NUTRITION 21, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FILED WITH THE ANNUAL REPORT OF THE

COMPANY ON FORM 10-K

JUNE 30, 2007

	PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-2



CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2007 AND 2006	F-3



CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2007, 2006 AND 2005	F-5



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2007, 2006 AND 2005	F-6



CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2007, 2006 AND 2005	F-7



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Stockholders and Board of Directors

Nutrition 21, Inc.

We have audited the accompanying consolidated balance sheets of Nutrition 21, Inc. and subsidiaries as of June 30, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended June 30, 2007. Our audits also included the 2007, 2006 and 2005 consolidated financial statement schedule listed in the Index in Item 15. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nutrition 21, Inc. and subsidiaries as of June 30, 2007 and 2006, and their consolidated results of operations and cash flows for each of the years in the three-year period ended June 30, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of June 30 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring organization of the Treadway Commission (COSO) and our report dated September 25, 2007, expressed an unqualified opinion on management’s assessment of the internal control over financial reporting and an adverse opinion on the effectiveness of the internal control over financial reporting.

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in fiscal year 2006.

/s/ J.H. Cohn LLP

Roseland, New Jersey

September 25, 2007

F-2

NUTRITION 21, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

	June 30, 2007		June 30, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	2,417	$	2,414
Short-term investments		1,000		11,500
Accounts receivable (less allowance for doubtful accounts and returns of $827 and $9 at June 30, 2007 and 2006, respectively)		1,918		2,600

Other receivables		344		205
Inventories		3,945		963
Prepaid expenses and other current assets		1,369		392
Total current assets		10,993		18,074
Property and equipment, net		64		116
Patents, trademarks and other amortizable intangibles (net of accumulated amortization of $23,387 and $19,511 at June 30, 2007 and 2006, respectively)		3,271		5,375

Goodwill		14,715		---
Other intangibles with indefinite lives		5,379		---

Other assets		272		291

TOTAL ASSETS	$	34,694	$	23,856

See accompanying notes to consolidated financial statements.

F-3

NUTRITION 21, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	June 30, 2007			June 30, 2006
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES

Current liabilities:

Accounts payable	$	7,085		$	2,282
Accrued expenses		1,411			914
Deferred income		2,929			1,710
Total current liabilities		11,425			4,906

Long term debt		2,342			—

Deferred income taxes		2,152			—

6% Series I convertible preferred stock subject to mandatory redemption (redemption value $3,594 and $6,586 at June 30, 2007 and 2006, respectively)		2,838			4,410

Total liabilities		18,757			9,316
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 and 6,586 shares outstanding at June 30, 2007 and 2006, respectively		—			—

Common stock, $0.005 par value, authorized 100,000,000 shares; 60,946,443 and 48,783,220 shares issued and outstanding at June 30, 2007 and 2006, respectively		301			243
Additional paid-in capital		107,069			86,582
Accumulated deficit		(91,433	)		(72,285	)
Total stockholders’ equity		15,937			14,540
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	34,694		$	23,856

See accompanying notes to consolidated financial statements.

F-4

NUTRITION 21, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

	YEAR ENDED JUNE 30,
	2007			2006			2005

Net sales	$	41,623		$	10,298		$	9,462
Other revenues		526			366			1,249

TOTAL REVENUES		42,149			10,664			10,711

COSTS AND EXPENSES

Cost of revenues		13,599			2,722			2,469
Selling, general and administrative expenses		40,813			11,848			9,885
Research and development expenses		1,241			1,546			2,696
Depreciation and amortization expenses		3,257			2,235			2,280
Impairment charge for intangible assets		678			—			—

TOTAL COSTS AND EXPENSES		59,588			18,351			17,330

OPERATING LOSS		(17,439	)		(7,687	)		(6,619	)

Interest income		440			303			91
Interest expense		2,135			2,921			497

LOSS BEFORE INCOME TAXES		(19,134	)		(10,305	)		(7,025	)

Income taxes		14			12			19

NET LOSS	$	(19,148	)	$	(10,317	)	$	(7,044	)

Basic and diluted loss per common share	$	(0.33	)	$	(0.26	)	$	(0.19	)

Weighted average number of common
shares - basic and diluted		57,462,944			40,262,851			38,041,426

F-5

NUTRITION 21, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except share data)

					Additional		Accumulated
	Common Stock				Paid-In Capital		Deficit			Total
	Shares		$		$		$			$
Balance at June 30, 2004		37,991,988		190		67,367		(54,924	)		12,633

Exercise of stock options and warrants		103,732		—		50		—			50
Issuance of common stock for deferred compensation		60,975		—		25		—			25
Issuance of warrants and beneficial conversion features related to 6% Series I convertible preferred stock		—		—		4,698		—			4,698
Charge for stock appreciation rights		—		—		23		—			23
Issuance of warrants for services		—		—		42		—			42
Net loss for the year		—		—		—		(7,044	)		(7,044	)

Balance at June 30, 2005		38,156,695		190		72,205		(61,968	)		10,427

Charge for stock appreciation rights		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	)		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	)	$	15,937

