SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

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

For Fiscal Year ended June 30, 2008

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

For the transition period from _________________ to ________________________ .

Commission File Number 0-14983

NUTRITION 21, INC.

(Exact Name of Registrant as Specified in its Charter)

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

4 Manhattanville Road, Purchase, New York 10577-2197

(914) 701-4500

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

Common Stock (par value $.005 per share) Nasdaq Capital Market

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. x

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 definition 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 x Smaller reporting company o

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

Yes o No x

As of December 31, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $39,870,018 based on the closing sale price as reported on the NASDAQ Capital Market System.

As of September 21, 2008, there were 64,555,862 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on November 20, 2008 are incorporated by reference into Part III.

FORM 10-K REPORT INDEX

10-K Part and Item No.		Page No.

PART I
Item 1	Business	3
Item 1A	Risk Factors	13
Item 1B	Unresolved Staff Comments	22
Item 2	Properties	22
Item 3	Legal Proceedings	22
Item 4	Submission of Matters to a Vote of Security Holders	22

PART II

Item 5	Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6	Selected Financial Data	24
Item 7	Management's Discussion and Analysis of Financial
	Condition and Results of Operations	24
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	29
Item 8	Financial Statements and Supplementary Data	29
Item 9	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	29
Item 9A	Controls and Procedures	29
Item 9B	Other Information	30

PART III

Item 10	Directors, Executive Officers and Corporate Governance	31
Item 11	Executive Compensation	31
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	31
Item 13	Certain Relationships and Related Transactions, and Director Independence	31
Item 14	Principal Accounting Fees and Services	31

PART IV

Item 15	Exhibits, Financial Statement Schedules	32

Disclosures in this Form 10-K contain certain forward-looking statements, including without limitation, statements concerning the Company's operations, economic performance and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "believe," "expect," "anticipate" and other similar expressions generally identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based largely on the Company's current expectations and are subject to a number of risks and uncertainties, including without limitation, changes in external market factors, changes in the Company's business or growth strategy or an inability to execute its strategy due to changes in its industry or the economy generally, the emergence of new or growing competitors, various other competitive factors and other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. Actual results could differ materially from the results referred to in the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the results referred to in the forward-looking statements contained in this Form 10-K will in fact occur. The Company makes no commitment to revise or update any forward looking statements in order to reflect events or circumstances after the date any such statement is made.

PART I

Item 1. BUSINESS

We are a nutritional bioscience company and the marketer of Chromax^® chromium picolinate products and Iceland Health^® omega-3 fish oil-based supplements with health benefits substantiated by clinical research.

We hold more than 30 patents for nutrition products and uses. Our portfolio of health and wellness brands includes: Iceland Health® Maximum Strength Omega-3, Iceland Health® Joint Relief, Iceland Health® Advanced Memory Formula(TM), Chromax®, and Diabetes Essentials®. We also make private label supplements and ingredients for third parties. Our products are sold nationally through more than 29,000 major food, drug and super center stores as well as internationally.

Our core business strategy is to create and develop branded nutritional supplement products based on identified consumer needs. We then support these products with extensive marketing initiatives. Our products are distributed through mass retailers and direct to consumers.

We have enjoyed significant success in our direct response business with Iceland Health brands, which are premium quality and uniquely positioned products. They are supported with significant advertising investment which generates high consumer awareness.

Our Internet address is www.nutrition21.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with or furnish it to the Securities and Exchange Commission (“SEC”). Our SEC reports can be accessed through the investor relations section of our Web site.

History of the Company

The Company is a New York corporation that was incorporated on June 29, 1983 as Applied Microbiology, Inc. Prior to 1995 the Company focused on the development and commercialization of antibacterial technologies for new drugs. The Company subsequently licensed these technologies to third parties. Beginning in 1995, the Company shifted its focus to developing and marketing nutrition products and ingredients. In 1997 the Company acquired a comprehensive chromium-based patent portfolio based on a picolinate form of chromium that was invented and researched by the United States Department of Agriculture. In 1999, the Company acquired the Lite Bites consumer product line from Optimum Lifestyles, Inc. In August of 2003, the Company discontinued its investment in the Lite Bites product line. In 2006, the Company acquired Iceland Health and its exclusive rights until 2015 to market and sell in the US omega-3 fatty acids produced with a proprietary distillation process by an Icelandic company.

The Company’s Products

The Chromium Franchise

The Company currently sells chromium picolinate under its Chromax^® trademark to vitamin supplement and food manufacturers and marketers as well as directly to retailers for its patented uses in human and animal nutrition products. Finished products that incorporate chromium picolinate are marketed to enable consumers to supplement their requirements for essential dietary chromium needs. Daily doses typically range between 50-1,000 mcg.

The function of insulin, the body’s master metabolic hormone, is in part dependent on chromium that must be supplied through diet or supplementation. Recognizing that a number of the signs and symptoms of diabetes are shared in common with chromium deficiency, a 1999 Congressional mandate urged the National Institutes of Health’s Office of Dietary Supplements (ODS) and the USDA to further evaluate the role of chromium in diabetes. An ODS November 1999 Chromium and Diabetes Workshop Summary prioritized the research questions that had to be resolved in order to evaluate chromium’s potential role in preventing and/or mitigating diabetes management. In December 2004, Congress passed an Appropriations bill that included Report Language that “chromium picolinate can restore normal glucose metabolism by enhancing insulin sensitivity,” and that encouraged the National Center for Complementary and Alternative Medicine (NCCAM) to expand its chromium research.

According to the American Diabetes Association, 23.6 million people suffer from diabetes; it is the sixth leading cause of death in the U.S. and one of the most costly health problems. Insulin resistance is thought to be a precursor to diabetes and is estimated to affect one in five Americans according to the Journal of American Dietetic Association, February 2004.

Nutrition 21’s core research and development program has followed the ODS research guidelines with the goal of further commercializing its chromium patent estate by expanding chromium use for therapeutic applications in diabetes and other health conditions linked to insulin resistance. On August 25, 2005, the U.S. Food & Drug Administration (FDA), through its Qualified Health Claim (QHC) process, acknowledged there is limited but credible evidence to suggest that chromium picolinate may reduce the risk of insulin resistance, and therefore may possibly reduce the risk of type 2 diabetes. The FDA ruling is the first QHC related to diabetes, and it relates only to chromium picolinate and not other forms of chromium. See “Governmental Regulation”.

In collaboration with both independent and sponsored academic researchers at leading U.S. and international institutions and government agencies, the Company’s research objectives have been to strengthen the substantiation for FDA Qualified Health Claims of broader scope by continuing to:

Firmly establish the safety of Chromax chromium picolinate. Chromax chromium picolinate has been affirmed as Generally Recognized as Safe (GRAS) for use in nutritional bars and beverages

Firmly establish the mechanism of action of chromium picolinate as an insulin sensitizer in insulin mediated glucose metabolism

Confirm a relationship between low chromium status and an increased risk of diabetes and other conditions linked to insulin resistance

Use double-blind placebo-controlled trials to continue to demonstrate the potential of its chromium product(s) to safely prevent, mitigate or treat diabetes

Explore chromium’s potential role in mitigating or treating symptoms related to mental health issues, such as depression

Identify other opportunities to expand the therapeutic use of its chromium technology

Communicate the cost and health benefits of chromium-based supplements to secure approval of its product(s) for use as a first line therapy in diabetes management

The Company will continue to publicize the outcomes of these and forthcoming studies in order to increase the demand for sales of stand-alone chromium picolinate as well as its use in vitamin and supplement formulas.

The Company must also continue to demonstrate the safety of this product. The following studies, in the Company’s opinion, demonstrate that chromium picolinate is safe.

The United States Government, acting through the National Institutes of Health-National Toxicology Program (“NTP”), has independently evaluated the safety of chromium picolinate with government approved tests. In 2002 and 2008, the NTP did not find any significant safety concerns related to chromium picolinate, even at high doses.

In 2002 a group of experts consisting of Richard Anderson, Ph.D. (senior scientist, USDA chromium expert), Walter Glinsman, MD (former director from the FDA), and Joseph Borzelleca, Ph.D. (professor emeritus of pharmacology and toxicology from Virginia Commonwealth University) reviewed all existing studies of chromium picolinate and found no safety concerns.

In 1997 United States Department of Agriculture (“USDA”) researchers published results of a high dose chromium picolinate study, concluding that chromium picolinate is safe.

The marketing opportunities for the Company’s chromium picolinate have been enhanced by recent announcements issued by the United States Food & Drug Administration (FDA) and the United Kingdom’s Food Standards Agency (FSA) that chromium picolinate is safe.

Several researchers have questioned the safety of chromium picolinate. In 1995 and 2002, a research group headed by Dianne Stearns, Ph.D. (Dartmouth College and Northern Arizona University) administered chromium picolinate in a laboratory to Chinese hamster ovary cell lines, and in 2003 another research group headed by John Vincent, Ph.D. (University of Alabama) administered chromium picolinate to fruit flies. Both reported safety concerns. The Company engaged an independent contract research organization, BioReliance Corporation, and replicated the studies conducted by Stearns using Chromax chromium picolinate following internationally accepted procedures. BioReliance Corporation found Chromax chromium picolinate to be safe. This study was published in Mutation Research, 2005. Experts have advised that fruit fly studies do not predict results in humans. The United States Government, acting through the National Institutes of Health-National Toxicology Program (“NTP”), has independently evaluated the safety of chromium picolinate with government approved tests. In 2002 and 2008, the NTP did not find any significant safety concerns related to chromium picolinate, even at high doses.

The Company’s Existing Ingredients Business

Since 1997, the Company’s primary business has been to develop and market proprietary ingredients to the vitamin and supplement market for both human and animal applications. Today, Chromax chromium picolinate is the Company’s primary ingredients product.

The Company’s ingredient customers manufacture and distribute chromium picolinate as a stand-alone chromium supplement marketed either under their own private labels or for their vitamin, mineral and supplement lines.

Use of the Company’s chromium picolinate, which includes a license from the Company under its patents, is required for all products that consist of or contain chromium picolinate sold in the US for glucose control and its derivative benefits, including cholesterol control and improved body composition, established uses for chromium as chromium picolinate. Beginning in 2006, Nutrition 21 began to limit the sale of chromium picolinate for inclusion in stand-alone products, and began to supply the private label needs of retailers.

The Company derives additional revenues from the sale and licensing of chromium picolinate to customers who incorporate it and other of the Company’s ingredients into many other finished multi-ingredient nutritional supplement products. These include vitamin/mineral formulas, weight loss and sports nutrition supplements, bars, drink mixes, beverages and other products. These products are sold by the Company’s customers under a variety of brands throughout the world through natural/health food stores, supermarkets, drug stores, and mass merchandisers, and also through direct sales and catalogue sales.

The Company is actively promoting its research findings, as well as the recent FDA pronouncement surrounding the safety of chromium picolinate, to functional food manufacturers, including health and consumer product distributors in the U.S. as well as internationally. These provide new market opportunities for the Company’s products.

The Company’s chromium picolinate is also sold into the animal feed market for managing the health of breeding sows and their offspring, where it has been shown to improve glucose control in gestating swine. Research outcomes include improved fertility, productivity and recovery for the sows, and stronger and more resilient offspring.

The Company sells its products on terms that grant its customers a license under the Company’s patents to sell the Company’s chromium picolinate for the particular uses covered by its patents. The fee for this license is bundled on an unallocated basis with the price that the Company charges to its customers for products that the Company sells to them. See “Supply and Manufacturing” for information on manufacturing agreements between the Company and the manufacturers of its principal products.

During each of the fiscal years ended June 30, 2008, 2007 and 2006 respectively, ingredient sales of Chromax chromium picolinate accounted for more than 16%, 18% and 86% of the Company's total revenues.

In fiscal year 2008, three customers accounted for 20% of the Company’s total revenues, while in fiscal year 2007, two customers accounted for 14% of the Company’s total revenues. In fiscal year 2006, two customers accounted for 30% of the Company’s total revenues.

In fiscal year 2007, we began accounting for our business in two industry segments, ingredients and branded products.

