to Condensed Consolidated Financial Statements (unaudited)
                                                                            
                                                                            8ITEM
      2
                                                                            Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
                                                                            
                                                                            12ITEM
      3
                                                                            Quantitative
      and Qualitative Disclosures About Market Risk
                                                                            
                                                                            14ITEM
      4(T)
                                                                            Controls
      and Procedures
                                                                            
                                                                            14PART II
                                                                            OTHER INFORMATIONITEM
      1
                                                                            Legal
      Proceedings
                                                                            
                                                                            15ITEM
      6
                                                                            Exhibits
                                                                            
                                                                            15





2




NUTRITION
21, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(in
thousands, except share and per share data)





March 31,
                                              2010
                                            
                                            
                                            June 30,
                                              2009(unaudited)
                                            
                                            
                                            (Note 1)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                            
                                            $
                                            255
                                            
                                            
                                            $
                                            1,373Restricted
      cash
                                            
                                            
                                            100
                                            
                                            
                                            
                                            —Accounts
      receivable (less allowances for doubtful accounts and returns of $1,697
      and $327 at March 31, 2010 and June 30, 2009,
respectively)
                                            
                                            
                                            1,146
                                            
                                            
                                            
                                            2,752Other
      receivables
                                            
                                            
                                            204
                                            
                                            
                                            
                                            516Inventories
                                            
                                            
                                            142
                                            
                                            
                                            
                                            3,878Prepaid
      expenses and other current assets
                                            
                                            
                                            234
                                            
                                            
                                            
                                            467Total
      current assets
                                            
                                            
                                            2,081
                                            
                                            
                                            
                                            8,986Property
      and equipment, net
                                            
                                            
                                            38
                                            
                                            
                                            
                                            46Patents,
      trademarks and other amortizable intangibles (net of accumulated
      amortization of $26,854 and $26,643 at March 31, 2010 and June 30, 2009,
      respectively)
                                            
                                            
                                            649
                                            
                                            
                                            
                                            766Goodwill
                                            
                                            
                                            —
                                            
                                            
                                            
                                            636Other
      intangibles with indefinite lives
                                            
                                            
                                            —
                                            
                                            
                                            
                                            3,000Other
      assets
                                            
                                            
                                            463
                                            
                                            
                                            
                                            1,389TOTAL
      ASSETS
                                            
                                            $
                                            3,231
                                            
                                            
                                            $
                                            14,823





See accompanying notes to condensed
consolidated financial statements.




3




NUTRITION
21, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(in
thousands, except share and per share data)




March 31,
                                                2010
                                              
                                              
                                              June 30,
                                                2009(unaudited)
                                              
                                              
                                              (Note 1)LIABILITIES
      AND STOCKHOLDERS’ DEFICITLIABILITIESCurrent
      liabilities:Short-term
      borrowings
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              4,457Accounts
      payable
                                              
                                              
                                              890
                                              
                                              
                                              
                                              4,439Accrued
      expenses
                                              
                                              
                                              1,336
                                              
                                              
                                              
                                              2,218Deferred
      income
                                              
                                              
                                              —
                                              
                                              
                                              
                                              361Total
      current liabilities
                                              
                                              
                                              2,226
                                              
                                              
                                              
                                              11,475Deferred
      income taxes
                                              
                                              
                                              —
                                              
                                              
                                              
                                              1,2008%
      Series J convertible preferred stock subject to mandatory redemption
      (redemption value $17,750 at March 31, 2010 and June 30,
    2009)
                                              
                                              
                                              14,583
                                              
                                              
                                              
                                              13,218Total
      liabilities
                                              
                                              
                                              16,809
                                              
                                              
                                              