See accompanying notes to consolidated financial statement

F-6

NUTRITION 21, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	YEAR ENDED JUNE 30,
	2007			2006			2005
Cash flows from operating activities:
Net loss	$	(19,148	)	$	(10,317	)	$	(7,044	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment		59			169			181
Amortization of intangibles		3,198			2,066			2,099
Accretion of preferred stock and amortization of deferred financing costs		1,609			2,360			376
Non-cash interest expense and accretion on note payable to Iceland Health		165			—			—
Series I convertible preferred stock dividend charged as interest expense		322			528			—
Issuance of warrants for services		—			—			42
Charge for stock appreciation rights		—			97			23
Stock-based compensation expense		615			315			—
Increase to provision for doubtful accounts		300			—			—
Impairment charge for intangible assets		678			—			—
Changes in operating assets and liabilities net of effects from acquisition of Iceland Health, Inc.;
Accounts receivable		402			(1,821	)		563 563
Other receivables		(140	)		74			(23	)
Inventories		(2,515	)		(381	)		582
Prepaid expenses and other current assets		(716	)		(2	)		(169	)
Other assets		—			—			186
Accounts payable and accrued expenses		3,664			923			236
Deferred income		1,220			—			—
Net cash used in operating activities		(10,287	)		(5,989	)		(2,948	)

Cash flows from investing activities:
Contingent payments for acquisitions		(223	)		(176	)		(176	)
Purchases of property and equipment		(7	)		(36	)		(116	)
Payments for patents and trademarks		(252	)		(198	)		(233	)
Redemption of investments available for sale		15,500			—			—
Purchase of investments available for sale		(5,000	)		(3,500	)		(6,000	)
Decrease (Increase) in restricted cash		—			1,225			(1,225	)
Cash portion of Iceland Health, Inc. purchase price net of cash acquired		(872	)		—			—
Net cash provided by (used in) investing activities		9,146			(2,685	)		(7,750	)

Cash flows from financing activities:
Proceeds from stock option and warrant exercises		1,144			1,172			50
Net proceeds from private placements of common stock, net of issuance costs		—			9,325			—
Proceeds from private placement of Series I convertible preferred stock, net of issuance costs								9,159
issuance costs		—			—			9,159
Additional issuance costs related to Series I convertible preferred stock		—			(84	)		—
Net cash provided by financing activities		1,144			10,413			9,209

Net increase (decrease) in cash and cash equivalents		3			1,739			(1,489	)
Cash and cash equivalents at beginning of year		2,414			675			2,164
Cash and cash equivalents at end of year	$	2,417		$	2,414		$	675

See accompanying notes to consolidated financial statements.

F-7

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1:

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Nutrition 21, Inc. (“Nutrition 21”, or together with its subsidiaries, the “Company”) is a nutritional bioscience company and the supplier of chromium picolinate-based, selenium and omega-3 fish oil-based supplements. The Company markets Chromax^® chromium picolinate. Another chromium picolinate-based supplement developed and marketed by Nutrition 21 is Diachrome®, a proprietary, non-prescription, insulin sensitizer for people with type 2 diabetes. It is sold in select drug retailers nationwide. As a result of the acquisition of Iceland Health (“IH”) in August 2006, the Company is the exclusive importer of Icelandic fish oils, including omega-3 fatty acids sold under the Iceland Health^® brand. The Company’s operations related to the licensing of pharmaceutical products have become immaterial. Accordingly, the Company operates in two business segments; ingredients group and branded products group.

Consolidation

The consolidated financial statements include the accounts of Nutrition 21, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents and Short-Term Investments

The Company considers all interest-earning liquid investments with a maturity of less than three months when acquired to be cash equivalents. Investments in marketable securities with maturities beyond three months are classified as current assets because of their highly liquid nature. All short-term investments are classified as available for sale and are recorded at market value. Realized gains and losses are determined using the specific identification method. Unrealized gains and losses would be reflected in Accumulated Other Comprehensive Income, if material. Cash equivalents included in the accompanying financial statements include money market accounts, bank overnight investments and commercial paper.

F-8

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1:

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Inventories

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

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization is provided using the straight-line method over the related assets’ estimated useful lives or the term of the lease, if shorter. The estimated useful lives are as follows:

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

Patents and Trademarks

The Company capitalizes certain patent and trademark costs. Patent and trademark costs are amortized over their estimated useful lives, ranging from 3 to 15 years.

Revenue Recognition

Sales revenue, net of allowances, is recognized when title transfers, upon delivery at the customer site. There are no customer acceptance provisions to be met before the recognition of any product revenue. Revenue is recognized only where collectibility of accounts receivable is reasonably assured. Other revenues are comprised primarily of license and royalty fees recognized as earned in accordance with agreements entered into by the Company when there is no further involvement required by the Company. The Company accrues for related product returns based on historical activity.

When customers have a guaranteed right to return products, the Company defers revenue recognition until its customers sell the product to the end user. Upon shipment by the Company, amounts billed to customers with a guaranteed right to return products 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.

Research and Development

Research and development costs are expensed as incurred.

F-9

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1:

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Accounting For Warrants Issued With Convertible Debt

The Company accounts for the intrinsic value of beneficial conversion rights arising from the issuance of convertible debt instruments with non-detachable conversion rights that are in-the-money at the commitment date pursuant to the consensuses of EITF Issue No. 98-5 and EITF Issue No. 00-27. Such value is determined after first allocating an appropriate portion of the proceeds received to warrants or any other detachable instruments included in the exchange.

Impairment of Amortizable Long-Lived Assets

The Company reviews long-lived tangible assets and certain intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value.

Goodwill and Other Intangibles with Indefinite Lives

Goodwill consists principally of the excess of cost over the fair value of net assets acquired. Other intangibles with indefinite lives are the registered tradenames acquired with the acquisition of Iceland Health, Inc. Such assets are not amortized. Instead they are tested periodically for impairment.