Refer to Item 7 for a discussion of revenue, loss before income taxes and total assets for each of our ingredients and branded products segments.

Chromax^®, chromium picolinate branded finished product

Until the Company began to market its premium priced Chromax branded chromium picolinate mineral supplement, the only significant branded products were so-called A-to-Z lines, such as Nature Made and private label store brands, for example CVS chromium picolinate, unlike the calcium market which is now dominated by leading brands such as Caltrate^® and Citrical^®. Beginning in late 2005, the Company entered into distribution agreements directly with leading national retail drug/pharmacy chains to sell its premium priced Chromax branded chromium picolinate mineral supplement. The Chromax brand is targeted to consumers interested in preventing health concerns resulting from increased age and obesity that can lead to insulin resistance, including pre-diabetes, diabetes, cardiovascular health, fighting weight gain and controlling carbohydrates. The initial target market for Chromax is women age 35 to 55. Insulin resistance is an epidemic condition that dramatically increases the risk for type 2 diabetes, coronary heart disease and stroke, estimated to affect one in three Americans, according to The American College of Endocrinology (ACE).

The Company’s distribution agreements with retailers are terminable by either party on notice, and do not require any retailer to purchase any amount of product.

Diabetes Essentials® nutrient based product line specifically formulated for people with type-2 diabetes

The Company is also commercializing Diabetes Essentials® as a nutritional complement to medical treatment for people with type 2 diabetes. The lead product is Diachrome® specially formulated to provide advanced nutritional support for people with type 2 diabetes, offering a unique dual effect on blood sugar and heart health.

Research conducted at Johns Hopkins University has suggested that there is a direct link between low chromium levels and the occurrence of cardiovascular disease and research conducted at the Harvard School of Public Health has further suggested that there is a direct link between low chromium levels and the occurrence of cardiovascular disease in people with diabetes. Diachrome combines Chromax® chromium picolinate (to aid in healthy insulin function) with the B vitamin biotin (for healthy insulin regulation). Studies published in medical journals such as The American Journal of Medical Science and Diabetes Technology and Therapeutics support the benefits of this combination in the regimen of people with type 2 diabetes.

In a clinical study of men and women with type 2 diabetes, Diachrome, the once-daily doctor-recommended supplement, was taken in addition to oral, anti-diabetic prescriptions. The results showed that the addition of Diachrome promoted healthy blood sugar after only 90 days. It was also found that Diachrome significantly benefited those who have high baseline A1c, fasting plasma glucose and lipid levels.

For a number of years, Diachrome has been studied for its potential as a safe and effective support to diabetes care. A growing body of scientific evidence indicates that Diachrome’s unique ingredient combination has positive effects on insulin function, blood glucose and lipid metabolism.

The nutrient based line is available in easy-to-swallow capsules or convenient Nutrition To Go drink packets. The line is being sold nationally at drug and food retailers.

Iceland Health Omega-3 based franchise

In August 2006, the Company acquired Iceland Health, Inc., which has developed a leading brand position in the omega-3 market, one of the fastest growing categories in the supplement industry since 2003. Iceland Health has the exclusive U.S. right until 2015 to market and sell fish oil manufactured by an Icelandic company to pharmaceutical standards utilizing a patented distillation process to remove toxins and dioxins. The Company primarily markets omega-3 products through direct response channels including TV infomercials, radio, print, direct mail, and Internet e-commerce, and has also begun to market these products into the retail distribution channel. Iceland Health products are sold nationally in over 29,000 food, drug and supercenter stores. Within one year of retail sales Iceland Health Omega-3 and Iceland Health Joint Relief are each in the top 20 branded SKUS in their respective segments of the Drug Channel.

Product Development

We are continuing to research and develop new Iceland Health® brand extensions, two of which have recently been launched in major retail chains, including Walgreens, Rite Aid and CVS.

The first of these new products, Iceland Health® Omega-3 Cholesterol Health, helps lower bad (LDL) cholesterol by up to 15% and promotes healthy cholesterol and cardiovascular health.

The second of these products, Iceland Health® Joint Relief Plus SLEEP Support offers consumers the same superior benefit of improving joint mobility and flexibility as our current Joint Relief product, along with the added benefit of melatonin to promote a 100% drug-free uninterrupted sleep.

The Company holds patents for several other novel nutrition compounds and uses that provide additional product opportunities for development and commercialization that address additional age-related health care concerns. Nutrition 21 plans to market these products in the future once the Chromax, Diachrome and Iceland Health products are established at retail.

The Company’s Pharmaceutical Licensing Opportunities for its Chromium Technologies

The Company owns or has exclusive licenses to patents for pharmaceutical applications that relate to chromium’s role in treating mental health conditions, such as depression and PMS/PMDD. The Company also has a patent pending related to chromium’s role in mitigating the negative effects caused by drug induced insulin resistance. The Company will seek to out-license the development and marketing of these pharmaceutical products to pharmaceutical companies.

Pharmaceutical Products Licensed to Third Parties

In August 2000, the Company exclusively licensed to Biosynexus Incorporated certain rights to nisin and lysostaphin antibacterial technologies for development and marketing of new drugs for human uses. The licenses provide for milestone payments and royalties to the Company. To date, the Company has received only minimum royalties of $200,000 annually under these licenses.

Based on a license agreement with ImmuCell Corporation, the Company as licensor may become entitled to royalty payments upon commercial sale by ImmuCell of certain skin and environment sanitizers and teat dips for the prevention of animal mastitis.

Research and Development

During the fiscal years ended June 30, 2008, 2007 and 2006, the Company spent approximately $0.9 million, $1.2 million and $1.5 million, respectively, on research and development. The Company’s research and development program is based on chromium and seeks to discover and substantiate the efficacy and safety of ingredients and products that have a significant nutritional therapeutic value to consumers. The primary research focus over the past few years has been in the area of diabetes, cardiovascular health, and mental health. Discovering the mechanism of action of chromium picolinate and further confirming the beneficial effects of chromium picolinate in people with diabetes have been critical objectives, as well as further differentiating chromium picolinate’s clinical effects versus other forms of chromium.

This research effort has enabled the Company to identify patentable new combinations of chromium and new uses for chromium, and new food systems that can be enhanced by the inclusion of its ingredient systems.

Clinical Studies, Presentations and Publications

The Company from time to time provides funding for clinical studies of its products to evaluate safety, efficacy and mechanism of action, and in other instances supplies chromium picolinate and other products for use in studies for which it provides no funding. The Company believes that positive results in these studies, whether or not funded by it, provide benefits to the Company by furthering acceptance of its products. The Company also makes presentations at various meetings to share research findings and to gain acceptance of its products. The following information summarizes some of these studies and details of those studies that were funded by the Company. The information also summarizes selected recent presentations and publications that relate to the Company’s products.

Studies in progress:

The Company has supplied its Chromax chromium picolinate to Griffin Hospital/Yale School of Medicine for a clinical study funded by the National Institutes of Health to evaluate “Chromium Effects in Impaired Glucose Tolerance.” The purpose of this study is to evaluate the effects of chromium picolinate on both measures of glucose tolerance and brachial artery endothelial function.

The Company has supplied its Chromax chromium picolinate to Pennington Biomedical Research Center for a clinical study funded by the National Institutes of Health to evaluate “Chromium and Insulin Action.” The purpose of this study is to evaluate the effects of chromium picolinate on glucose metabolism in people with newly diagnosed type 2 diabetes, and may provide data to generate recommendations for or against routine clinical use in this population.

The Company has supplied its Chromax chromium picolinate to the University of California, Davis for a clinical study funded by the National Institutes of Health to evaluate the “Effects of Chromium on Progression of Insulin Resistance.” The purpose of this study is to evaluate the bioavailability (tissue chromium status) and efficacy of chromium picolinate and chromium nicotinate in ameliorating diet-induced insulin resistance and dyslipidemia.

The Company has supplied its Chromax chromium picolinate to the State University of New York at Stony Brook for a clinical study funded by the National Institutes of Health to evaluate “A Novel Therapy for Glucose Intolerance in HIV Disease.” The purpose of this study is to evaluate the safety and efficacy of chromium picolinate in the treatment of insulin resistance in HIV disease.

The Company has supplied its Chromax chromium picolinate to the State University of New York at Stony Brook for a clinical study funded by the National Institutes of Health to evaluate “Chromium Treatment of Obesity-Related Insulin Resistance.” The purpose of this study is to evaluate the safety and efficacy of chromium picolinate in the treatment of obesity-related insulin resistance and may provide data to generate dietary chromium recommendations for reducing the risk of diabetes and associated diseases.

The Company has supplied its Chromax chromium picolinate to the University of California, San Francisco for a clinical study funded by the National Institutes of Health to evaluate “Chromium and Insulin Resistance.” The purpose of this study is to evaluate the safety and efficacy of chromium picolinate in the treatment of insulin resistance in non-obese, non-diabetic subjects.

Studies Completed in 2008:

The Company supplied its Chromax chromium picolinate to Yale - Griffin Prevention Research Center for a clinical study entitled “Chromium Picolinate for Weight Loss.” This study evaluated the effect of supplementation with chromium picolinate on weight loss, abdominal body fat, and cardiovascular risk factors.

The Company supplied its Chromax chromium picolinate to the University of Cincinnati for a clinical study entitled “Chromium Supplementation in Cognitive Aging.” This study evaluated the effect of supplementation with chromium picolinate on cognitive function in men and women with mild cognitive impairment and age-associated memory impairment.

Presentations and Publications in 2008:

A paper entitled “Chromium picolinate and biotin combination improves glucose metabolism in treated, uncontrolled overweight to obese patients with type 2 diabetes” was published in Diabetes Metabolism Research & Reviews. This paper concluded that the combination of chromium picolinate and biotin, administered as an adjuvant to current prescription anti-diabetic medication, can improve glycaemic control in overweight to obese individuals with type 2 diabetes; especially those patients with poor glycaemic control on oral therapy.

A paper entitled “Chromium picolinate does not produce chromosome damage” was published in Toxicology In Vitro. This paper concluded that chromium picolinate does not induce chromosomal damage in bone marrow cells at single doses of 33, 250 and 2000 mg/kg of body weight and there was no indication of any toxicity of chromium picolinate.

A paper entitled “Chromium picolinate for insulin resistance in subjects with HIV disease: a pilot study” was published in Diabetes, Obesity and Metabolism. This paper concluded that chromium picolinate therapy improved insulin resistance in some HIV-positive subjects.

A paper entitled “Metabolic effects of a novel silicate inositol complex of the nitric oxide precursor arginine in the obese insulin-resistant JCR:LA-cp rat” was published in Metabolism. This paper concluded that that the arginine silicate inositol complex is absorbed efficiently, raising plasma arginine levels, and is more biologically effective than the free amino acid hydrochloride.

A poster presentation entitled “Effects of chromium histidinate supplementation on insulin sensitivity and lipid profile in rat models of insulin resistance and of type 2 diabetes” was given at the Experimental Biology Conference (FASEB). This presentation reported that chromium histidinate is well absorbed and is efficacious.

A poster presentation entitled “Chromium Supplementation Enhances Cerebral Activation in Older Adults With Early Memory Changes” was given at the annual meeting of the American Neuropsychiatric Association. This presentation reported that supplementation with chromium picolinate in older adults with early memory changes may enhance cognitive inhibitory control and speed of processing and associated cerebral function.

A poster presentation entitled “Improved cognitive-cerebral function in age-related memory decline with chromium supplementation,” was given at the annual meeting of the American College of Neuropsychopharmacology. This presentation reported that supplementation with chromium picolinate in older adults with early memory changes may enhance cognitive inhibitory control and speed of processing and associated cerebral function.

Governmental Regulation

The U.S. Food and Drug Administration (“FDA”) regulates the labeling and marketing of the Company’s dietary supplements under the Dietary Supplement and Health Education Act (“DSHEA”). Under DSHEA, dietary supplements that were first marketed as dietary supplements after October 1994 require safety approval by the FDA. See “The Company’s Existing Ingredient Business” for further information on the safety of the Company’s products. Under DSHEA, the Company is required to submit for FDA approval claims regarding the effect of its dietary supplements on the structure or function of the body. DSHEA also requires an FDA approval for claims that relate dietary supplements to disease prevention (so-called “health claims").