                                              25,893Commitments
      and contingenciesSTOCKHOLDERS’
      DEFICIT:Preferred
      stock, $0.01 par value, authorized 5,000,000 shares, 100,000 shares
      designated as Series H, none issued and outstanding; 17,750 shares
      designated as Series J convertible preferred stock issued and outstanding
      at March 31, 2010 and June 30, 2009 (see liabilities
above)
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Common
      stock, $0.005 par value, authorized 150,000,000 shares; 83,241,563 shares
      and 71,231,450 issued and outstanding at March 31, 2010 and June 30, 2009,
      respectively
                                              
                                              
                                              414
                                              
                                              
                                              
                                              353Additional
      paid-in capital
                                              
                                              
                                              118,850
                                              
                                              
                                              
                                              117,761Accumulated
      deficit
                                              
                                              
                                              (132,842
                                              )
                                              
                                              
                                              (129,184
                                              )Total
      stockholders’ deficit
                                              
                                              
                                              (13,578
                                              )
                                              
                                              
                                              (11,070
                                              )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
                                              
                                              $
                                              3,231
                                              
                                              
                                              $
                                              14,823





See accompanying notes to condensed
consolidated financial statements.




4




NUTRITION
21, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(in
thousands, except share and per share data)


(unaudited)




Three Months
                                                  Ended
                                                
                                                
                                                Nine Months
                                                  EndedMarch 31,
                                                
                                                
                                                March 31,2010
                                                
                                                
                                                2009
                                                
                                                
                                                2010
                                                
                                                
                                                2009Net
      sales
                                                
                                                $
                                                1,602
                                                
                                                
                                                $
                                                1,913
                                                
                                                
                                                $
                                                5,796
                                                
                                                
                                                $
                                                5,254Other
      revenues
                                                
                                                
                                                77
                                                
                                                
                                                
                                                115
                                                
                                                
                                                
                                                252
                                                
                                                
                                                
                                                243TOTAL
      REVENUES
                                                
                                                
                                                1,679
                                                
                                                
                                                
                                                2,028
                                                
                                                
                                                
                                                6,048
                                                
                                                
                                                
                                                5,497COSTS
      AND EXPENSESCost
      of revenues
                                                
                                                
                                                418
                                                
                                                
                                                
                                                484
                                                
                                                
                                                
                                                1,372
                                                
                                                
                                                
                                                1,305Advertising
      and promotion expenses
                                                
                                                
                                                162
                                                
                                                
                                                
                                                152
                                                
                                                
                                                
                                                512
                                                
                                                
                                                
                                                431General
      and administrative expenses
                                                
                                                
                                                709
                                                
                                                
                                                
                                                983
                                                
                                                
                                                
                                                2,571
                                                
                                                
                                                
                                                2,742Research
      and development expenses
                                                
                                                
                                                124
                                                
                                                
                                                
                                                93
                                                
                                                
                                                
                                                306
                                                
                                                
                                                
                                                266Depreciation
      and amortization
                                                
                                                
                                                63
                                                
                                                
                                                
                                                264
                                                
                                                
                                                
                                                227
                                                
                                                
                                                
                                                910TOTAL
      COSTS AND EXPENSES
                                                
                                                
                                                1,476
                                                
                                                
                                                
                                                1,976
                                                
                                                
                                                
                                                4,988
                                                
                                                
                                                
                                                5,654OPERATING
      INCOME (LOSS)
                                                
                                                
                                                203
                                                
                                                
                                                
                                                52
                                                
                                                
                                                
                                                1,060
                                                
                                                
                                                
                                                (157
                                                )Interest
      income
                                                
                                                
                                                —
                                                
                                                
                                                
                                                8
                                                
                                                
                                                
                                                2
                                                
                                                
                                                
                                                86Interest
      expense
                                                
                                                
                                                (915
                                                )
                                                
                                                
                                                (1,161
                                                )
                                                
                                                
                                                (2,855
                                                )
                                                
                                                
                                                (3,438
                                                )LOSS
      FROM CONTINUING OPERATIONS
                                                
                                                
                                                (712
                                                )
                                                
                                                
                                                (1,101
                                                )
                                                