The Company tests for impairment as defined in SFAS No. 142, “Goodwill and Other Intangible Assets (the “Assets”).” This test is a two-step process. The first step of the impairment test, used to identify potential impairment, which compares the fair value of the assets with their carrying amount. If the fair value, which is based on future cash flows, exceeds the carrying amount, the Assets are not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment

F-10

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

loss, if any. The second step compares the implied fair value of the assets with the carrying amount of the assets. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the assets over the implied fair value of the assets.

Advertising costs

Advertising costs are expensed as incurred. The amount charged to expense during fiscal years 2007, 2006 and 2005 was $21.3 million, $1.0 million and $1.4 million, respectively.

Note 2

STOCK-BASED COMPENSATION

Since July 1, 2005, share-based employee compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. The Company has no awards with market or performance conditions. The Company adopted the provisions of revised Statement of Financial Accounting Standards No. 123 (“FAS 123R”) “Share Based Payments” on July 1, 2005, the first day of the Company’s fiscal year using modified prospective application. The valuation provisions of FAS 123R apply to new awards and to awards that were outstanding on the effective date and subsequently modified or cancelled. Estimated compensation expense for awards outstanding on the effective date are being recognized over the remaining service period using the compensation cost as of the grant date originally calculated for pro forma disclosure purposes under FAS Statement No. 123, “Accounting for Stock-Based Compensation” (FAS 123). The Company has used the Black-Scholes option pricing model to calculate the fair value of stock options.

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123R-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to FAS 123R. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123R.

As of June 30, 2007, the Company has adopted seven stock option plans, which permit the grant of share options and shares to its employees for up to 16.2 million shares of common stock. The Company believes that such awards better align the interests of the employees with those of its shockholders. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those options generally vest ratably over several years from the date of grant and expire ten years from the date of vesting. Approximately 6.2 million options remain available for grant under these plans at June 30, 2007.

F-11

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2

STOCK-BASED COMPENSATION (continued)

Pro-Forma Information under FAS 123 prior to Fiscal 2006

For purposes of pro-forma disclosures under FAS 123 for the year ended June 30, 2005, the estimated fair value of the share based awards was assumed to be amortized over their vesting periods. The pro-forma effects of recognizing estimated compensations expense under the fair value method or net loss and loss per common share for fiscal year 2005 were as follows:

		Year Ended
		June 30, 2005
Net loss as reported	$	(7,044	)
Deducts: Total stock-based employee compensation expense determined under fair value-based method for all awards		(263	)
Pro-forma net loss	$	(7,307	)

Loss per common share:
Basic and diluted - as reported	$	(0.19	)
Basic and diluted - pro-forma	$	(0.19	)

Share-Based Compensation Information under FAS 123R

The assumptions used in the Company’s Black-Scholes option pricing model related to stock option grants during the year ended June 30, 2007, were expected option lives of 3.0 - 4.5 years volatility factor of 95.5% and risk-free interest rate of 5.1%. The Company has not paid nor does it contemplate paying a dividend in the near future. As such a 0% dividend yield was used. The pre-vesting forfeiture rate in the years of expected lives are based on the Company’s historical option pre-vesting cancellation and employee exercise information, respectively.

The weighted average assumptions used in the Company’s Black-Scholes option pricing model related to stock option grants during the years ended June 30, 2007, 2006 and 2005 were as follows:

	June 30,
	2007	2006	2005
Expected option lives	3.0 - 4.5 years	3.0 - 4.5 years	3.0 - 3.5 years
Volatility	95.5%	101.6%	97.5%
Risk-free interest rate	5.1%	4.5%	4.5%
Dividend yield	0%	0%	0%
Forfeiture rate	5%	5%	N/A

As share-based compensation expense recognized in the consolidated statement of operations for the years ended June 30, 2007 and 2006 is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures are estimated to be approximately 5%, based on historical experience.

F-12

The Company recorded $0.6 million and $0.3 million in share-based compensation expense in the years ended June 30, 2007 and 2006, respectively. Share-based compensation expense is recorded in selling, general and administrative expenses.

The following is a summary of option activity for the year ended June 30, 2007. During the year ended June 30, 2007, the Company granted 665,000 stock options with an exercise price equal to the market price at the date of grant with a fair value of $1.0 million based on the market price at the date of grant.

OPTIONS	Shares (000)			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Yrs.)		Aggregate Intrinsic Value ($000)
Outstanding at July 1, 2006		4,630		$	0.92
Granted		665		$	1.56
Exercised		(832	)	$	1.08
Forfeited or expired		(351	)	$	1.85
Outstanding at June 30, 2007		4,112		$	0.91		6.1	$	3,048
Exercisable at June 30, 2007		3,251		$	0.82		6.1	$	2,705

The weighted-average grant-date fair value of options granted during the fiscal years 2007, 2006 and 2005 was $1.56, $0.80 and $0.84 per share, respectively. The total intrinsic value of options exercised during the fiscal years ended June 30, 2007, 2006 and 2005 was $0.6 million, $0.7 million and $58 thousand, respectively.