The Company received FDA approval for a qualified health claim. On August 25, 2005, the FDA recognized chromium picolinate as a safe nutritional supplement that may reduce the risk of insulin resistance and possibly type 2 diabetes. The FDA concluded:

“One small study suggests that chromium picolinate may reduce the risk of insulin resistance, and therefore possibly may reduce the risk of type 2 diabetes. FDA concludes, however, that the existence of such a relationship between chromium picolinate and either insulin resistance or type 2 diabetes is highly uncertain.”

The FDA also concluded that chromium picolinate is safe stating the following:

“FDA concludes at this time, under the preliminary requirements of 21 CRF 101.14(b)(3)(ii), that the use of chromium picolinate in dietary supplements as described in the [approved] qualified health claims discussed in section IV is safe and lawful under the applicable provisions of the Act.”

The Federal Trade Commission (“FTC”) regulates product-advertising claims and requires that claims be supported by competent and reliable scientific evidence.

Prior to our acquisition of a California limited partnership called Nutrition 21 ("Nutrition 21 LP"), the FTC opened an inquiry into certain of the claims that Nutrition 21 LP was making for chromium picolinate. The inquiry was terminated by the FTC with Nutrition 21 LP entering into a consent agreement that requires Nutrition 21 LP to support its claims by competent and reliable scientific evidence. After we acquired Nutrition 21 LP in 1997, we undertook new clinical studies to support the claims we intended to make for our products. The FTC has subsequently audited our chromium picolinate advertising and has not found either a lack of competent and reliable scientific evidence or a failure to comply with the consent agreement. The FTC continues to monitor our advertising and could limit our advertising in ways that could make marketing our products more difficult or result in lost sales.

Proprietary Rights

Trademarks

Chromax, Diachrome, Iceland Health, Selenomax, SelenoPure, Zinmax, Zenergen, and Magnemax are among the more well known trademarks owned by Nutrition 21: Chromax for chromium picolinate; Diachrome for chromium picolinate and biotin; Iceland Health for Omega-3 supplements; Selenomax for high selenium yeast; SelenoPure for yeast-free selenium; Zinmax for zinc picolinate; Zenergen for chromium picolinate and conjugated linoleic acid; and Magnemax for manganese picolinate.

Patents

Nutritional Patents

Our significant patents consist of:

• two method of use patents that expire in March 2009 that cover the method of use in low doses of chromium picolinate for improving body composition and glucose stabilization and one method of use patent that expires in December 2009 that covers the use of chromium picolinate for cholesterol maintenance,

• another method of use patent that expires in 2015 and covers the use of high doses of chromium picolinate for glucose stabilization,

• four patents that expire in 2017 and cover the use of chromium for relieving the symptoms of depression and pre-menstrual syndrome,

• two composition of matter patents that expire in 2017 and cover chromium picolinate and biotin compositions and their use for stabilizing serum glucose,

• one composition of matter patent that expires in 2017 and covers a composition of chromium picolinate and other ingredients and its use for improving body composition,

• twelve other chromium-based patents that expire in 2017, 2018 and 2021 that cover a range of compositions and uses for which we do not offer products, and

• one composition of matter patent that expires in 2019 that covers a composition of chromium histidinate.

Composition of matter patents protect the manufacture, sale or use of a product. Method of use patents cover the use of a product. Method of use patents are more difficult to enforce since the actual infringer is the person that takes the product for the patented use. In order to enforce a method of use patent against manufacturers or sellers, the patent owner must prove contributory or induced infringement, which is more difficult than enforcing a composition of matter patent.

The Company maintains non-disclosure safeguards, including confidentiality agreements, with employees and certain consultants. There can be no assurance, however, that others may not independently develop similar technology or that secrecy will not be breached despite any agreements that exist.

Although the Company holds exclusive rights to United States patents for the nutritional uses for which chromium picolinate is sold, the Company is often faced with competition from companies, including importers that disregard its patent rights. These companies take calculated risks that the Company will not sue to enforce its patent rights against them. The Company determines whether to file suit against an infringer by taking into consideration an estimate of infringing sales and the cost of patent enforcement. While there is no guarantee that the Company will be able to successfully enforce its patent rights against these competitors, the Company continues to monitor industry practices.

Pharmaceutical Patents

The Company owns more than 100 patents relating to, among other things, the expression and production of proteins by recombinant Bacillus strains; plasmid vectors and methods of construction; expression and production of recombinant lysostaphin; novel bacteriocin compositions and their use as broad spectrum bactericides; the use of bacteriocin compositions to treat bovine mastitis; the use of bacteriocin compositions in oral healthcare; the use of bacteriocin compositions on skin for healthcare and hygiene; and the use of bacteriocin compositions in gastrointestinal healthcare. These patents are licensed to Biosynexus Incorporated, and ImmuCell Corporation as set forth under ”Pharmaceutical Products Licensed to Third Parties.”

The Company maintains trade secret protection for bacterial strains, technical know-how, and other information it considers proprietary and beneficial for the manufacture, use, regulatory approval, and marketing of the Company's products.

Competition

Numerous manufacturers and retailers compete actively for consumers. In addition, nutritional supplements can be purchased in a wide variety of channels of distribution. These channels include mass market retail stores and the Internet. These markets generally have low barriers to entry. Private label products of our customers also provide competition to our products. Additional national or international companies may seek in the future to enter or to increase their presence in the health foods channel or the vitamin, mineral supplement market.

In our ingredients business, we believe that we have a relatively strong position for existing stand-alone chromium sales, and we have a relatively small market share for sales of chromium into multi-ingredient products. Our major competitor in this business is InterHealth Nutraceuticals Inc. which is a privately held company that markets chromium polynicotinate.

Our therapeutic branded business confronts many large established companies in a huge industry that serves the diabetes therapeutic market. The market is served by the major pharmaceutical companies that offer various medications to diabetics. Our success in this arena will in large part depend on our obtaining a scientific consensus that our supplement offers benefits that are competitive with the numerous products offered by companies that participate in this business.

Our omega-3 business is highly competitive. As we enter retail distribution channels with our omega-3 products, we will be entering an intensely competitive market with large established companies and brands such as Nordic Naturals, which offers omega-3 fatty acids that have potency and purity similar to our products, as well as Bumble Bee Seafoods and Puritan's Pride.

Supply and Manufacturing

We rely on outside suppliers to formulate, manufacture and package our products. We do not have long-term agreements with any of our suppliers other than our manufacturer in Iceland. We acquire omega-3 fatty acids that are sold as Iceland Health Omega 3 from the manufacturer in Iceland under an agreement that gives us the exclusive right until 2015 to import omega-3 fatty acids from this manufacturer and to distribute this product in the United States. We plan to negotiate an extension of the exclusivity with the manufacturer beyond 2015. These products are identified on packaging as “coming from Iceland.”

We purchase omega-3 fatty acids for our Iceland Health Joint Relief product from various suppliers in the United States, on a purchase order basis, for sale in packaging that does not identify the product as “coming from Iceland.” Should our manufacturer in Iceland fail to adequately supply us at any time, we believe that we can, with some disruption, purchase additional omega-3 fatty acids from our current or other suppliers in the US, but we may be adversely affected by our inability to identify these products as “coming from Iceland.”

We purchase our chromium and related compounds on a purchase order basis from several suppliers, but our business may nevertheless be disrupted if we are required to change a significant supplier.

All of the Company’s suppliers comply with GMPs (Good Manufacturing Practices) for nutritional supplements. GMP is a system of procedures and documentation written or analytical, to assure our products contain the appropriate strength, quality, composition and purity which they purport to have.

Employees

As of June 30, 2008, the Company had 20 full-time employees, of whom 3 were executive employees, 7 were administrative, 8 were engaged in marketing and sales, and 2 were involved in research, process and product development, and manufacturing. The Company does not have a collective bargaining agreement with any of its personnel and considers its relationship with its employees to be satisfactory.

Item 1A. RISK FACTORS

An investment in the Company involves the following risks, among others:

Financial Performance and Reporting Risks

We have not been profitable for the last seven fiscal years. We had net losses of $16.942 million, $19.148 million, $10.317 million, $7.044 million, $5.901 million, $10.506 million and $6.011 million for the fiscal years ended on June 30, 2008, 2007, 2006, 2005, 2004, 2003 and 2002, respectively. As a result we have been required periodically to rely on offerings of securities to fund cash shortfalls in our business.

In the fiscal year ending June 30, 2009, we expect to incur approximately $0.3 million of expenses for accretion of debt discount and amortization of debt issuance costs on Series I preferred stock that was issued in fiscal year 2005. In the fiscal years ending June 30, 2009 and 2010, respectively, we expect to incur approximately $2.0 million of expenses for accretion of debt discount and amortization of debt issuance costs and in June 30, 2011, we expect to incur approximately $0.5 million of expenses for accretion of debt discount and amortization of debt issuance costs on Series J preferred stock that was issued in fiscal year 2007. Also, the issuance of additional securities other than common stock may increase these expenses.

We may need to raise additional funds. During the fiscal years ended June 30, 2008, 2007 and 2006, cash used in operations was $14.8 million, $10.3 million and $6.0 million, respectively. To fund any negative cash flow, we may need to raise funds. There is no assurance that additional funds will be available on terms favorable to the Company and its shareholders, or at all. The Series I and J preferred stock agreements limit our ability to incur indebtedness and to issue additional preferred stock.

Illiquidity of Auction Rate Securities. We own $4.0 million of auction rate securities that are illiquid under current market conditions, and have borrowed $3.0 million using these securities as collateral through January 7, 2009. We will be negatively impacted if our auction rate securities do not become liquid before this borrowing or any additional refinancing becomes due.

Claims by an Investor. An investor in shares of the Company’s Series J Convertible Preferred Stock in May and June 2008 claimed by letter that the Company has committed alleged breaches that require the Company among other things to redeem for approximately $23,075,000 all outstanding shares of Series J Preferred Stock, to pay approximately $300,000 of accrued and unpaid dividends on the Series J Preferred Stock, and to make anti-dilution adjustments whereby 21,344,000 shares of Series I and Series J Preferred Stock would be convertible into common stock at $0.41 per share instead of $1.2158 per share, and warrants to purchase 9,628,471 shares of common stock at $1.2158 per share would be adjusted to entitle the holders to purchase 28,551,938 shares of common stock at $0.41 per share. The Company disagrees with the claims of the Investor. In the Company’s opinion the breaches alleged by the Investor do not exist, and the Company has so advised the Investor. For additional information, see the Report on Form 8-K that the Company filed on June 27, 2008.

Business Strategy and Operational Risks

As a part of our business strategy, we have made and may continue to make acquisitions. These acquisitions could disrupt our operations and harm our operating results. An element of our strategy includes expanding our product offerings, gaining shelf-space and gaining access to new skills and other resources through strategic acquisitions when attractive opportunities arise. Acquiring additional businesses and the implementation of other elements of our business strategy are subject to various risks and uncertainties. Some of these factors are within our control and some are outside our control. These risks and uncertainties include, but are not limited to, the following:

o	Any acquisition may result in significant expenditures of cash, stock and/or management resources,

o	Acquired businesses may not perform in accordance with expectations,

o	We may encounter difficulties and costs with the integration of the acquired businesses,

o	Management’s attention may be diverted from other aspects of our business,

o	We may face unexpected problems entering geographic and product markets in which we have limited or no direct prior experience,

o	We may lose key employees of acquired or existing businesses,

o	We may incur liabilities and claims arising out of acquired businesses, and

o	We may incur indebtedness or issue additional capital stock which could be dilutive to holders of our common stock.

Because a significant portion of our sales is to a small number of retail customers, we are dependent to a large degree upon these customers and their ability to successfully sell our products. In fiscal 2008, three of our mass merchandise retail customers together accounted for approximately 20% of our total revenues, and eight of our mass merchandise retail customers represented approximately 25% of our total revenues. Consistent with industry practice, we do not operate under a long-term written supply contract with our mass merchandise retail customers. Our business would materially suffer if we lost any major mass merchandise retail customer or if our business with a major mass merchandise retail customer were to decrease significantly.