                                                
                                                (1,793
                                                )
                                                
                                                
                                                (3,509
                                                )Income
      taxes
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —LOSS
      FROM CONTINUING OPERATIONS
                                                
                                                
                                                (712
                                                )
                                                
                                                
                                                (1,101
                                                )
                                                
                                                
                                                (1,793
                                                )
                                                
                                                
                                                (3,509
                                                )DISCONTINUED
      OPERATIONSLoss
      on sale of discontinued operations, net of tax
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (2,140
                                                )
                                                
                                                
                                                —(Loss)
      Income from discontinued operations, net of tax
                                                
                                                
                                                (124
                                                )
                                                
                                                
                                                697
                                                
                                                
                                                
                                                275
                                                
                                                
                                                
                                                3,421(Loss)
      income from discontinued operations
                                                
                                                
                                                (124
                                                )
                                                
                                                
                                                697
                                                
                                                
                                                
                                                (1,865
                                                )
                                                
                                                
                                                3,421NET
      LOSS
                                                
                                                $
                                                (836
                                                )
                                                
                                                $
                                                (404
                                                )
                                                
                                                $
                                                (3,658
                                                )
                                                
                                                $
                                                (88
                                                )Net
      loss per common share: continuing operations
                                                
                                                $
                                                (0.01
                                                )
                                                
                                                $
                                                (0.02
                                                )
                                                
                                                $
                                                (0.02
                                                )
                                                
                                                $
                                                (0.05
                                                )Net
      (loss) income per common share: discontinued operations
                                                
                                                $
                                                (0.00
                                                )
                                                
                                                $
                                                0.01
                                                
                                                
                                                $
                                                (0.02
                                                )
                                                
                                                $
                                                0.05Net
      loss per common share
                                                
                                                $
                                                (0.01
                                                )
                                                
                                                $
                                                (0.01
                                                )
                                                
                                                $
                                                (0.04
                                                )
                                                
                                                $
                                                (0.00
                                                )Weighted
      average number of common shares – basic and diluted
                                                
                                                
                                                80,450,283
                                                
                                                
                                                
                                                67,746,755
                                                
                                                
                                                
                                                77,740,145
                                                
                                                
                                                
                                                65,738,852





See accompanying notes to condensed
consolidated financial statements.




5




NUTRITION
21, INC.
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
 (in
thousands, except share data)
 (unaudited)
 
 Common Stock
                                                  
                                                  
                                                  AdditionalPaid-InCapital
                                                  
                                                  
                                                  AccumulatedDeficit
                                                  
                                                  
                                                  TotalShares
                                                  
                                                  
                                                  $
                                                  
                                                  
                                                  $
                                                  
                                                  
                                                  $
                                                  
                                                  
                                                  $Balance
      at June 30, 2009
                                                  
                                                  
                                                  71,231,450
                                                  
                                                  
                                                  $
                                                  353
                                                  
                                                  
                                                  $
                                                  117,761
                                                  
                                                  
                                                  $
                                                  (129,184
                                                  )
                                                  
                                                  $
                                                  (11,070
                                                  )Issuance
      of common stock for dividends on Series J preferred stock
                                                  
                                                  
                                                  12,049,472
                                                  
                                                  
                                                  
                                                  61
                                                  
                                                  
                                                  
                                                  1,005
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  1,066Stock-based
      compensation expense
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  84
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  84Cancellation
      of restricted stock
                                                  
                                                  
                                                  (39,359
                                                  )
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Net
      loss for the period
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (3,658
                                                  )
                                                  
                                                  
                                                  (3,658
                                                  )Balance
      at March 31, 2010
                                                  
                                                  
                                                  83,241,563
                                                  
                                                  
                                                  $
                                                  414
                                                  
                                                  
                                                  $
                                                  118,850
                                                  
                                                  
                                                  $
                                                  (132,842
                                                  )
                                                  
                                                  $
                                                  (13,578
                                                  )




See accompanying notes to condensed
consolidated financial statements.