F-13

NUTRITION 21, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands, except share data)

(unaudited)

Note 2

STOCK-BASED COMPENSATION (continued)

A summary of the status of the Company’s nonvested options as of June 30, 2007 and changes during the year ended June 30, 2007 is presented below:

NONVESTED OPTIONS	Options			Wtd-Avg Grant-Date Fair Value

Nonvested at July 1, 2006		842,085		$	0.64
Granted		505,250			1.57
Vested		(376,553	)		0.76
Forfeited		(109,144	)		0.76
Nonvested at June 30, 2007		861,638		$	0.79

At June 30, 2007, there was $0.7 million of unrecognized compensation costs related to non-vested awards. The costs are expected to be recognized over a weighted average period of 3 years.

The total fair value of shares vested during the years ended June 30, 2007, 2006 and 2005 was $0.6 million, $0.7 million and $0.6 million, respectively.

The following is a summary of restricted stock activity for the year ended June 30, 2007. During the year ended June 30, 2007, the Company granted 515,000 shares of restricted stock with an exercise price equal to the market price at the date of grant with a market value of $0.8 million.

RESTRICTED STOCK	Shares (000)			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Yrs.)		Aggregate Intrinsic Value ($000)
Outstanding at July 1, 2006		-0-			—
Granted		515		$	1.56
Exercised		—			—
Forfeited or expired		(14	)		—
Outstanding at June 30, 2007		501		$	1.57		3.0	$	22
Exercisable at June 30, 2007		—			—		—		—

F-14

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3

SHORT-TERM INVESTMENTS

	June 30,
Short-term investments are comprised as follows(in thousands):	2007		2006
Available for sale:
3.87% corporate bond, maturing 12/15/06		—		1,000
Auction rate securities⁽¹⁾		1,000		10,500
TOTAL	$	1,000	$	11,500

⁽¹⁾

Included in investments in available-for-sale securities at June 30, 2007 and 2006 are investments in auction rate securities with short-term interest rates that generally can be reset every 28 days. The auction rate securities have long-term maturity dates and provide us with enhanced yields. However, we believe we have the ability to quickly liquidate them at their original cost, although there is no guaranty and, accordingly, they are carried at cost which approximates fair value, and classified as current assets. All income generated from these investments is recorded as interest income.

Note 4

FINANCIAL INSTRUMENTS AND MAJOR CUSTOMERS

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

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Concentrations of credit risk with respect to accounts receivable are limited as the Company performs on-going credit evaluations of its customers. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit considerations. Management does not believe that significant credit risk exists at June 30, 2007.

The Company sells its products to customers in the Americas. The Company performs ongoing credit evaluations of its customer’s financial condition and limits the amount of credit extended as deemed appropriate, but generally requires no collateral. The Company maintains reserves for credit losses based on past write-offs, collections and current credit evaluations and, through June 30, 2007, such losses have been within management’s expectations.

In fiscal years 2007 and 2006, two customers accounted for approximately 14% and 30% of total revenues, respectively. For fiscal year 2005, one customer accounted for approximately 34% of total revenues. In addition, two customers accounted for 51% of accounts receivable, net at June 30, 2007 and 50% of accounts receivable, net at June 30 2006.

F-15

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5

PROPERTY AND EQUIPMENT, NET

The components of property and equipment, net, at June 30, 2007 and 2006 are as follows (in thousands):

	2007			2006

Furniture and fixtures	$	499		$	498
Machinery and equipment		135			135
Office equipment and leasehold improvements		543			543
Computer equipment		836			830
		2,014			2,006
Less: accumulated depreciation and amortization		(1,949	)		(1,890	)
Property and equipment, net	$	64		$	116

Note 6

PATENTS, TRADEMARKS AND OTHER AMORTIZABLE INTANGIBLES, NET

During fiscal years 2007, 2006 and 2005, changes in intangible assets relate to the investment of $0.2 million, in each of the respective years, in existing patents, which will be amortized over the remaining life of the patents. No significant residual value is estimated for these intangible assets. Intangible asset amortization expense was $3.2 million for fiscal year 2007, $2.1 million for fiscal year 2006 and $2.1 million for fiscal year 2005. The components of intangible assets are as follows (in thousands):

	June 30,
	2007					2006
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Patents and licenses	$	9,169	$	(9,165	)	$	8,871	$	(8,544	)
Trademarks, trade names and other amortizable intangible assets		17,489		(14,222	)		16,015		(10,967	)
	$	26,658	$	(23,387	)	$	24,886	$	(19,511	)

Amortization expense for the net carrying amount of intangible assets at June 30, 2007 is estimated to be approximately $1.1 million in fiscal years 2008, 2009 and 2010, respectively.

The Company periodically evaluates the recoverability and the amortization period of its intangible assets. Some factors the Company considers important in assessing whether or not impairment exists include performance relative to expected historical or projected future operating results, significant changes in the manner or use of the assets or the strategy for the overall business. When the Company evaluated these factors, it was determined that a non-cash $0.7 million impairment charge of intangibles was warranted in fiscal year 2007.