The success of our retail distribution business is dependent, to a large degree, on the positioning of our products by our mass merchandise retail customers and on the support they provide for our products, which are outside our control and in turn depend in large part on the level of sales of our products.

A significant amount of marketing expenditures is required in order to generate sales of our products, and we cannot be certain if our marketing initiatives will be successful or if we will be able to raise these funds. Both our mass merchandise retail distribution business and our Iceland Health direct response marketing business require substantial expenditures to generate sales.

To succeed in our arrangements with mass merchandise retailers we need to launch and maintain successful marketing campaigns to encourage consumers to purchase branded products stocked by these retailers. Our failure to generate such demand could cause retailers to terminate their relationship with us. Our arrangements with mass retailers are terminable by them on notice.

Our direct response marketing business requires significant expenditure for the purchase of media advertising and related matters in advance of sales. Growth in our sales of Iceland Health products will be impaired if we do not successfully introduce new products into our mass distribution channels with the support of significant marketing expenditures.

Our advertising and promotion expenses aggregated approximately 71% of total revenues in the fiscal year ended June 30, 2008.

We rely on a limited number of products for the majority of our sales and any reduction in the demand for or availability of these products would have an adverse effect on our sales. Our significant products are limited to Chromax, Diachrome, Iceland Health Omega-3, Iceland Health Joint Relief and Advanced Memory Formula. This narrow line of products puts us at risk of being affected adversely should sales of even a small number of products fail to grow as expected or decline, or should new products not be accepted in the marketplace either initially or not at all. Successful growth of our business depends on our ability to develop and market new products on a continuous basis.

We rely on outside suppliers to formulate, manufacture and package our products. Because we do not have long-term agreements with any of our suppliers other than our manufacturer in Iceland, our business could be disrupted if our relationship with a supplier is terminated or curtailed, or if a supplier suffers financial difficulties or otherwise fails to supply us on a timely basis and at favorable prices. We acquire omega-3 fatty acids that are sold as Iceland Health Omega 3 from a manufacturer in Iceland under an agreement that gives us the exclusive right until 2015 to import omega -3 fatty acids from this manufacturer and to distribute this product in the United States. These products are identified on packaging as “coming from Iceland.” We purchase omega-3 fatty acids for our Iceland Health Joint Relief product from various suppliers in the United States, on a purchase order basis, for sale in packaging that does not identify the product as “coming from Iceland.” Should our manufacturer in Iceland fail to adequately supply us at any time, we believe that we can with some disruption purchase additional omega-3 fatty acids from our current or other suppliers in the US, but we may be adversely affected by our inability to identify these products as “coming from Iceland.” We purchase our chromium and related compounds on a purchase order basis from several suppliers, but our business may nevertheless be disrupted if we are required to change a significant supplier.

The failure of third party call center operators to effectively handle customer calls could adversely affect our business. We rely on outside contractors for the call center requirements of our direct response marketing business, and we are dependent on the uninterrupted and efficient operation of these facilities. Should we experience unacceptable numbers of uncompleted calls we will need to slow our marketing of Iceland Health products and to commit additional resources to better train our call center suppliers.

Several researchers have questioned the safety of chromium picolinate, and we may be liable for damages if our products are proven to have harmful side effects.

In 1995 and 2002, a research group headed by Dianne Stearns, Ph.D. (Dartmouth College and Northern Arizona University) administered chromium picolinate in a laboratory to Chinese hamster ovary cell lines and reported safety concerns. Also, in 2003, a research group headed by John Vincent, Ph.D. (University of Alabama) administered chromium picolinate to fruit flies and reported safety concerns. See “The Chromium Franchise” for recent safety announcements issued by the United States' Food & Drug Administration (FDA), the National toxicology Program (NTP) and the United Kingdom's Food Standards Agency (FSA). However, the Stearns and Vincent studies can nevertheless reduce the marketability of our products. In addition, if in fact safety concerns are well founded for humans, our viability will be affected since a large portion of our revenues is derived from the sale of chromium picolinate for inclusion in nutritional supplement products.

Harmful effects could also result in legal action against us. We have $5.0 million of product liability insurance for the products we currently market and intend to obtain product liability insurance for products we will market in the future. We may not succeed in obtaining additional insurance or obtaining insurance sufficient to cover all possible liabilities.

If we are unable to retain key personnel, our ability to manage our business effectively and continue our growth could be negatively impacted. Our Chief Executive Officer, and other key management employees are primarily responsible for our day-to-day operations, and we believe our success depends in part on our ability to retain them and to continue to attract additional qualified individuals to our management team. The loss or limitation of the cservices of any of our key management employees or the inability to attract additional qualified management personnel could have a material adverse effect on our business, financial condition, and results of operations.

We have no proprietary rights in products that we import from Iceland. The Iceland manufacturer of the omega-3 fatty acids that we sell as “coming from Iceland” uses a patented distillation process to remove toxins and dioxins from the fish oils from which the product is derived. However, the product itself is not patented, nor do we have the right to sue persons who infringe on the manufacturer’s distillation process. Further, the product competes with omega-3 fatty acids that are produced with competitive distillation processes or that are derived directly from algae in a process that does not need to remove toxins and dioxin.

If we do not timely take action to overcome the effect of the expiration of our patent rights, or if we do not enforce our patent rights, or are unsuccessful enforcing our patent rights, we will face increased competition. Our significant patents consist of:

• two method of use patents that expire in March 2009 that cover the use in low doses of chromium picolinate for improving body composition and glucose stabilization and one method of use patent that expires in December 2009 that covers the use of chromium picolinate for cholesterol maintenance,

• another method of use patent that expires in 2015 and covers the use of high doses of chromium picolinate for glucose stabilization,

• four patents that expire in 2017 and cover the use of chromium for relieving the symptoms of depression and pre-menstrual syndrome,

• two composition of matter patents that expire in 2017 and cover chromium picolinate and biotin compositions and their use for stabilizing serum glucose,

• one composition of matter patent that expires in 2017 and covers a composition of chromium picolinate and other ingredients and its use for improving body composition,

• twelve other chromium-based patents that expire in 2017, 2018 and 2021 that cover a range of compositions and uses for which we do not offer products, and

• one composition of matter patent that expires in 2019 that covers chromium histidinate.

Our ingredients business accounted for approximately 16% of our revenues in the fiscal year 2008 and, since our ingredients are not branded, this business depends almost entirely on the strength of our patents. Our branded products that are based on chromium picolinate or other patented compounds also benefit from patent protection. We will be materially and adversely affected if, by the expiration date of significant patents, which is March 2009 for our patents for low dose uses of chromium picolinate, we cannot maintain prior revenue levels by reducing prices and increasing unit sales or by developing other formulations of chromium picolinate products to replace any reduction in sales.

We have also applied for 7 other United States patents relating to improving insulin sensitivity, improving cognitive function, improving immune function, reducing hyperglycemia, and treatment of diabetes, dyslipidemia, hypercholesterolemia and other diseases. If we do not obtain patent protection, our ability to develop and market products for these disease states will be adversely affected, since we will be subject to competition on the products we develop. In addition, we expect to incur significant expense for the development and marketing of our cognitive product and we may be adversely affected should our application for a patent for our new cognitive product not be approved. Despite past successes in obtaining patent protection, there is no guarantee a patent will be granted in each instance.

Composition of matter patents protect the manufacture, sale or use of a product. Method of use patents cover the use of a product. Method of use patents are more difficult to enforce since the actual infringer is the person that takes the chromium picolinate for the patented use. In order to enforce a method of use patent against manufacturers or sellers, the patent owner must prove contributory or induced infringement, which is more difficult than enforcing a composition of matter patent.

We are from time to time faced with competition from companies, including importers, that disregard our patent rights. Companies frequently take calculated risks that we will not sue to enforce our patent rights against them and that we will not prevail in any suits that we do bring. In considering whether to bring a suit, we take into account an estimate of infringing sales and the legal costs of enforcing the patent.

Competitors who disregard our patent rights can undercut our prices because they avoid paying for the technology in their products.

If we fail to protect our trademarks, then our ability to compete could be negatively affected, which would harm our financial condition and operating results. The market for our products depends to a significant extent upon the goodwill associated with our Chromax, Diachrome and Iceland Health trademarks. We own the material trademark rights used in connection with the packaging, marketing and distribution of our products in the markets where those products are sold. Therefore, trademark protection is important to our business. Although most of our trademarks are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting trademark protection. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The loss or infringement of our trademarks could impair the goodwill associated with our brands and harm our reputation, which would harm our financial condition and operating results.

Industry and Market Risks

We are highly dependent upon consumers’ perception of the safety and quality of our products as well as similar products distributed by other companies in our industry, and adverse publicity and negative public perception regarding particular ingredients or products or our industry in general could limit our ability to increase revenue and grow our business. Decisions about purchasing made by consumers of our products may be affected by adverse publicity or negative public perception regarding particular ingredients or products or our industry in general. This negative public perception may include publicity regarding the legality or quality of particular ingredients or products in general or of other companies or our products or ingredients specifically. Negative public perception may also arise from regulatory investigations, regardless of whether those investigations involve us. We are highly dependent upon consumers’ perception of the safety and quality of our products as well as similar products distributed by other companies. Thus, the mere publication of reports asserting that such products may be harmful could have a material adverse effect on us, regardless of whether these reports are scientifically supported. Publicity related to nutritional supplements may also result in increased regulatory scrutiny of our industry. Adverse publicity may have a material adverse effect on our business, financial condition and results of operations. There can be no assurance of future favorable scientific results and media attention or of the absence of unfavorable or inconsistent findings.

Changes in consumer preferences and discretionary spending could negatively impact our operating results. Our business is subject to changing consumer trends and preferences. Our continued success depends in part on our ability to anticipate and respond to these changes, and we may not respond in a timely or commercially appropriate manner to such changes. Furthermore, the nutritional supplement industry is characterized by rapid and frequent changes in demand for products and new product introductions and enhancements. Our failure to accurately predict these trends could negatively impact consumer opinion of our products, which in turn could harm our customer and distributor relationships and cause the loss of sales.

We face intense competition from competitors that are larger, more established and possess greater resources than we do, and if we are unable to compete effectively, we may be unable to grow our market share in order to become profitable. Numerous manufacturers and retailers compete actively for consumers. There can be no assurance that we will be able to compete in this intensely competitive environment. In addition, nutritional supplements can be purchased in a wide variety of channels of distribution. These channels include mass market retail stores and the Internet. Because these markets generally have low barriers to entry, additional competitors could enter the market at any time. Private label products of our customers also provide competition to our products. Additional national or international companies may seek in the future to enter or to increase their presence in the health foods channel or the vitamin, mineral supplement market. Increased competition in either or both could have a material adverse effect on us.

Our product sales may decline due to the introduction by others of products that have competitive advantages. We are not aware of any studies that compare the relative advantages or disadvantages of our products as against other competitive products. Research supporting competitors' claims in the nutrition supplement market is not subject to mandatory review by any government agency. Therefore, new products can appear and be brought to market rapidly and with little advance notice. Competitive products may appear or be supported by new research before we are able to respond with new product development or countervailing research. If competing products are developed that customers believe are superior to our products, sales of our products could decline and our business would be harmed.

Our products are subject to government regulation, which could limit or prevent the sale of our products. The manufacture, packaging, labeling, advertising, promotion, distribution and sale of our products are subject to regulation by numerous national and local governmental agencies in the United States and other countries. The primary regulatory bodies in the United States are the FDA and FTC. Failure to comply with these regulatory requirements may result in various types of penalties or fines. These include injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions. Individual states also regulate nutritional supplements. A state may interpret claims or products presumptively valid under federal law as illegal under that state’s regulations. In markets outside the United States, we are usually required to obtain approvals, licenses or certifications from a country’s ministry of health or comparable agency, as well as labeling and packaging regulations, all of which vary from country to country. Approvals or licensing may be conditioned on reformulation of products or may be unavailable with respect to certain products or product ingredients. Any of these government agencies, as well as legislative bodies, can change existing regulations, or impose new ones, which could cause any of the following:

requirements for the reformulation of certain or all products to meet new standards,

the recall or discontinuance of certain or all products,

additional record keeping,

expanded documentation of the properties of certain or all products,

expanded or different labeling,

adverse event tracking and reporting, and

additional scientific substantiation.