6




NUTRITION
21, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
thousands)


(unaudited)





Nine
      Months Ended
                                March
      31,2010
                              
                              
                              2009Cash
      flows from operating activities:Net
      loss
                              
                              $
                              (3,658
                              )
                              
                              $
                              (88
                              )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      of property and equipment
                              
                              
                              10
                              
                              
                              
                              22Amortization
      of intangibles
                              
                              
                              217
                              
                              
                              
                              888Accretion
      of preferred stock and amortization of deferred financing
      costs
                              
                              
                              1,792
                              
                              
                              
                              1,792Accretion
      on note payable to Iceland Health
                              
                              
                              —
                              
                              
                              
                              55Convertible
      preferred stock dividends paid in common stock charged as interest
      expense
                              
                              
                              1,066
                              
                              
                              
                              1,226Stock-based
      compensation expense
                              
                              
                              84
                              
                              
                              
                              327Loss
      on sale of discontinued operations
                              
                              
                              2,140
                              
                              
                              
                              —Gain
      on disposal of assets
                              
                              
                              (6
                              )
                              
                              
                              —Changes
      in operating assets and liabilities net of effects of
      dispositions:Accounts
      receivable
                              
                              
                              1,257
                              
                              
                              
                              (841
                              )Other
      receivables
                              
                              
                              312
                              
                              
                              
                              (290
                              )Inventories
                              
                              
                              2,335
                              
                              
                              
                              (2,083
                              )Prepaid
      expenses and other current assets
                              
                              
                              233
                              
                              
                              
                              711Accounts
      payable
                              
                              
                              (1,074
                              )
                              
                              
                              (733
                              )Accrued
      expenses
                              
                              
                              (862
                              )
                              
                              
                              (437
                              )Deferred
      income
                              
                              
                              (361
                              )
                              
                              
                              (650
                              )Net
      cash provided by (used in) operating activities
                              
                              
                              3,485
                              
                              
                              
                              (101
                              )Cash
      flows from investing activities:Contingent
      payments for acquisitions, allocated to goodwill, patents and
      trademarks
                              
                              
                              (69
                              )
                              
                              
                              (340
                              )Purchases
      of property and equipment
                              
                              
                              (1
                              )
                              
                              
                              (6
                              )Payments
      for patents and trademarks
                              
                              
                              (76
                              )
                              
                              
                              (51
                              )Increase
      in restricted cash
                              
                              
                              —
                              
                              
                              
                              1,000Proceeds
      from sale of auction rate securities
                              
                              
                              —
                              
                              
                              
                              4,000Net
      cash (used in) provided by investing activities
                              
                              
                              (146
                              )
                              
                              
                              4,603Cash
      flows from financing activities:Proceeds
      from stock option exercises
                              
                              
                              —
                              
                              
                              
                              4Repayments
      of short-term borrowings and long-term debt
                              
                              
                              (4,457
                              )
                              
                              
                              (3,035
                              )Redemption
      of 6% Series I convertible preferred stock
                              
                              
                              —
                              
                              
                              
                              (3,594
                              )Net
      cash used in financing activities
                              
                              
                              (4,457
                              )
                              
                              
                              (6,625
                              )Net
      decrease in cash and cash equivalents
                              
                              
                              (1,118
                              )
                              
                              
                              (2,123
                              )Cash
      and cash equivalents at beginning of period
                              
                              
                              1,373
                              
                              
                              
                              4,817Cash
      and cash equivalents at end of period
                              
                              $
                              255
                              
                              
                              $
                              2,694




See
accompanying notes to condensed consolidated financial statements.




7




NUTRITION
21, INC.