Note 7

ACCRUED EXPENSES

The following items are included in accrued expenses at June 30, 2007 and 2006 (in thousands):

	2007		2006
Consulting and professional fees payable	$	203	$	397
Accrued compensation and related expense		99		57
Accrued expenses related to branded products		855		222
Other accrued expenses		254		238
	$	1,411	$	914

F-16

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8

SERIES I CONVERTIBLE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION

On March 31, 2005, the Company entered into a Securities Purchase Agreement (the “Agreement”) under which the Company sold to private investors 9,600 shares of 6% Series I Convertible Preferred Stock and warrants to purchase 2,948,662 shares of Common Stock for gross proceeds of $9.6 million. During fiscal years 2007 and 2006, 184,292 and 61,430 warrants, respectively, were exercised for cash. At June 30, 2007, 2,702,940 of these warrants remain outstanding. Each share of Preferred Stock has a stated value of $1,000 per share. The Preferred Stock is convertible into common stock at the option of the holders at $1.2535 per share, subject to anti-dilution provisions. Subject to certain conditions, the Company can force conversion of the Preferred Stock if the volume weighted average price of the common stock is at least $3.76 for 20 consecutive trading days. The Preferred Stock pays cumulative dividends at the annual rate of 6%. Dividends are payable in cash or common stock at the sole election of the Company. Dividends shall be valued at 90% of the average of the 20 VWAPs (daily volume weighted average price). The Company must redeem the Preferred Stock at the original issue price plus accrued dividends on March 31, 2009 and, accordingly, the carrying values of the preferred stock is included in noncurrent liabilities in the consolidated balance sheets. The Agreement also provides for early redemption of the Preferred Stock on the occurrence of certain default events. The Warrants are exercisable commencing October 1, 2005 and ending on March 31, 2010 at $1.3104 per share subject to anti-dilution provisions and other limitations. The Warrants may be exercised on a cashless basis (i.e., by deducting from the number of shares otherwise issuable on exercise a number of shares that has a then market value equal to the exercise price) after March 31, 2006 so long as no registration statement is in effect with respect to the sale of shares issuable upon exercise.

The Company, based on relative fair value, initially recorded additional paid-in capital of $4.6 million relating to a beneficial conversion feature of the preferred stock and the fair value of the warrants with the remaining $5.0 million of the proceeds recorded as a long-term liability. As a result, dividends on the preferred stock are charged as interest expense. Related issuance costs of $0.5 million, classified as other assets on the consolidated balance sheets, are amortized to interest expense over the term of the preferred stock. In addition, debt discount is being accreted based on the redemption price and charged to interest expense over the term of the preferred stock. In fiscal year 2007 and 2006, $1.6 million and $2.3 million, respectively, was charged to interest expense for accretion.

Note 9:

STOCKHOLDERS’ EQUITY

On May 19, 2006, the Company completed separate private placements of 5,555,557 shares of common stock at $1.80 per share for aggregate gross proceeds of $10.0 million. The Company also issued to the investors 2,222,222 five year warrants that are exercisable at $2.20 per share. At June 30, 2007, all of these warrants remain outstanding.

The Company adopted a Shareholder Rights Plan on September 12, 2002. Under this plan, the Company 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.

F-17

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9:

STOCKHOLDERS’ EQUITY (continued)

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 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 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.

Warrants Issued for Services

In addition to the warrants issued to the private investors, the Company, from time to time, has issued warrants to purchase Common Stock to non-employees for services rendered. Warrants are granted to purchase the Company’s Common Stock with exercise prices set at fair market value on the date of grant. The terms of the warrants vary depending on the circumstances, but generally expire in three to five years. The Company had outstanding warrants issued to non-employees for services as follows:

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

Outstanding at July 1, 2006		419,833		$	1.18
Granted		-0-			—
Exercised		(70,000	)		1.00
Forfeited or expired		(180,000	)		1.29
Outstanding at June 30, 2007		169,833		$	1.78		3.3	$	—
Exercisable at June 30, 2007		169,833		$	1.78		3.3	$	—

The weighted-average grant-date fair value of warrants granted during the fiscal years 2006 and 2005 was $0.75 and $0.20, respectively. The total intrinsic value of warrants exercised during the fiscal years ended June 30, 2007, 2006 and 2005 was $60 thousand, $0.9 million and $0 thousand, respectively.

The warrants expire between 2007 and 2010.

The Company recorded compensation expense associated with the issuance of warrants to non-employees for services rendered of $14 thousand and $42 thousand during fiscal years 2006 and 2005, respectively.

F-18

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10

LOSS PER COMMON SHARE

Diluted loss per share for the fiscal years ended June 30, 2007, 2006 and 2005, does not reflect the total of any of the incremental shares related to the assumed conversion or exercise of preferred stock, stock options and warrants (10,822,510, 12,695,989 and 12,351,813 shares, respectively) as the effect of such inclusion would be anti-dilutive.

Note 11

BENEFIT PLANS

Through September 19, 2004, eligible employees of the Company were entitled to participate and to accrue benefits in the AB Mauri Food Inc. Retirement Plan, a non-contributory defined benefit pension plan (the “Pension Plan”) maintained by AB Mauri Food Inc. No additional pension benefits accrue under the Pension Plan for services performed or compensation paid on or after September 19, 2004. Service with the Company after September 19, 2004 will be considered solely for purposes of vesting and for determining eligibility for early retirement benefits.

During fiscal years 2007, 2006, and 2005, the Company made contributions to the Pension Plan of $0.2 in each of the respective years. The Company is obligated to make a final payment of $0.2 million in fiscal year 2008.

In addition, the Company also maintains a 401(k) defined contribution plan. Contributions to the plan for the fiscal years 2007, 2006 and 2005 were $0.1 million each year.