Any or all of these requirements could have a material adverse effect on us. There can be no assurance that the regulatory environment in which we operate will not change or that such regulatory environment, or any specific action taken against us, will not result in a material adverse effect on us.

U.S. government regulation currently affects the sale of our products. The U.S. Food and Drug Administration regulates the labeling and marketing of our dietary supplements under the Dietary Supplement and Health Education Act, also known as DSHEA. Under DSHEA, we are required to submit for FDA approval claims regarding the effect of our dietary supplements on the structure or function of the body. DSHEA also requires FDA approval for health claims that relate dietary supplements to disease prevention.

Under DSHEA, within 30 days after first marketing a product, a company must submit to the FDA for review each claim (other than a qualified health claim) by the company that the product benefits bodily structure or function. If the FDA believes that a claim suggests the product is intended to diagnose, treat, cure or prevent a disease, it will reject the claim, usually within three months, in which case the company may no longer make the claim. To date, the FDA has not rejected any of our claims for benefit to bodily structure and function that are significant for the marketing of our products. Should the FDA in the future reject significant claims, we may be unable to interest consumers in purchasing our products.

The FDA review of health claims requires significant scientific agreement that the totality of the data supports the claims that a product prevents disease. We applied for a qualified health claim on December 19, 2003, related to the prevention of diabetes. In August 2005, the FDA recognized chromium picolinate as a safe nutritional supplement that may reduce risk of insulin resistance and possibly type 2 diabetes, and concluded that there is credible evidence to support the following qualified health claim:

One small study suggests that chromium picolinate may reduce the risk of insulin resistance, and therefore possibly may reduce the risk of type 2 diabetes. FDA concludes, however, that the existence of such a relationship between chromium picolinate and either insulin resistance or type 2 diabetes is highly uncertain.”

The FDA declined to permit other qualified health claims that were proposed by the Company.

We are subject to a Federal Trade Commission consent agreement that may adversely affect our business. The Federal Trade Commission ("FTC") regulates product-advertising claims, and requires that claims be supported by competent and reliable scientific evidence. Prior to our acquisition of a California limited partnership called Nutrition 21 ("Nutrition 21 LP"), the FTC opened an inquiry into certain of the claims that Nutrition 21 LP was making for chromium picolinate. The inquiry was terminated by the FTC with Nutrition 21 LP entering into a consent agreement that requires Nutrition 21 LP to support its claims by competent and reliable scientific evidence. After we acquired Nutrition 21 LP in 1997, we undertook new clinical studies to support the claims we intended to make for our products. The FTC has subsequently audited our chromium picolinate advertising and has not found either a lack of competent and reliable scientific evidence or a failure to comply with the consent agreement.

We have reached a settlement with QVC that will become effective upon FTC Commissioners’ approval of the QVC’s settlement with the FTC regarding liability for weight loss advertising claims that were made on QVC, Inc. televised shopping programs for Lite Bites, a product that we have since discontinued. We anticipate that any settlement would also resolve potential claims by the FTC against us for these advertising claims. The cost of a settlement has been reserved for in our financial statements. The FTC continues to monitor our advertising and could limit our advertising in ways that could make marketing our products more difficult or result in lost sales.

Stock Market Risks

The market price for our common stock may be particularly volatile, and our stockholders may be unable to resell their shares at a profit. The trading price of our common stock has been subject to wide fluctuations and may continue to fluctuate in the future in response to a variety of factors, including:

o quarter-to-quarter variations in operating results,

o material announcements by us or our competitors,

o governmental regulatory action,

o negative or positive publicity involving us or the nutritional supplement industry generally,

o general economic downturns,

o announcements by official or unofficial health and medical authorities,

o consumer preferences generally, or

o other events or factors, many of which are beyond our control.

In addition, the stock market has historically experienced significant price and volume fluctuations, which have particularly affected the market prices of many nutritional supplement companies and which have, in certain cases, not had a strong correlation to the operating performance of these companies. General economic conditions, such as recession or interest rate or currency rate fluctuations in the United States or abroad, could negatively affect the market price of our common stock. In addition, our operating results in future quarters may be below the expectations of securities analysts and investors. If that were to occur, the price of our common stock would likely decline, perhaps substantially.

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 September 22, 2008, the Company had approximately 64.6 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 108,493 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. At that time 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 before maturity at the original issue price.

Item 1B.

UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

Since September 1998, the Company has maintained its corporate headquarters pursuant to a seven and one-half year lease at 4 Manhattanville Road, Purchase, New York 10577-2197 (Tel: 914-701-4500). On June 15, 2005, the Company extended the term of the lease of its corporate headquarters to June 30, 2009, at an annual lease rental of $388,040, subject to annual increases over the term of the lease based on increases in certain building operating expenses.

Item 3. LEGAL PROCEEDINGS

On March 24, 2004, the FTC sued QVC in the U.S. District Court for the Eastern District of Pennsylvania for claims made on QVC for the Company’s Lite Bites products and other products. QVC has in the same lawsuit filed on April 14, 2004, Third-Party Complaints for damages against six parties including the Company (Third-Party Defendants). The Company discontinued the Lite Bites product line in fiscal year 2003. QVC has reached a settlement with the FTC staff that requires FTC Commissioners’ approval. The Third-Party Defendants have reached a settlement with QVC that will become effective upon FTC Commissioners’ approval of the QVC settlement.

U.S. Customs and Border Protection is claiming that Iceland Health underpaid duty on importation of fish oil from Iceland. The Company is contesting the determination.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted for a vote of the security holders during the fourth quarter of fiscal 2008.

PART II

Item 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Matters Relating to Common Stock

The Company's Common Stock trades on the Nasdaq Capital Market System under the symbol "NXXI”.

The Company has not paid a cash dividend to its public shareholders on its Common Stock. The Company intends to retain all earnings, if any, for the foreseeable future for use in the operation and expansion of its business and, accordingly, the Company does not contemplate paying any cash dividends on its Common Stock in the foreseeable future. In addition, if dividends on the Company’s Series I and J Preferred Stock are unpaid, the Company is precluded from paying dividends on its Common Stock and any other equity securities.

The following table sets forth the average high and low sales prices as reported by the Nasdaq Market for the Common Stock.

Common Stock

Fiscal Quarter Ended	High		Low

September 30, 2006	$	1.87	$	1.74
December 31, 2006	$	1.65	$	1.56
March 31, 2007	$	1.82	$	1.73
June 30, 2007	$	1.83	$	1.75
September 30, 2007	$	1.00	$	0.92
December 31, 2007	$	0.71	$	0.68
March 31, 2008	$	0.46	$	0.42
June 30, 2008	$	0.47	$	0.42

As of September 22, 2008, there were approximately 467 holders of record of the Common Stock. The Company believes that the number of beneficial owners is substantially greater than the number of record holders, because a large portion of its Common Stock is held of record in broker "street names."

Shareholder Rights Plan

Under a Shareholder Rights Plan, the Company has distributed, as a dividend, one preferred share purchase right for each share of Common Stock of the Company held by stockholders of record as of the close of business on September 25, 2002. The Rights Plan is designed to deter coercive takeover tactics, including the accumulation of shares in the open market or through private transactions, and to prevent an acquirer from gaining control of the Company without offering a fair price to all of the Company's stockholders. The Rights will expire on September 11, 2012.

Each Right entitles stockholders to buy one one-thousandth of a share of newly created Series H Participating Preferred Stock of the Company for $3.00 per share. Each one one-thousandth of a share of the Series H Preferred Stock is designed to be the functional equivalent of one share of Common Stock. The Rights will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's Common Stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 15% or more of the Company's Common Stock.

If any person or group (an "Acquiring Person") becomes the beneficial owner of 15% or more of the Company's Common Stock, then (1) the Rights become exercisable for Common Stock instead of Series H Preferred Stock, (2) the Rights held by the Acquiring Person and certain affiliated parties become void, and (3) the Rights held by others are converted into the right to acquire, at the purchase price specified in the Right, shares of Common Stock of the Company having a value equal to twice such purchase price. The Company will generally be entitled to redeem the Rights, at $.001 per Right, until 10 days (subject to extension) following a public announcement that an Acquiring Person has acquired a 15% position.

Item 6. SELECTED FINANCIAL DATA

The following tables summarize selected consolidated financial data that should be read in conjunction the more detailed financial statements and related footnotes and management’s discussion and analysis of financial condition and results of operations included herein. Figures are stated in thousands of dollars, except per share amounts.

Selected Statement of	Year Ended June 30,
Operations Data:	2008			2007(1)			2006			2005			2004
Total Revenues	$	47,071		$	41,177		$	10,664		$	10,711		$	10,232
Operating Loss		(13,426	)		(17,439	)		(7,687	)		(6,619	)		(5,854	)
Loss Before Income Taxes		(16,928	)		(19,134	)		(10,305	)		(7,025	)		(5,833	)
Income Tax Provision		14			14			12			19			68
Net Loss		(16,942	)		(19,148	)		(10,317	)		(7,044	)		(5,901	)
Basic and Diluted Loss per
Common Share		(0.27	)		(0.33	)		(0.26	)		(0.19	)		(0.16	)

	At June 30,
Selected Balance Sheet Data:	2008		2007		2006		2005		2004

Total Assets	$	39,626	$	34,694	$	23,856	$	19,680	$	16,367
Long-term Debt		4,185		2,342		—		—		—
Mandatorily Redeemable Preferred Stock		14,864		2,838		4,410		5,324		—
Stockholders' Equity		7,401		15,937		14,540		10,427		12,633

________________________

(1)

Includes the results of operations of Iceland Health LLC since acquisition in August 2006.

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto of the Company included elsewhere herein.

Overview

The Company’s revenues are primarily derived from the sale of proprietary and clinically-substantiated nutritional supplements and the grant of patent licenses related to those ingredients to manufacturers and marketers of vitamin and mineral supplements. The fee for the licenses is bundled on an undifferentiated basis with the price that the Company charges for its ingredients.

Cost of goods sold includes both direct and indirect manufacturing costs. Research and development expenses include internal expenditures as well as expenses associated with third party providers. Selling, general and administrative expenses include salaries and overhead, third party fees and expenses, royalty expenses for licenses and trademarks, and costs associated with the selling of the Company’s products. The Company capitalizes patent costs and intangible asset costs, and amortizes them over periods of one to seventeen years.

The following table sets forth items in the Consolidated Statements of Operations as a percent of revenues:

	Fiscal Year Percent of Revenues
	2008			2007			2006
Total Revenues		100	%		100	%		100	%
Cost of revenues*		38.0			33.7			26.4
Advertising and promotion expenses		71.1			81.2			53.5
General and administrative expenses		13.2			15.2			57.6
Research and development expenses		2.0			3.0			14.5
Operating loss		(28.5	)		(42.4	)		(72.1	)
Net loss		(36.0	)		(46.5	)		(96.7	)

*Based upon percent of net sales

Results of Operations

1. Year ended June 30, 2008 vs. year ended June 30, 2007

Revenues

Net sales for the Ingredients Group of $7.7 million in fiscal year 2008 were $0.2 million greater when compared to $7.5 million in fiscal year 2007.

Net sales for the Branded Products Group were $38.6 million in fiscal year 2008 compared to $33.1 million in fiscal year 2007. Net sales through the direct response channel were $28.7 million in fiscal year 2008 compared to $25.9 million in fiscal year 2007, which includes sales of Iceland Health since the acquisition in August 2006. Net sales to retailers was $9.9 million in fiscal year 2008 compared to $7.2 million in fiscal year 2007. Sales of Omega-3 and Joint Relief products which were successfully introduced in the second quarter of fiscal year 2008 in the retail market was the primary reason for the improvement.