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(in
thousands, except share data)


(unaudited)





Note
      1
              BASIS OF
      PRESENTATION





The
accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”) for Quarterly Reports on Form 10-Q and do not include all of
the information and note disclosures required by accounting principles generally
accepted in the United States of America.  Accordingly, the unaudited
condensed consolidated financial statements should be read in conjunction with
the Company’s audited consolidated financial statements and notes thereto for
the fiscal year ended June 30, 2009 included in the Company’s Annual Report on
Form 10-K/A filed on October 22, 2009 (the “Form 10-K/A”).  The
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of the management, considered necessary for a fair presentation of
financial position, results of operations and cash flows for the interim
periods.  The June 30, 2009 balance sheet has been derived from the
audited consolidated financial statements included in the Form 10-K/A. Operating
results for the three and nine-month periods ended March 31, 2010 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2010.





Our
consolidated financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
the settlement of liabilities in the normal course of business and accordingly,
no adjustments have been made to recorded amounts to reflect the outcome of this
uncertainty.  For several years we have incurred significant losses,
and have relied on financing activities to supplement cash from
operations.  At March 31, 2010, we had cash and cash equivalents of
$0.3 million, a decrease of $1.1 million from June 30, 2009, and we had a
working capital deficiency of approximately $0.1 million. We have incurred
annual operating losses and, at March 31, 2010, we had an accumulated deficit of
approximately $132.8 million.





The
current economic conditions are expected to continue to negatively impact our
ability to generate net income. In addition, in September 2011 the holders
of our Series J Convertible Preferred Stock have the right to redeem the Series
J Preferred Stock for approximately $17,750. Our continuation as a going concern
is subject to our ability to generate or obtain sufficient cash to meet our
obligations on a timely basis and to attain profitable operations.





Note
      2
              STOCK-BASED
      COMPENSATION





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





Stock-based
compensation expense recognized in the condensed consolidated statements of
operations for the nine-month periods ended March 31, 2010 and 2009 are based on
awards ultimately expected to vest, and is reduced for estimated forfeitures.
Forfeitures are estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates.  Pre-vesting forfeitures are estimated to be approximately
10%, based on historical experience.





The
Company granted 2.2 million stock options during the nine-month period ended
March 31, 2010 with an exercise price equal to the market price at the date of
grant with an  aggregate fair value of $72 thousand based on the
Black-Scholes option pricing model.




The
assumptions used in the Black-Scholes option pricing model related to stock
option grants during the nine month period ended March 31, 2010 were expected
option life of 2.4 years, volatility factor of 99% and risk-free interest rate
of 1.0%. The Company has not paid, nor does it contemplate paying a dividend on
its common stock in the near future. As such a 0% dividend yield was used. The
pre-vesting forfeiture rate and the years of expected life are based on the
Company's historical option pre-vesting cancellation and employee exercise
information, respectively.





The
Company recorded $84 thousand and $0.3 million in stock-based compensation
expense for stock options and restricted stock awards during the nine-month
periods ended March 31, 2010 and 2009, respectively.  Stock-based
compensation expense is recorded in general and administrative
expenses.




8




NUTRITION
21, INC.


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(in
thousands, except share data)


(unaudited)





Note
      2
              STOCK-BASED
      COMPENSATION
(continued)




The
following is a summary of option activity for the nine-month period ended March
31, 2010:





Options
                
                Shares
                  (000)
                
                
                Weighted-AverageExercise Price
                
                
                WeightedAverageRemaining
                  ContractualTerm (Yrs.)
                
                
                Aggregate
                  Intrinsic Value
                  ($000)Outstanding at
      July 1, 2009
                
                
                4,799
                
                
                $
                0.67Granted
                
                
                2,256
                
                
                $
                0.06Exercised
                
                
                —
                
                
                
                —Forfeited
      or expired
                
                
                (1,946
                )
                
                $
                0.47Outstanding
      at March 31, 2010
                
                
                5,109
                
                
                $
                0.48
                
                
                
                6.5
                
                
                $
                -Exercisable
      at March 31, 2010
                
                
                3,407
                
                
                $
                0.61
                
                
                
                5.4
                
                
                $
                -




The
following is a summary of restricted stock activity for the nine-month period
ended March 31, 2010:





Restricted Stock
                
                Shares
                  (000)
                
                
                Weighted-AverageExercise Price
                
                
                Weighted
                  AverageRemaining
                  ContractualTerm (Yrs.)
                