Note 12

INCOME TAXES

The provisions for income taxes for the fiscal years ended June 30, 2007, 2006 and 2005 consist of the following (in thousands):

	2007		2006		2005
Current state taxes	$	14	$	12	$	19
Deferred		—		—		—
	$	14	$	12	$	19

Income taxes attributed to the pre-tax loss differed from the amounts computed by applying the US federal statutory tax rate to the pre-tax loss as a result of the following (in thousands):

	2007			2006			2005
Income tax (benefit) at U.S. statutory rate	$	(6,506	)	$	(3,475	)	$	(3,379	)
Increase/ (reduction) in income taxes resulting from:
Change in valuation allowance		5,292			2,132			3,366
True up of deferred tax asset		1,669			—			—
Non deductible interest and dividends		729			1,311			—
State taxes, net of federal		(1,139	)		8			19
Other items		(36	)		36			13
Total income tax	$	14		$	12		$	19

F-19

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12

INCOME TAXES (continued)

The tax effects of temporary differences that give rise to deferred taxes and deferred tax assets and deferred tax liabilities at June 30, 2007 and 2006 are presented below (in thousands):

	2007			2006
Deferred tax assets:
Net operating loss carryforwards	$	15,298		$	10,671
Accrued expenses		158			93
Allowance for doubtful accounts		331			–
Inventory reserve		77			21
Intangible and fixed assets		5,039			4,826
Other		3			3
Total gross deferred tax assets		20,906			15,614
Less valuation allowance		(20,906	)		(15,614	)
Net deferred tax assets	$	–		$	–
Deferred tax liability:
Tradenames		(2,152	)		–

At June 30, 2007, the Company has available, for federal and state income tax purposes, net operating loss carry forwards of approximately $38.2 million expiring through 2027. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Ultimate uitilization/availability of such net operating losses and credits is dependent upon the Company’s ability to generate taxable income in future periods and may be significantly curtailed if a significant change in ownership occurs in accordance with the provisions of the Tax Reform Act of 1986.

Note 13

COMMITMENTS AND CONTINGENCIES

The Company and the Federal Trade Commission (“FTC”) are discussing whether the Company should have any liability for weight loss advertising claims that were made on QVC, Inc. for the Company’s Lite Bites® products. On March 24, 2004, the FTC sued QVC in the U.S. District Court for the Eastern District of Pennsylvania for these claims and for claims made on QVC for 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, in the same lawsuit, filed on March 4, 2005, a Third-Party Complaint for indemnity against Marvin Segel, its on-air spokesperson for Lite-Bites products. The Company discontinued the Lite Bites

product line in fiscal year 2003. Neither the FTC nor QVC has set forth an amount being sought as damages, nor can the Company estimate its liability, if any.

The Company has entered into various research and license agreements with certain universities to supplement the Company's research activities and to obtain for the Company rights to certain technology. The agreements generally require the Company to fund the research and to pay royalties based upon a percentage of product sales.

F-20

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13

COMMITMENTS AND CONTINGENCIES (continued)

The Company leases certain office space in the United States. The lease expires in the year 2009. Rent expense under this operating lease was approximately $0.4 million in each of fiscal years 2007, 2006, and 2005. Future non-cancelable minimum payments under this lease are as follows (in thousands):

Fiscal Year		Amount

2008		388
2009		291
Total		$679

In connection with the Company’s purchase agreement for Nutrition 21 on August 11, 1997, the Company made cash payments of $0.2 million for each of the fiscal years 2007 and 2006 and $0.2 million for the fiscal year 2005.

Note 14

ACQUISITION OF ICELAND HEALTH, INC.

In accordance with SFAS No. 141, “Business Combinations”, acquisitions are accounted for under the purchase method of accounting. Under the purchase method of accounting, identifiable assets acquired and liabilities assumed are recorded at their estimated fair values. Goodwill is recorded to the extent the purchase price consideration, including certain acquisition and closing costs, exceeds the fair value of the net identifiable tangible and intangible assets acquired at the date of the acquisition. The results of operations of the acquired company are consolidated beginning as of the date of acquisition.

Effective August 26, 2006, the Company acquired all of the issued and outstanding common stock of Iceland Health, Inc. (“IH”). The Company delivered or paid to the former stockholders 8.0 million shares of the Company’s common stock with a fair value of $15.5 million; $1.0 million in cash; and $2.5 million in 5% notes that are due on August 25, 2009. The notes have been discounted based on a market interest rate and are secured with IH’s trade names and trade- marks and the goodwill with respect to these names and marks. The Company also agreed to pay to the former stockholders up to $2.5 million in earn out payments based on 3% of the amount by which Net Sales of Eligible Products (each as defined) in successive one-year periods after the closing exceed $10.0 million. Any earn-out payments disbursed in future periods will be recorded as an additional element of the cost of the acquisition, in accordance with accounting principles generally accepted in the United States of America. In fiscal year 2007, $0.4 million was recorded as an additional element of the cost of the acquisition. In September 2007, the Company issued to the former stockholders, in accordance with the acquisition agreement, an additional 1.5 million shares of the Company’s common stock as the volume weighted average price of the Company’s common stock during the 30 trading days immediately preceding the first anniversary of the closing was less than $2 per share. The fair value of the shares will be recorded as an additional element of the cost of the acquisition.

F-21

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14

ACQUISITION OF ICELAND HEALTH, INC. (continued)

Of the $21.4 million of acquired intangible assets, Goodwill, which is not deductible for tax purposes, was $14.7 million, $5.4 million was assigned to registered trademarks, which were determined to have indefinite useful lives. Of the remaining balance of intangible assets acquired, $0.9 million was assigned to customer relationships which are being amortized over a 7.5 month period, and $0.4 million was assigned to non-compete agreements which are being amortized over 3 years.