Cost of Revenues

Cost of revenues for the Ingredients Products Group were $1.9 million in each of fiscal years 2008 and 2007.

Cost of revenues for the Branded Products Group were $15.7 million in each of fiscal year 2008 compared to $11.8 million in fiscal year 2007. While the cost of revenues sold through the direct response channel was $8.6 million in each of fiscal years 2008 and 2007, cost of products sold through the retail channel was $7.1 million, an increase of $4.5 million when compared to fiscal year 2007. An increase in the inventory provision ($1.6 million) as well as cost of products associated with increased sales to retailers were the primary reasons.

Advertising and Promotion Expenses (“Advertising”)

Advertising for the Ingredients Products Group was $0.9 million for fiscal years 2008 and 2007, respectively. Advertising for the Branded Products Group was $32.6 million in fiscal year 2008 compared to $32.5 million in fiscal year 2007. Expenditures for Advertising in the direct response channel in fiscal year 2008 of $19.0 million were $2.3 million less than fiscal year 2007. Increases in media spending for the retail channel partially offset the reduction.

Unallocated Corporate Expenses

Unallocated corporate expenses comprised of general and administrative expenses, research and development expenses, depreciation and amortization, impairment charges, interest expense, net and license fees for the fiscal year ended June 30, 2008 were $12.2 million compared to $12.6 million for the fiscal year ended June 30, 2007. Increases in interest expense, net of $1.8 million in fiscal year 2008 relating to our financings were offset by lower amortization of intangibles ($1.0 million), no impairment charge for intangible assets in fiscal year 2008 ($0.7 million) and reduced spending for research and development and general and administrative expenses ($0.4 million).

Operating Loss

Operating loss for the fiscal year 2008 of $13.4 million was $4.0 million less than the operating loss in fiscal year 2007 of $17.4 million. Increase in sales to retailers, net of cost of $2.1 million, lower depreciation and amortization expenses of $1.0 million, lower research and development expense of $0.3 million in fiscal year 2008 when compared to fiscal year 2007 and a non-recurring impairment charge in fiscal year 2007 for intangible assets of $0.7 million were the primary reasons for the improvement.

Net Loss

Net loss for the fiscal year 2008 of $16.9 million was $2.2 million less than the fiscal year 2007 net loss of $19.1 million. The improvement in the operating loss of $4.0 million in fiscal year 2008 was partially offset by increased interest expense, net of ($1.8 million) related to our financings.

Liquidity and Capital Resources

Cash, cash equivalents and short-term investments at June 30, 2008 were $4.8 million compared to $3.4 million at June 30, 2007.

During the year ended June 30, 2008, cash used in operating activities was $14.8 million compared to $10.3 million in the comparable period a year ago. The principal factor contributing to the increase was increased cash expenditures related to the reduction of outstanding payables.

During the year ended June 30, 2008, cash used in investing activities was $4.2 million compared to cash provided of $9.1 million. In the fiscal period ended June 30, 2007, the Company’s net redemptions of its short-term investments amounted to $10.5 million. In the comparable period ended June 30, 2008, the Company purchased $4.0 million of investments and used $1.0 million as collateral.

During the year ended June 30, 2008, net cash provided by financing activities was $21.4 million compared to $1.1 million in fiscal year 2007. The current year period includes net proceeds of $16.6 million from the September 2007 issuance of 8% Series J Convertible Preferred Stock due 2011. In addition, the Company received $3.0 million from a short-term loan from JP Morgan Chase Bank (“Chase”) at LIBOR + 0.500 percentage points, while pledging $4.0 million of its auction rate securities as collateral. At June 30, 2008, the Company had net borrowings of $1.4 million from Gerber Finance Inc. in accordance with its loan and security agreement.

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. At June 30, 2008, the company reported its auction rate securities (“ARS”) at fair value. The Company’s ARS are collateralized by student loan portfolios (substantially all of which are guaranteed by the United States Government). Beginning in February 2008, the auctions for all of the ARS then held by us were unsuccessful, resulting in our continuing to hold them beyond their typical auction reset dates. As a result of the lack of liquidity in the ARS market and not as a result of the quality of the underlying collateral, for the year ended June 30, 2008, we recorded a temporary impairment on our ARS of $0.3 million, which is reflected in accumulated other comprehensive loss in our consolidated balance sheet. We have assumed an average maturity of our ARS in excess of one year due to the lack of liquidity in the ARS markets and the long-term remaining duration of the underlying securities; therefore, we have classified these securities as noncurrent on our June 30, 2008 consolidated balance sheet. In addition to adjusting the carrying value of our ARS, if our assessment of the valuation adjustment in future periods is other than temporary, we would record an impairment charge through our statement of operations.

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 shareholders, or at all.

Results of Operations

2. Year ended June 30, 2007 vs. year ended June 30, 2006

Revenues

Net product sales for the Ingredients product Group for fiscal year 2007 were $7.5 million, a decrease of $2.5 million when compared to $10.0 million for fiscal year 2006. The termination of certain licensing agreements for bulk ingredients initiated in fiscal year 2006 was the primary reason for the decline.

Net product sales for the Branded Products Group were $33.1 million for the fiscal year 2007 compared to $0.3 million in the same period last year. Sales through the direct response channel, which all occurred in fiscal year 2007 due to the acquisition of Iceland Health, Inc. in August 2006, were $25.9 million. The net product sales to retailers were $7.2 million in fiscal 2007 compared to $0.3 million in fiscal year 2006. Net product sales of branded products continued to improve due primarily to continued customer awareness and expanded distribution.

Other revenues for fiscal year 2007 were $0.5 million compared to $0.3 million in fiscal year 2006.

Cost of Revenues

Cost of revenues for the Ingredients Products Group were $1.9 million in the fiscal year 2007 compared to $2.2 million in fiscal year 2006. The decline in bulk ingredients sales, as well as product mix, were the primary reasons for the decline in product costs.

Cost of revenues for the Branded Products Group were $11.2 million in fiscal year 2007 compared to $0.5 million in fiscal year 2006. Cost of revenues for products sold through the direct response channel were $8.6 million in fiscal year 2007, while the cost of products sold to retailers were $3.1 million in the fiscal year 2007 compared to $0.5 million in fiscal year 2006.

Advertising and Promotion Expenses (“Advertising”)

Advertising for the Ingredients Products Group for fiscal year 2007 were $0.7 million compared to $0.9 million in fiscal year 2006. Continued reductions in sales related activities was the primary reason for the reduction.

Advertising in fiscal year 2007 for the Branded Products Group was $33.8 million compared to $4.8 million in fiscal year 2006. Increased marketing expenditures related to the introduction of branded products combined with the marketing and advertising expenditures associated with selling product through the direct response channel were the primary reasons for the increase.

Unallocated Corporate Expenses

Unallocated corporate expenses in fiscal year 2007 were $13.1 million compared to $12.2 million in fiscal year 2006. Increased amortization of intangible assets ($1.0 million), impairment charge of $0.7 million and a $0.3 million provision for doubtful accounts was partially offset by decreases in research and development expenditures ($0.3 million); lower expense related to accretion of preferred stock and amortization of deferred financing costs ($1.0 million) and lower expenditures for legal services ($0.3 million).

Research and Development

Research and development expense of $1.2 million declined $0.3 million when compared to $1.5 million in fiscal year 2006. The Company continues to curtail its spending on new applications.

Operating Loss

Operating loss for fiscal year 2007 was $17.4 million compared to $7.7 million for fiscal year 2006. Continued marketing related expenditures related to the Company’s branded products account for the increase.

Net Loss

Net loss for fiscal year 2007 was $19.1 million compared to $10.3 million for fiscal year 2006. The increased selling and marketing expenditures as well as a noncash impairment charge of $0.7 million noted above was the primary reasons for the increase.

Critical Accounting Policies and Estimates

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

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

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

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

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

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

The Company adopted SFAS No. 123(R), “Share-Based Payment” which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, including issuance of stock options to employees. SFAS No. 123(R) was effective for the Company beginning with the first quarter of fiscal year 2006. The Company measures stock-based compensation cost at grant date, based on the estimated fair value of the award, and recognizes the cost as expense on a straight-line basis (net of estimated forfeitures) over the employee requisite service period. The Company estimates the fair value of stock options using a Black-Scholes valuation model.

Contractual Obligations

The Company’s contractual obligations are comprised of an operating lease for its corporate headquarters, a long-term obligation to 6% Series I convertible preferred stockholders, 8% Series J convertible preferred stockholders and an earn-out payment to the former stockholders of Iceland Health, Inc. as follows:

			Payments due by period
			Less than		1 – 3		3 - 5
(in thousands)	Total		One Year		Years		Years

Operating lease obligations	$	388	$	388	$	—	$	—
Long-term obligations	$	23,844	$	3,594	$	20,250	$	—

Item 7A.

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 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements are included herein commencing on page F-1.

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

Item 9A.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by Nutrition 21, Inc. in the reports it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by Nutrition 21, Inc. in the reports it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, Nutrition 21, Inc. has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2008, and based upon this evaluation the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective in providing reasonable assurance of compliance.

Management’s Annual Report On Internal Control Over Financial Reporting

Nutrition 21, Inc.’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes, in accordance with generally accepted accounting principles. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

As discussed in our Annual Report on Form 10-K/A for the year ended June 30, 2007, there was a material weakness in our internal control over financial reporting in that the Company’s independent review and knowledge of complex accounting transactions and disclosures (stock options; income taxes; projections for impairment analysis) was inadequate. In light of this material weakness, management has concluded that, as of June 30, 2007, the Company did not maintain effective internal control over financial reporting. As defined by the Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 5, a material weakness is a deficiency or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Effective with the Form 10-Q for the quarter ended December 31, 2007, the Company obtained the services of an independent registered public accounting firm to examine the company’s complex accounting transactions and disclosures and to review its financial reports prior to filing with the Securities and Exchange Commission.

There were no significant changes in our internal controls over financial reporting or in other factors during the three month period ended June 30, 2008 which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Nutrition 21, Inc.’s management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of its internal control over financial reporting as of June 30, 2008, based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management concluded that our internal control over financial reporting was effective as of June 30, 2008.

This annual report does not include an attestation report of J.H. Cohn LLP, Nutrition 21, Inc.’s independent registered public accounting firm, regarding internal control over financial reporting. Management’s report was not subject to attestation by J.H. Cohn LLP pursuant to temporary rules of the SEC that permit Nutrition 21, Inc. to provide only management’s report in this annual report.

Item 9B.

OTHER INFORMATION

None

PART III

Item 10.

Directors, Executive Officers and Corporate Governance.

The information called for by Item 10 is incorporated by reference from the Company’s definitive proxy statement for the 2008 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2008 fiscal year.

The Company has a code of ethics that applies to all of its employees, officers, and directors, including its principal executive officer, principal financial and accounting officer, and controller. The text of the Company’s code of ethics is posted on its website at www.nutrition21.com. The Company intends to disclose future amendments to, or waivers from, certain provisions of the code of ethics for executive officers and directors in accordance with applicable NASDAQ and SEC requirements.

Item 11.

Executive Compensation.

The information called for by Item 11 is incorporated by reference from the Company’s definitive proxy statement for the 2008 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2008 fiscal year.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information called for by Item 12 is incorporated by reference from the Company’s definitive proxy statement for the 2008 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2008 fiscal year.

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

The information called for by Item 13 is incorporated by reference from the Company’s definitive proxy statement for the 2008 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2008 fiscal year.

Item 14.

Principal Accounting Fees and Services.

The information called for by Item 14 is incorporated by reference from the Company’s definitive proxy statement for the 2008 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2008 fiscal year.

PART IV

Item 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)

1. Financial Statements

The financial statements are listed in the Index to Consolidated Financial Statements on page F-1 and are filed as part of this annual report.

Financial Statement Schedules

The following financial statement schedule is included herein:

Schedule II – Valuation and Qualifying Accounts

All other schedules are not submitted because they are not applicable, not required, or because the information is included in the Consolidated Financial Statements.