                
                Aggregate
                  Intrinsic Value
                  ($000’s)Outstanding
      at July 1, 2009
                
                
                169
                
                
                $
                1.57Granted
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —Forfeited
      / expired or cancelled
                
                
                (39
                )
                
                
                —Outstanding
      at March 31, 2010
                
                
                130
                
                
                $
                1.49
                
                
                
                —
                
                
                $
                —Exercisable
      at March 31, 2010
                
                
                130
                
                
                $
                1.49
                
                
                
                —
                
                
                
                —





At March
31, 2010, there was $0.2 million of unrecognized compensation costs related to
nonvested options and restricted stock awards. The costs are expected to be
recognized over a weighted average period of 1.4 years.





Note
      3
            FINANCIAL
      INSTRUMENTS





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





Note
      4
            INVENTORIES





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




9




NUTRITION
21, INC.


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(in
thousands, except share data)


(unaudited)





Note
      5
            EARNINGS (LOSS) PER
      COMMON SHARE





Diluted
earnings (loss) per common share for the three and nine month periods ended
March 31, 2010 and 2009 does not reflect the total of any incremental shares
related to the assumed conversion or exercise of preferred stock, stock options,
and warrants (26,450,134 and 26,247,377 shares for the three-month periods ended
March 31, 2010 and 2009, respectively) as the effect of such inclusions would be
anti-dilutive.





Note
      6
            SUPPLEMENTAL CASH FLOW
      INFORMATION





Nine months ended
                          March 31,2010
                        
                        
                        2009Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                        
                        $
                        180
                        
                        
                        $
                        248Supplemental
      schedule of non-cash financing activities:Increase
      in obligation for Nutrition 21 contingent payments
                        
                        $
                        —
                        
                        
                        $
                        147Issuance
      of common stock for dividends on Series J preferred stock
                        
                        $
                        1,066
                        
                        
                        $
                        1,064Issuance
      of common stock for dividends on Series I preferred stock
                        
                        $
                        —
                        
                        
                        $
                        162





Note
      7
            8% SERIES J
      CONVERTIBLE PREFERRED STOCK





As
further explained in Note 12 in the 2009 Annual Report on 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
nine-month period ended March 31, 2010, the Company issued 12,049,472 shares of
common stock with a fair value of $1.0 million in lieu of a cash
dividend.  At March 31, 2010, the outstanding Series J preferred stock
was convertible into 14,599,441 shares of common stock.





Note
      8
            SHORT-TERM
      BORROWINGS





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





As of
June 30, 2009, the Company had outstanding borrowings of $1.9 million. In August
2009, the Lender declared that our fiscal year 2009 fourth quarter loss
constituted a breach of a financial covenant. The Lender waived the breach and
agreed to the Company repaying the borrowings by November 15, 2009. As of March
31, 2010, the Company had repaid its total borrowings outstanding with Gerber
Finance, Inc. and the Loan and Security Agreement had been
terminated.





As a
result of the acquisition of Iceland Health, Inc. on August 26, 2006, the
Company delivered to the former stockholders a $2.5 million 5% note that was due
on August 25, 2009. As of March 31, 2010, the notes were paid in
full.




10




NUTRITION
21, INC.


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(in
thousands, except share data)


(unaudited)





Note
      9
            SEGMENT
      REPORTING





The
Company had two reportable business segments during fiscal year 2009, as a
supplier of essential minerals, most notably chromium picolinate (Ingredients
Products Group), and as a supplier of finished goods to food, drug and mass
retailers (Branded Products Group). With the sale of the Branded Products Group
on December 29, 2009, the Company classified the Branded Products Group as
discontinued operations, see Note 10.