The shares issued and issuable to the Stockholders at the closing were restricted, but the Company filed a registration statement for these shares within 90 days of the closing, which is now effective and as a result, the shares are no longer restricted.

F-22

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands, except share data)

(unaudited)

Note 14

ACQUISITION OF ICELAND HEALTH, INC. (continued)

The purchase price allocation has been determined as follows:

Assets purchased:

Net identifiable tangible assets	$	181
Other intangibles with indefinite lives		5,379
Customer relationships		924
Non-compete agreements		375
Goodwill		14,715
Deferred tax liability		(2,152	)
Purchase Price	$	19,422

Pro-forma Information

The following unaudited pro-forma financial information presents the combined results of operations of the Company and IH for the years ended June 30, 2007 and 2006, as if the acquisition had occurred as of the beginning of each period instead of August 26, 2006, after giving effect to certain adjustments. The pro-forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and IH been a single entity during this period.

	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	)

Note 15

SEGMENT REPORTING

The Company’s business segments are based on the organization structure used by the Company’s chief operating decision maker for making operating and investment decisions and for assessing performance. As a result, the Company operates in two business segments: as a supplier of essential minerals, most notably chromium picolinate (Ingredients Group), and as a supplier of finished goods to food, drug and mass retailers (Branded Products Group).

F-23

NUTRITION 21, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands, except share data)

(unaudited)

Note 15

SEGMENT REPORTING (continued)

The organization structure used by the Company’s chief operating decision maker changed in fiscal 2007 to accommodate the acquisition of IH in August 2006, as well as the increased importance of sales of finished goods to retailers. The Company evaluates the performance of its operating segments based solely on its operating results before income taxes; therefore assets of the Company are not allocated by segment. Unallocated corporate expenses include executive salaries, research and development expenditures, depreciation, amortization, interest expense, net and external professional fees, such as accounting, legal and investor relations costs.

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

	Year Ended
	June 30,			June 30,
	2007			2006
Net sales
Ingredients Group	$	7,528		$	9,999
Branded Products Group		34,095			299
Sales to external customers		41,623			10,298

Other revenues		526			366

Total Revenues	$	42,149		$	10,644

Income (loss) before income taxes
Ingredients Group		4,542			6,768
Branded Products Group		(11,057	)		(4,896	)
Unallocated corporate expenses		(12,619	)		(12,177	)

Loss before income taxes	$	(19,134	)	$	(10,305	)
Unallocated corporate assets	$	34,694		$	23,856

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

The Company has not presented financial data by segment for the year ended June 30, 2005 as it is not practical to restate fiscal year 2005.

Note 16

SETTLEMENT OF PATENT LAWSUIT

On December 18, 2006, the Company and General Nutrition Corporation (“GNC”) entered into a settlement agreement to settle patent litigation brought by the Company against GNC for infringement of certain U.S. patents owned by the Company. As part of the settlement, GNC acknowledged the validity of the patents. Additionally, the Company received $2.6 million in cash in partial settlement of the lawsuit, which is included in deferred income and is being

F-24

NUTRITION 21, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands, except share data)

(unaudited)

Note 16

SETTLEMENT OF PATENT LAWSUIT (continued)

recognized ratably over 36 months beginning in December 2006, as well as commitments by GNC to purchase chromium picolinate and products made with chromium picolinate from Nutrition 21.

Note 17

SUPPLEMENTAL CASH FLOW INFORMATION

	Year ended June 30,
	2007		2006		2005
Supplemental disclosure of cash flow information (in thousands)
Cash paid for interest	$	—	$	—	$	—
Cash paid for income taxes		14		12		19
Supplemental schedule of non-cash financing activities:
Increase in obligation for Nutrition 21 contingent payment		83		54		31
Cashless exercise of warrants		—		505		—
Issuance of common stock for deferred compensation		—		—		25
Issuance of warrants to purchase 292,461 shares of common stock for services related to 6% Series I convertible preferred stock		—		—		248
Beneficial conversion feature related to 6% Series I convertible preferred stock		—		—		4,698
Issuance of common stock for conversion of Series I preferred stock		2,992		2,488		—
Issuance of common stock for dividends on Series I preferred stock		322		528		—
Issuance of common stock for purchase of Iceland Health, Inc.		15,472		—		—

Note 18

SUBSEQUENT EVENTS

The Company entered into a Loan and Security Agreement (the “Agreement”) dated as of June 30, 2007 with Gerber Finance Inc. (the “Lender”). Under the Agreement, the Company may on a revolving basis and at Lender’s discretion borrow against eligible receivables and eligible inventory under a formula set forth in the Agreement, up to a maximum of $5.0 million at any time outstanding. Borrowings bear interest at the prime rate plus 3% and are collateralized by a security interest in all the assets of the Company.

On September 10, 2007, the Company privately placed 17,750 shares of preferred stock and 6,715,218 warrants for aggregate gross proceeds of $17.8 million. Each share of preferred stock has a stated value of $1,000 per share and subject to certain conditions is convertible into common stock at the option of the holder at $1.2158 per share. The preferred stock pays cumulative dividends at the annual rate of 8%. Dividends are payable quarterly, in cash, except that in certain circumstances dividends may be paid in shares of common stock valued at 90% of the then 20 consecutive day volume weighted average price.

The Company must, on the fourth anniversary of the closing, redeem the preferred at the stated value per share plus accrued dividends. The warrants are exercisable for five years beginning six months after the closing at $1.2158 per share. Both the preferred stock and the warrants have anti-dilution provisions.

