UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2002

[_] 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 0-28551

______________________

Nutri/System, Inc.
------------------
(Exact name of Registrant as specified in its charter)

Delaware 23-3012204
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

202 Welsh Road,
Horsham, Pennsylvania 19044
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(Address of principal executive offices) (Zip Code)

(215) 706-5300
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(Registrant's telephone number, including area code)

- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 __
---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of April 24, 2002:

Common Stock, $.001 par value 26,360,437 shares

Nutri/System, Inc.

INDEX TO FORM 10-Q

Page
----

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements (Unaudited)

Consolidated Balance Sheets.................................................. 1

Consolidated Statements of Operations........................................ 2

Consolidated Statements of Cash Flows........................................ 3

Notes to Consolidated Financial Statements................................... 4

Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 9

Item 3 - Quantitative and Qualitative Disclosure About Market Risk............... 13

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings....................................................... 14

Item 2 - Changes in Securities and Use of Proceeds............................... 14

Item 3 - Defaults Upon Senior Securities......................................... 14

Item 4 - Submission of Matters to a Vote of Security Holders..................... 14

Item 5 - Other Information....................................................... 14

Item 6 - Exhibits and Reports on Form 8-K........................................ 14

SIGNATURES........................................................................... 15

NUTRI/SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, dollars in thousands, except share data)

December 31, March 31,
2001 2002
------------- ------------

ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 1,118 $ 3,521
Restricted cash 528 528
Trade receivables, less allowance of
$0 in 2001 and 2002, respectively 222 1,236
Inventories, net 2,758 1,756
Other current assets 460 438
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Total current assets 5,086 7,479

FIXED ASSETS, net 852 791

INTANGIBLES, net 290 290

OTHER ASSETS 159 161
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$ 6,387 $ 8,721
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,346 $ 3,126
Accrued payroll and related benefits 113 233
Net liabilities of discontinued operation 161 144
Other current liabilities 156 146
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Total current liabilities 2,776 3,649

NON-CURRENT LIABILITIES 123 120
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Total liabilities 2,899 3,769
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COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:

Preferred stock $.001 par value -- --
(5,000,000 shares authorized, no shares outstanding)
Common stock, $.001 par value (100,000,000 shares authorized;
shares issued - 28,735,794 ; shares outstanding-27,065,394 at
December 31, 2001 and 26,710,394 at March 31, 2002) 29 29
Additional paid-in capital 29,333 29,348
Warrants exercisable at $1 per share 324 324
Accumulated deficit (25,475) (23,739)
Treasury stock, at cost (1,670,400 shares at December 31, 2001
and 2,025,400 at March 31, 2002) (723) (1,010)
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Total stockholders' equity 3,488 4,952
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$ 6,387 $ 8,721
========== ==========

The accompanying notes are an integral part of these consolidated financial
statements.

NUTRI/SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, dollars in thousands, except per share amounts)

Three Months Ended
March 31
--------------------------
2001 2002
----------- ----------

REVENUES $ 6,981 $ 10,439

COSTS AND EXPENSES:
Cost of revenues 3,829 6,010
Advertising and marketing 1,357 736
General and administrative 1,620 1,824
Depreciation and amortization 102 87
Non-cash compensation expense 8 15
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6,916 8,672
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Operating income from continuing operations 65 1,767

INTEREST INCOME, net 39 4
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Income before discontinued operation and income taxes 104 1,771

DISCONTINUED OPERATION:

Income from discontinued operation 533 --
-------- ---------

Income before income taxes 637 1,771

Income tax expense -- 35
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Net income $ 637 $ 1,736
======== =========

BASIC AND DILUTED INCOME PER SHARE:

Continuing operations -- 0.06

Discontinued operation 0.02 --
-------- ---------
$ 0.02 $ 0.06
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WEIGHTED AVERAGE SHARES OUTSTANDING:

Basic 28,706 27,038

Diluted 28,706 27,628

The accompanying notes are an integral part of these consolidated financial
statements.