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





Note
      10
            DISCONTINUED
      OPERATIONS





The
Company decided to refocus its energies and capital on its more profitable core
business, Ingredients. As a result, on December 29, 2009, the Company sold the
assets of its direct response and retail businesses to Nature’s Products, Inc.
and its affiliates. The purchase price was $3.2 million plus the assumption of
certain liabilities. The transaction resulted in a loss of $2.1 million, which
has been recorded in the condensed consolidated statement of operations as a
loss on sale of discontinued operations. Pursuant to the Purchase Agreement,
$0.1 million was deposited into an escrow account to be held to satisfy certain
indemnification claims that may arise, and has been recorded as restricted cash
in the condensed consolidated balance sheets.





For the
nine month period ended March 31, 2010, revenues from discontinued operations
were $4.5 million and losses from discontinued operations were $1.8 million
compared with revenues of $29 million and income from discontinued operations of
$3.4 million in the comparable period a year ago. The net loss from continuing
operations for the nine-month period ended March 31, 2010 was $1.8 million
compared to $3.5 million for the comparable period a year ago.




11




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





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





Forward-Looking
Statements and Risk Factors





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





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





Critical Accounting Policies
and Estimates





The
preparation of the consolidated financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities and expenses.  On an on-going basis, the Company evaluates
its estimates, including those related to uncollectible accounts receivable,
inventories, intangibles and other long-lived assets.  The Company
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.  Actual
results may differ from these estimates under different assumptions or
conditions.





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





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





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





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





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





General





The
Company had two reportable business segments during fiscal year 2009, as a
supplier of essential minerals, most notably chromium picolinate (Ingredients
Products Group), and as a supplier of finished goods to food, drug and mass
retailers (Branded Products Group). On December 29, 2009, the Company sold the
assets of its Branded Products Group, and the Company classified the Branded
Products Group as discontinued operations, see Note 10.





Revenues
from Ingredients 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.




12




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





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





Results
of Operations





Revenues





Net sales
were $1.6 million for the three month period ended March 31, 2010, compared to
$1.9 million in the comparable period a year ago.  A decline in zinc
picolinate sales was the primary reason for the change.





Net sales
of $5.8 million were $0.5 million greater for the nine months ended March 31,
2010, when compared to $5.3 million in the comparable period a year ago. Sales
of chromium picolinate for human consumption were $0.6 million greater in the
current period, combined with sales of $0.6 million into a new market segment
account.  Partially offsetting these improvements was lower than
anticipated sales of chromium picolinate for animal use of $0.4
million.





Cost of
revenues





Cost of
revenues were $0.4 million and $1.4 million, for the three and nine-month
periods ended March 31, 2010.





Advertising and Promotion
Expenses (“Advertising”)





Advertising
in the three and nine-month periods ended March 31, 2010 and 2009, respectively,
were $0.2 million and $0.5 million.





General and Administrative
Expenses (“G&A”)





G&A
were $0.7 million for the three month period ended March 31, 2010 compared to
$1.0 million for the same period a year ago.  The decrease is
primarily due to a reduction in investor relations expenses ($0.1 million) and
consulting fees ($0.1 million). G&A were $2.6 million for the nine month
period ended March 31, 2010 compared to $2.7 million in the comparable period a
year ago.





Interest expense,
net





Interest
expense, net was $0.9 million and $2.9 million for the three and nine month
periods ended March 31, 2010 compared to $1.2 million and $3.4 million in the
comparable periods a year ago. The decrease in interest expense is due to the
redemption of Series I preferred stock in fiscal year 2009, as well as the
repayment of loans outstanding to Gerber Finance, Inc. and the former
stockholders of Iceland Health, Inc.





Net Loss





Net loss
for the three month period ended March 31, 2010 was $0.8 million compared to a
net loss of $0.4 million in the comparable period a year ago for the reasons
noted above.