F-25

NUTRITION 21, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands, except share data)

(unaudited)

Note

Note 19

QUARTERLY FINANCIAL INFORMATION (unaudited)

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

Fiscal Year 2007

Revenues		4,684			9,434			16,055			11,976
Gross profit		3,137			6,576			11,265			7,572
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	)

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

Fiscal Year 2006

Revenues	$	3,601		$	2,099		$	2,461		$	2,503
Gross profit		3,000			1,448			1,877			1,617
Loss before income taxes		(1,128	)		(3,098	)		(2,328	)		(3,751	)
Net loss		(1,138	)		(3,103	)		(2,330	)		(3,746	)
Net loss per common share:
Basic and diluted	$	(0.03	)	$	(0.08	)	$	(0.06	)	$	(0.09	)

F-26

Schedule II

NUTRITION 21, INC.

VALUATION AND QUALIFYING ACCOUNTS

			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, 2007
Allowance for doubtful accounts		9		300			518		—			827
Deferred tax valuation allowance		15,614		5,292								20,906
Allowance for returns and allowances		—		450			—		—			450
Allowance for inventory obsolescence		54		147			—		—			201

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	)		—
Allowance for inventory obsolescence		60		62			—		68			54

Year ended June 30, 2005
Allowance for doubtful accounts		10		—			—		(1	)		9
Deferred tax valuation allowance		10,116		3,366			—		—			13,482
Allowance for returns and allowances		516		(126	)		—		—			390*
Allowance for inventory obsolescence		6		54			—		—			60

*Included in accrued expenses in the consolidated balance sheets in fiscal year 2006 and 2005.

F-27

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

10-K Part and Item No.		Page No.

PART I

Item 1	Business	3
Item 1A	Risk Factors	26
Item 2	Properties	34
Item 3	Legal Proceedings	35
Item 4	Submission of Matters to a Vote of Security Holders	35

PART II

Item 5	Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	36
Item 6	Selected Financial Data	37
Item 7	Management's Discussion and Analysis of Financial Condition and Results of Operations	37
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	42
Item 8	Financial Statements and Supplementary Data	42
Item 9	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	42
Item 9A	Controls and Procedures	42
Item 9B	Other	44

PART III

Item 10	Directors and Executive Officers of the Registrant	45
Item 11	Executive Compensation	45
Item 12	Security Ownership of Certain Beneficial Owners and Management	45
Item 13	Certain Relationships and Related Transactions	45
Item 14	Principal Accounting Fees and Services	45

PART IV

Item 15	Exhibits, Financial Statement Schedules	46

Fiscal Quarter Ended	High	Low

September 30, 2005	$0.93	$0.87
December 31, 2005	$0.65	$0.62
March 31, 2006	$2.15	$1.59
June 30, 2006	$1.82	$1.71
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

Selected Statement of		Year Ended June 30,
Operations Data:		2007⁽¹⁾			2006			2005			2004			2003⁽¹⁾

Total Revenues	$	42,149		$	10,664		$	10,711		$	10,232		$	10,615
Operating Loss		(17,439	)		(7,687	)		(6,619	)		(5,854	)		(11,081	)
Loss Before Income Taxes (Benefit)		(19,134	)		(10,305	)		(7,025	)		(5,833	)		(11,050	)
Income Taxes Provision (Benefit)		14			12			19			68			(544	)
Net Loss		(19,148	)		(10,317	)		(7,044	)		(5,901	)		(10,506	)
Diluted Loss per Common Share		(0.33	)		(0.26	)		(0.19	)		(0.16	)		(0.32	)

	At June 30,
Selected Balance Sheet Data:	2007	2006	2005	2004	2003

Total Assets	34,694	23,856	19,680	16,367	18,920
Long-term Debt	2,342	--	--	--	--
Mandatorily Redeemable Preferred Stock	2,838	4,410	5,324	--	--
Stockholders' Equity	15,937	14,540	10,427	12,633	15,436

	Fiscal Year Percent of Revenues
		2007		2006		2005
Total Revenues		100	%	100	%	100.	%
Cost of revenues*		32.7		73.6		73.9
Selling, general and administrative expenses		96.8		111.1		92.3
Research and development expenses		2.9		14.5		25.2
Operating loss		(41.4	)	(72.1	)	(61.8	)
Net loss		(45.4	)	(96.7	)	(65.8	)

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

Operating lease obligations	$	679	$	388	$	291	$	---
Long-term obligations	$	6,094	$	---	$	6,094	$	---


		NUTRITION 21, INC.

		By: /s/ Paul Intlekofer Paul Intlekofer, President and Chief Executive Officer


		/s/ Paul Intlekofer Paul Intlekofer, President and Chief Executive Officer

		/s/ John H. Gutfreund, John H. Gutfreund, Chairman of the Board

		/s/ P. George Benson P. George Benson, Director

		/s/ John L. Cassis John L. Cassis, Director

		/s/ Warren D. Cooper Warren D. Cooper Director

		/s/ Audrey T Cross Audrey T. Cross, Director

		/s/ Marvin Moser Marvin Moser, Director

		/s/ Alan J. Kirschbaum Chief Financial Officer, Vice President Finance and Treasury (Principal Financial Officer and Principal Accounting Officer)

September 28, 2007


/s/ Paul Intlekofer
Paul Intlekofer
President & Chief Executive Officer

September 28, 2007


/s/ Alan J. Kirschbaum
Alan J. Kirschbaum
Chief Financial Officer