Exhibits

The Index to Exhibits following the Signature Page indicates the Exhibits, which are being filed herewith, and the Exhibits, which are incorporated herein by reference.

SIGNATURES

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

3.01	Certificate of Incorporation (1)

3.01a	Certificate of Amendment to the Certificate of Incorporation (2)

3.01b	Certificate of Amendment to the Certificate of Incorporation (3)

3.01c	Certificate of Amendment to the Certificate of Incorporation (11)

3.01d	Certificate of Amendment to the Certificate of Incorporation (11)

3.01e	Certificate of Amendment to the Certificate of Incorporation (12)

3.01f	Form of Certificate of Amendment of Series I 6% Convertible Preferred Stock, designated as Exhibit 4.2 in the related Form 8-K (24)

3.01g	Form of Certificate of Amendment of Series J 8% Convertible Preferred Stock, designated as Exhibit 4.2 in the related Form 8-K (29)

4.1	Form of Securities Purchase Agreement dated March 31, 2005 between Nutrition 21, Inc. and various investors, designated as Exhibit 4.1 in the related Form 8-K (24)

4.2	Form of Registration Rights Agreement, designated as Exhibit 4.3 in the related Form 8-K (24)

4.3	Form of Common Stock Purchase Warrant, designated as Exhibit 4.4 in the related Form 8-K (24)

4.4	Letter Agreement dated March 9, 2005 with Bristol Investment Group, Inc., designated as Exhibit 4.5 in the related Form 8-K (24)

4.5	Form of Common Stock and Warrant Purchase Agreement May 19, 2006 by and among Nutrition 21, Inc. and investors signing on the signatory pages thereto, designated as Exhibit 4.1 in the related Form 8-K (26)

4.6	Form of Registration Rights Agreement by and among Nutrition 21, Inc. and investors signing on the signatory pages thereto, designated as Exhibit 4.2 in the related Form 8-K (26)

4.7	Form of Warrant issued to investors other than to CD Investment Partners, Ltd., designated as Exhibit 4.3 in the related Form 8-K (26)

4.8	Form of Common Stock and Warrant Purchase Agreement by and between Nutrition 21, Inc. and CD Investment Partners, Ltd., designated as Exhibit 4.4 in the related Form 8-K (26)

4.9	Form of Registration Rights Agreement entered into by and between Nutrition 21, Inc. and CD Investment Partners, Ltd., designated as Exhibit 4.5 in the related Form 8-K (26)

4.10	Form of Warrant issued to CD Investment Partners, Ltd., designated as Exhibit 4.6 in the related Form 8-K (26)

4.11	Form of Letter Agreement by and among Nutrition 21, Inc., C.E. Unterberg, Towbin, LLC and Dresdner Kleinwort Wasserstein Securities LLC, designated as Exhibit 4.7 in the related Form 8-K (26)

4.12	Form of Warrant issued to each of C.E. Unterberg, Towbin, LLC and Dresdner Kleinwort Wasserstein Securities LLC, designated as Exhibit 4.8 in the related Form 8-K (26)

4.13	Form of Securities Purchase Agreement dated September 10, 2007 between Nutrition 21, Inc. and various investors, designated as Exhibit 4.1 in the related Form 8-K (29)

4.14	Form of Registration Rights Agreement, designated as Exhibit 4.3 in the related Form 8-K (29)

4.15	Form of Common Stock Purchase Warrant, designated as Exhibit 4.4 in the related Form 8-K (29)

4.16	Letter Agreement dated August 9, 2007 with CE Unterberg, Towbin (now called Collins Stewart LLC) designated as Exhibit 4.5 in the related Form 8-K (29)

4.17	Form of Common Stock Purchase Warrant with Collins Stewart LLC and Life Science Group, Inc., designated as Exhibit 4.6 in the related Form 8-K (29)

10.01	Form of Incentive Stock Option Plan (8)

10.02	Form of Non-qualified Stock Option Plan (8)

10.02a	Form of 1989 Stock Option Plan (1)

10.02b	Form of 1991 Stock Option Plan (1)

10.02c	Form of 1998 Stock Option Plan (15)

10.24	Exclusive Option and Collaborative Research Agreement dated July 1, 1988 between the Company and the University of Maryland (4)

10.25	Lease dated as of February 7, 1995, between the Company and Keren Limited Partnership (7)

10.26	License Agreement dated as of December 12, 1996 between Licensee Applied Microbiology, Inc. and Licensor Aplin & Barrett Limited. (9)

10.27	License Agreement dated as of December 12, 1996 between Licensee Aplin & Barrett Limited and Licensor Applied Microbiology, Inc. (9)

10.28	Supply Agreement dated as of December 12, 1996 between Aplin & Barrett Limited and Applied Microbiology, Inc. (9)

10.29	Stock and Partnership Interest Purchase Agreement dated as of August 11, 1997, for the purchase of Nutrition 21. (10)

10.30	Sublease dated as of September 18, 1998, between the Company and Abitibi Consolidated Sales Corporation (12)

10.31	Strategic Alliance Agreement dated as of August 13, 1999 between AMBI Inc. and QVC, Inc. (15)*

10.32	Asset Purchase Agreement made as of December 30, 1999, by and between ImmuCell Corporation and AMBI Inc. (16)

10.33	License Agreement entered into as of August 2, 2000 between AMBI Inc. and Biosynexus Incorporated. (17)*

10.34	License and Sublicense Agreement entered into as of August 2, 2000 between AMBI Inc. and Biosynexus Incorporated. (17)*

10.35	Amended and Restated By-laws, and Rights Agreement adopted September 12, 2002 (20)

10.36	Amendment No. 1 to the Amended and Restated By-laws (27)

10.37	Nutrition 21, Inc. 2001 Stock Option Plan. (21)

10.38	Nutrition 21, Inc. 2002 Inducement Stock Option Plan. (21)

10.39	Nutrition 21, Inc. Change of Control Policy adopted September 12, 2002. (21)

10.40	Nutrition 21, Inc. 2005 Stock Plan (23)

10.41	Agreement and General Release and Waiver entered into as of November 30, 2005 between Nutrition 21, Inc. and Gail Montgomery (25)

10.42	Loan and Security Agreement between Gerber Finance, Inc. as Lender and Nutrition 21, LLC and Iceland Health, LLC as Co-Borrowers (28)

10.43	Nutrition 21, Inc. Guarantee (28)

10.44	Nutrition 21, LLC Guarantee (28)

10.45	Iceland Health, LLC Guarantee (28)

10.46	Amended and Restated Merger Agreement for the purchase of Iceland Health, Inc. dated as of August 25, 2006 (30)

10.47	Agreement and General Release and Waiver entered into as of April 28, 2008 between Nutrition 21, Inc. and Paul Intlekofer (31)

23.1	Consent of J.H. Cohn LLP (32)

31.1	Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32)

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32)

32.1	Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32)

32.2	Certification of Chief financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32)

(1)	Incorporated by reference to the Company's Report on Form 10-K for 1991.

(2)	Incorporated by reference to the Company's Report on Form 8-K dated September 4, 1992.

(3)	Incorporated by reference to the Company's Registration Statement on Form S-8 dated August 8, 1996, file No. 333-09801.

(4)	Incorporated by reference to the Company's Report on Form 10-K for 1988.

(5)	Incorporated by reference to the Company's Report on Form 10-K for the fiscal period January 31, 1992 through August 31, 1992.

(6)	Incorporated by reference to the Company's Report on Form 10-K for 1994.

(7)	Incorporated by reference to the Company's Report on Form 10-K for 1995.

(8)	Incorporated by reference to the Company’s Registration Statement on Form S-1 originally filed April 15, 1986, file No. 33-4822.

(9)	Incorporated by reference to the Company's Report on Form 8-K dated December 27, 1996.

(10)	Incorporated by reference to the Company's Report on Form 8-K dated August 25, 1997.

(11)	Incorporated by reference to the Company's Report on Form 10-K/A2 for 1997.

(12)	Incorporated by reference to the Company's Report on Form 10-K/A for 1998.

(13)	Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended September 30. 1998.

(14)	Incorporated by reference to the Company's Report on Form 8-K dated February 3, 1999.

(15)	Incorporated by reference to the Company's Report on Form 10-K for 1999.

(16)	Incorporated by reference to ImmuCell Corporation’s Report on Form 8-K dated January 13, 2000.

(17)	Incorporated by reference to the Company's Report on Form 10-K for 2000.

(18)	Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended December 31. 2000.

(19)	Incorporated by reference to the Company’s Report on Form 10-K for 2001.

(20)	Incorporated by reference to the Company’s Report on Form 8-K dated September 18, 2002.

(21)	Incorporated by reference to the Company’s Report on Form 10-K for 2002.

(22)	Incorporated by reference to the Company’s Report on Form 10-K/A for 2003.

(23)	Incorporated by reference to the Company’s Report on Form 8-K for 2005.

(24)	Incorporated by reference to the Company’s Report on Form 8-K dated April 4, 2005.

(25)	Incorporated by reference to the Company’s Report on Form 8-K dated December 15, 2005.

(26)	Incorporated by reference to the Company’s Report on Form 8-K dated May 23, 2006.

(27)	Incorporated by reference to the Company’s Report on Form 8-K dated April 30, 2007.

(28)	Incorporated by reference to the Company’s Report on form 8-K dated July 31, 2007.

(29)	Incorporated by reference to the Company’s Report on form 8-K dated September 12, 2007.

(30)	Incorporated by reference to the Company’s Report on form 8-K dated April 29, 2006.

(31)	Incorporated by reference to the Company’s Report on form 8-K dated April 29, 2008.

(32)	Filed herewith.

	PAGE

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-2

CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2008 AND 2007	F-3

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2008, 2007 AND 2006	F-5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2008, 2007 AND 2006	F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2008, 2007 AND 2006	F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	F-8

	June 30, 2008		June 30, 2007
ASSETS

Current assets:
Cash and cash equivalents	$	4,817	$	2,417
Short-term investments		—		1,000
Accounts receivable (less allowances for doubtful accounts and returns of $1,148 and $827 at June 30, 2008 and 2007, respectively)		2,922		1,918
Other receivables		286		344
Inventories		1,014		3,945
Prepaid expenses and other current assets		1,483		1,369
Total current assets		10,522		10,993
Property and equipment, net		69		64
Patents, trademarks and other amortizable intangibles (net of accumulated amortization) of $25,568 and $23,387 at June 30, 2008 and 2007, respectively		1,540		3,271

Goodwill		15,395		14,715
Other intangibles with indefinite lives		5,379		5,379
Other assets		2,981		272
Investments		3,740		—
TOTAL ASSETS	$	39,626	$	34,694

	June 30, 2008			June 30, 2007
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Current liabilities:
Short-term borrowings	$	3,000		$	—
Accounts payable		4,221			7,085
Accrued expenses		2,575			1,411
Deferred income		1,228			2,929
6% Series I convertible preferred stock subject to mandatory redemption (redemption value $3,594 at June 30, 2008)		3,270			—
Total current liabilities		14,294			11,425

Long-term debt		4,185			2,342
Deferred income taxes		2,152			2,152
6% Series I convertible preferred stock subject to mandatory redemption (redemption value $3,594 at June 30, 2007)		—			2,838
8% Series J convertible preferred stock subject to mandatory redemption (redemption value $17,750 at June 30, 2008)		11,594			—

Total liabilities		32,225			18,757
Commitments and contingencies

STOCKHOLDERS’ 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 June 30, 2008 and 2007, (see liabilities above); 17,750 shares designated as Series J convertible preferred stock, 17,750 issued and outstanding at June 30, 2008 (see liabilities above)		—			—

Common stock, $0.005 par value, authorized 150,000,000 and 100,000,000 shares at June 30, 2008 and 2007, respectively; 63,583,205 and 60,946,443 shares issued and outstanding at June 30, 2008 and 2007, respectively		315			301
Additional paid-in capital		115,721			107,069
Accumulated deficit		(108,375	)		(91,433	)
Accumulated other comprehensive loss		(260	)		—
Total stockholders’ equity		7,401			15,937
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	39,626		$	34,694