Net loss
for the nine month period ended March 31, 2010 was $3.6 million compared to net
loss of  $88 thousand in the comparable period a year ago. The loss
from discontinued operations of $1.9 million compared to income from
discontinued  operations of $3.4 million in the comparable period last
year  was partially offset by a smaller loss from continuing
operations of $1.8 million compared to a loss from continuing operations of $3.5
million in the comparable period last year.





Liquidity and Capital
Resources





Cash and
cash equivalents at March 31, 2010 were $0.3 million compared to $1.4 million at
June 30, 2009.





During
the nine month period ended March 31, 2010, net cash of $3.5 million was
provided by operating activities, compared to net cash used in operating
activities of $0.1 million in the comparable period a year ago. The cash effect
from the sale of discontinued operations was the primary reason for the
improvement.




13




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





During
the nine-month period ended March 31, 2010, net cash used in investing
activities was $0.1 million compared to net cash provided by investing
activities of $4.6 million in the comparable period a year
ago.  Proceeds from the sale of the auction rate securities in the
prior year was the primary reason.





During
the nine-month period ended March 31, 2010, net cash used in financing
activities was $4.5 million compared to $6.6 million in the comparable period a
year ago. Repayment of the Company’s short-term borrowings and notes payable
were the primary reasons for the use of funds.





Our
consolidated financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
the settlement of liabilities in the normal course of business. For several
years we have incurred significant losses, and have relied on financing
activities to supplement cash from operations.  At March 31, 2010, we
had cash and cash equivalents of $0.3 million, a decrease of $1.1 million from
June 30, 2009, and we had a working capital deficiency of approximately $0.1
million. We have incurred annual operating losses and, at March 31, 2010, we had
an accumulated deficit of approximately $132.8 million.





The
current economic conditions are expected to continue to negatively impact our
ability to generate net income. In addition, in September 2011 the holders
of our Series J Convertible Preferred Stock have the right to redeem the Series
J Preferred Stock for approximately $17,750. Our continuation as a going concern
is subject to our ability to generate or obtain sufficient cash to meet our
obligations on a timely basis and to attain profitable operations.





During
the quarter ended December 31, 2009, the Company completed the sale of its
retail and direct response businesses. For the nine-month period ended March 31,
2010, revenues from discontinued operations were $4.5 million and losses from
discontinued operations were $ 1.8 million compared with revenues of $29 million
and income from discontinued operations of $3.4 million in the comparable period
a year ago. The net loss from continuing operations for the nine-month period
ended March 31, 2010 was $1.8 million compared to $3.5 million for the
comparable period a year ago. The improvement in continuing operations is due
primarily to the Company’s continuing emphasis on cost control and strong
Chromium Picolinate sales for human consumption. The Company expects liquidity
to improve as a result of the sale of the Branded Products
Group.





Item
3 – Quantitative and Qualitative Disclosures about Market Risk





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





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 March 31, 2010.  Based on that
evaluation, our CEO and CFO concluded that, as of that date, our disclosure
controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15
or 15d-15 were effective.





There
were no changes in our internal controls over financial reporting during the
period ended March 31, 2010 which have materially affected or are reasonably
likely to materially affect our internal controls over financial
reporting.




14




PART
II - OTHER INFORMATION





Items 1A, 2, 3, 4 and 5 and are not
applicable and have been omitted.





Item
1 - Legal Proceedings





U.S.
Customs and Border Protection concluded its review of duties paid by Iceland
Health LLC on importation of fish oil from Iceland, and in a letter dated March
23, 2010 advised Iceland Health LLC that it
owes $180,949.29.





Item
6 - Exhibits





(a)
            Exhibits





31.1
              Certifications
      of the President and Chief Executive Officer pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.31.2
              Certifications
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-OxleyAct
      of 2002.32.1
              Certifications
      of the President and Chief Executive Officer pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.32.2
              Certification
      of the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-OxleyAct
      of 2002.




15




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:May
17, 2010


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




16