	Year Ended June 30,
	2008			2007			2006

Net sales	$	46,363		$	40,651		$	10,298
Other revenues		708			526			366

TOTAL REVENUES		47,071			41,177			10,664

COSTS AND EXPENSES

Cost of revenues		17,609			13,718			2,722
Advertising and promotion expenses		33,478			33,448			5,704
General and administrative expenses		6,197			6,274			6,144
Research and development expenses		954			1,241			1,546
Depreciation and amortization		2,259			3,257			2,235
Impairment charge for intangible assets		—			678			—

TOTAL COSTS AND EXPENSES		60,497			58,616			18,351

OPERATING LOSS		(13,426	)		(17,439	)		(7,687	)

Interest income		315			440			303
Interest expense		(3,817	)		(2,135	)		(2,921	)

LOSS BEFORE INCOME TAXES		(16,928	)		(19,134	)		(10,305	)

Income taxes		14			14			12

NET LOSS	$	(16,942	)	$	(19,148	)	$	(10,317	)

Basic and diluted loss per common share	$	(0.27	)	$	(0.33	)	$	(0.26	)

Weighted average number of common shares – basic and diluted		61,796,508			57,462,944			40,262,851

	Common Stock					Additional Paid-In			Accumulated			Accumulated Other Comprehensive
	Shares			Amount		Capital			Deficit			Loss			Total
Balance at June 30, 2005		38,156,695		$	190	$	72,205		$	(61,968	)	$	0		$	10,427

Charge for stock appreciation rights and cashless exercise of warrants		75,582			—		97			—			—			97
Conversion of 3,014 shares of Series I convertible preferred stock to shares of common stock		2,316,326			10		2,478			—			—			2,488
Issuance of common stock for dividends on Series I preferred stock		705,875			3		525			—			—			528
Stock based compensation expense		—			—		315			—			—			315
Private placement of common stock		5,555,557			28		9,297			—			—			9,325
Exercise of stock options and warrants		1,973,185			12		1,665			—			—			1,677
Net loss for the year		—			—		—			(10,317	)		—			(10,317	)
Balance at June 30, 2006		48,783,220			243		86,582			(72,285	)		0			14,540

Conversion of 2,992 shares of Series I convertible preferred stock to shares of common stock		2,386,915			12		2,980			—			—			2,992
Issuance of common stock for dividends on Series I preferred stock		196,249			1		321			—			—			322
Stock based compensation expense		—			—		615			—			—			615
Exercise of stock options and warrants		1,079,309			5		1,139			—			—			1,144
Issuance of common stock for the purchase of Iceland Health, Inc.		8,000,000			40		15,432			—			—			15,472
Issuance of restricted shares, net of forfeitures		500,750			—		—			—			—			—
Net loss for the year		—			—		—			(19,148	)		—			(19,148	)
Balance at June 30, 2007		60,946,443			301		107,069			(91,433	)		0			15,937

Issuance of warrants and beneficial conversion features related to 8% Series J convertible preferred stock		—			—		7,330			—			—			7,330
Issuance of common stock for dividends on Series I preferred stock		373,677			2		214			—			—			216
Issuance of common stock for dividends on Series J preferred stock		847,540			4		351			—			—			355
Issuance of common stock for the purchase of Iceland Health, Inc.		1,500,000			8		(8	)		—			—			—
Stock-based compensation expense					—		717			—			—			717
Exercise of stock options and warrants		87,755			—		48			—			—			48
Temporary impairment on investments in auction rate securities		—			—		—			—			( 260	)		(260	)
Cancellations of restricted stock		(172,210	)		—		—			—			—			-
Net loss for the period		—			—		—			(16,942	)		—			(16,942	)
Balance at June 30, 2008		63,583,205		$	315	$	115,721		$	(108,375	)	$	(260	)	$	7,401

	YEAR ENDED JUNE 30,
	2008			2007			2006
Cash flows from operating activities:
Net loss	$	(16,942	)	$	(19,148	)	$	(10,317	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment		37			59			169
Amortization of intangibles		2,180			3,198			2,066
Accretion of preferred stock and amortization of deferred financing costs		1,806			1,609			2,360
Non-cash interest expense and accretion on note payable to Iceland Health		58			165			—
Convertible preferred stock dividend paid in common stock charged as interest expense		571			322			528
Charge for stock appreciation rights		—			—			97
Stock-based compensation expense		717			615			315
Increase to provision for doubtful accounts and returns		321			300			—
Impairment charge for intangible assets		—			678			—
Changes in operating assets and liabilities net of effects from acquisition of Iceland Health, Inc. in 2006:
Accounts receivable		(11,325	)		402			(1,821	)
Other receivables		58			(140	)		74
Inventories		2,931			(2,515	)		(381	)
Prepaid expenses, other current assets and other assets		(1,861	)		(716	)		(2	)
Accounts payable and accrued expenses		(1,668	)		3,664			923
Deferred income		(1,701	)		1,220			—
Net cash used in operating activities		(14,818	)		(10,287	)		(5,989	)

Cash flows from investing activities:
Contingent payments for acquisitions allocated to goodwill, patents and trademarks		(981	)		(223	)		(176	)
Purchases of property and equipment		(42	)		(7	)		(36	)
Payments for patents and trademarks		(180	)		(252	)		(198	)
Redemption of investments available for sale		1,000			15,500			—
(Purchase) of investments available for sale		(4,000	)		(5,000	)		(3,500	)
Decrease in restricted cash		—			—			1,225
Cash portion of Iceland Health, Inc. purchase price net of cash acquired		—			(872	)		—
Net cash (used in) provided by investing activities		(4,203	)		9,146			(2,685	)

Cash flows from financing activities:
Proceeds from stock option and warrant exercises		48			1,144			1,172
Net proceeds from private placements of common stock, net of issuance costs		—			—			9,325
Proceeds from private placement of 8% Series J convertible preferred stock, net of issuance costs		16,603			—			—
Additional issuance costs related to Series I convertible preferred stock		—			—			(84	)
Proceeds from long-term debt, net		1,770			—			—
Proceeds from short-term borrowings		3,000			—			—
Net cash provided by financing activities		21,421			1,144			10,413

Net increase in cash and cash equivalents		2,400			3			1,739
Cash and cash equivalents at beginning of year		2,417			2,414			675
Cash and cash equivalents at end of year	$	4,817		$	2,417		$	2,414

Leasehold improvements	—	Term of lease
Furniture and fixtures	—	7 years
Machinery and equipment	—	5 to 7 years
Office equipment	—	3 to 5 years
Computer equipment	—	3 to 5 years

	June 30,
	2008		2007		2006
Expected option lives		3.2-5.0 years		3.0-4.5 years		3.0-4.5 years
Volatility		99.16%		95.5%		101.6%
Risk-free interest rate		3.23%		5.1%		4.5%
Dividend yield		0%		0%		0%
Forfeiture rate		16%		5%		5%

OPTIONS	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Yrs.)		Aggregate Intrinsic Value
Outstanding at July 1, 2007		4,112		$	0.91
Granted		1,750		$	0.64
Exercised		(88	)	$	0.53
Forfeited or expired		(2,263	)	$	0.63
Outstanding at June 30, 2008		3,511		$	0.91		5.5	$	20
Exercisable at June 30, 2008		2,340		$	1.02		4.5	$	10

NONVESTED OPTIONS	Options			Weighted- Average Grant-Date Fair Value

Nonvested at July 1, 2007		862		$	0.79
Granted		1,580		$	0.42
Vested		(319	)	$	0.87
Forfeited		(951	)	$	0.91
Nonvested at June 30, 2008		1,172		$	0.67

RESTRICTED STOCK	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Yrs.)		Aggregate Intrinsic Value
Outstanding at July 1, 2007		501		$	1.57
Granted		—
Exercised
Forfeited or expired		(172	)
Outstanding at June 30, 2008		329		$	1.57		2.0	$	—
Exercisable at June 30, 2008		183		$	1.57		2.0	$	—

Short-term investments are comprised as follows (in thousands):	June 30,
	2008		2007
Available for sale:
Auction rate securities⁽¹⁾		—	$	1,000
TOTAL	$	—	$	1,000

	2008		2007
Consulting and professional fees payable	$	848	$	321
Accrued compensation and related expense		245		85
Accrued expenses related to branded products		430		277
Accrued financing costs		622		123
Other accrued expenses		430		605
	$	2,575	$	1,411

WARRANTS	Number			Wtd-Avg Exercise Price		Wtd-Avg Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding at July 1, 2007		169,833		$	1.78
Granted		—			—
Exercised		—			—
Forfeited or expired		(72,611	)	$	1.62
Outstanding at June 30, 2008		97,222		$	1.80		2.9		—
Exercisable at June 30, 2008		97,222		$	1.80		2.9		—

	2008			2007
Deferred tax assets:
Net operating loss carryforwards	$	18,446		$	15,298
Accrued expenses		464			158
Allowance for doubtful accounts and returns		459			331
Inventory reserve		618			77
Intangible and fixed assets		5,478			5,039
Other		1			3
Total gross deferred tax assets		25,466			20,906
Less valuation allowance		(25,466	)		(20,906	)
Net deferred tax assets	$	0		$	0

Deferred tax liabilities:
Tradenames		(2,152	)		(2,152	)
	$	(2,152	)	$	(2,152	)

	Year Ended June 30,
	Year Ended June 30,
	2008			2007			2006
Net loss	$	(16,942	)	$	(19,148	)	$	(10,317	)
Other comprehensive loss:
Unrealized losses on investment		(260	)		—			—

Comprehensive loss	$	(17,202	)	$	(19,148	)	$	(10,317	)

Assets purchased:

Net identifiable tangible assets	$	181
Other intangibles with indefinite lives		5,379
Customer relationships		924
Non-compete agreements		375
Goodwill		15,395
Deferred tax liability		(2,152	)

Purchase Price	$	20,102

	Consolidated Pro-forma
	Year Ended
	June 30,			June 30,
	2007			2006

Total revenues	$	45,920		$	37,751

Net loss	$	(18,762	)	$	(8,757	)

Basic and diluted loss per common share	$	(0.33	)	$	(0.22	)

In thousands, except per share data	First Quarter			Second Quarter			Third Quarter			Fourth Quarter

Fiscal Year 2008

Revenues	$	12,197		$	13,009		$	10,820		$	11,045
Gross profit		4,015			3,977			6,063			3,554
Loss before income taxes		(4,050	)		(3,816	)		(8,168	)		(894	)
Net loss		(4,055	)		(3,817	)		(8,173	)		(897	)
Net loss per common share:
Basic and diluted	$	(0.07	)	$	(0.06	)	$	(0.13	)	$	(0.01	)

In thousands, except per share data	First Quarter			Second Quarter			Third Quarter			Fourth Quarter

Fiscal Year 2007

Revenues	$	4,682		$	9,105		$	15,765		$	11,625
Gross profit		3,095			6,229			10,933			7,202
Loss before income taxes		(4,109	)		(4,676	)		(2,192	)		(8,157	)
Net loss		(4,112	)		(4,679	)		(2,196	)		(8,161	)
Net loss per common share:
Basic and diluted	$	(0.08	)	$	(0.08	)	$	(0.04	)	$	(0.13	)

			Additions
Accounts	Balance Beginning of Year		Charged to Cost and Expense		Charged to Other Accounts		Deductions			Balance End of Year
($ in thousands)
Year ended June 30, 2008
Allowance for doubtful accounts	$	309	$	247	$	—	$	—		$	556
Deferred tax valuation allowance		20,906		4,560		—		—			25,466
Allowance for returns and allowances		518		74		—		—			592

Year ended June 30, 2007
Allowance for doubtful accounts	$	9	$	300	$	—	$	—		$	309
Deferred tax valuation allowance		15,614		5,292		—		—			20,906
Allowance for returns and allowances		—		—		518		—			518

Year ended June 30, 2006
Allowance for doubtful accounts	$	9	$	—	$	—	$	—		$	9
Deferred tax valuation allowance		13,482		2,132		—		—			15,614
Allowance for returns and allowances		390		—		—		(390	)		—