NUTRI/SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, dollars in thousands)

Three Months Ended
March 31
---------------------------
2001 2002
---------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 637 $ 1,736
Adjustments to reconcile net income to net cash provided by
operating activities-
Discontinued operation net income (533) --
Net cash from discontinued operation (84) (17)
Depreciation and amortization 102 87
Other non-cash expense 8 15
Changes in operating assets and liabilities-
Restricted cash (3) --
Trade receivables 98 (1,014)
Inventories (322) 1,002
Prepaid expenses and other assets 132 20
Accounts payable 303 780
Accrued payroll and related benefits 69 120
Other liabilities (19) (13)
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Net cash provided by operating activities 388 2,716
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions (28) (26)
---------- ----------

Net cash used in investing activities (28) (26)
---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock purchases, at cost (97) (287)
---------- ----------

Net cash used in financing activities (97) (287)
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NET CHANGE IN CASH AND CASH EQUIVALENTS 263 2,403

CASH AND CASH EQUIVALENTS,
beginning of period 1,638 1,118
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CASH AND CASH EQUIVALENTS,
end of period $ 1,901 $ 3,521
========== ==========

The accompanying notes are an integral part of these consolidated financial
statements.

NUTRI/SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share amounts)

(Unaudited)

1. BACKGROUND

Nature of the Business

Nutri/System, Inc. (a Delaware corporation) together with its subsidiaries (the
"Company") provides weight loss programs and distributes pre-packaged foods. As
discussed below, the Company was formed to combine the well-established
Nutri/System name and proven weight loss program with the Internet as a medium
of communication. In September 2000, the Company changed its name from
nutrisystem.com inc. to Nutri/System, Inc.

Nutri/System, Inc. and its predecessor businesses, including Nutri/System L.P.
and NutriSystem Direct, L.L.C. (collectively, the "Predecessor Businesses"),
have historically operated through Company-owned and franchised weight loss
centers. Currently, the territories of the nine remaining independent franchised
weight loss centers encompass less than 1% of the United States population and
there are no Company-operated centers. In 1998, the Company initiated
NutriSystem Direct, L.L.C., a direct marketing program of independent
distributors of the Company's diet program. In 2001, the Company began selling
foods through QVC, a shopping television network. The Company's pre-packaged
foods are now sold to weight loss program participants through the Internet,
QVC, independent distributors and the remaining franchised weight loss centers.

Since the inception of the Nutri/System business in 1972, the Company and its
predecessors have operated in various organizational and legal structures. In
early 1993, the business was party to a bankruptcy proceeding. This case was
converted to a Chapter 11 proceeding effective June 4, 1993. One of the
Company's predecessors operated as a debtor in possession through December 1993.
In 1999, the Company acquired the Predecessor Businesses for cash of $3,400 plus
17,500,000 shares of common stock. In order to fund the Company's purchase of
the Predecessor Businesses and planned investments, the Company completed a
private placement in 1999 that raised net proceeds of approximately $7,574. The
Company completed another private placement in 2000 that raised net proceeds of
$2,462.

From 1993 to 2000, the Company, together with its Predecessor Businesses,
incurred significant losses. In 2001, the Company generated net income of $1,249
and in the first quarter of 2002, the Company had net income of $1,736. There
can be no assurance that the Company will be able to sustain profitability or,
if necessary, obtain the capital to fund operating and investment needs in the
future. However, based on the Company's ability to generate earnings recently,
the variable nature of a portion of the Company's expenditures, the cash balance
at March 31, 2002 and management's belief that additional equity financing, if
required, can be raised, the Company believes that it has the ability to
continue operations into 2003.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of Financial Statements

As of December 31, 2001 and March 31, 2002, the Company's consolidated financial
statements include the accounts of Nutri/System, Inc. and its wholly owned
subsidiaries.

All significant intercompany accounts and transactions have been eliminated.

Interim Financial Statements (Unaudited)

The accompanying consolidated financial statements as of March 31, 2002 and for
the three months ended March 31, 2001 and 2002 are unaudited and, in the opinion
of management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Company's financial
position and results of operations for those interim periods. The results of
operations for the three months ended March 31, 2001 and 2002 are not
necessarily indicative of the results to be expected for any other interim
period or the year ending December 31, 2002.

Cash Flow Information

For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments purchased with original maturities of three months
or less as cash equivalents. The Company made no payments for income taxes
during the three months ended March 31, 2001 or 2002. Payments for interest were
$2 and $1 for the three months ended March 31, 2001 and 2002.

Restricted Cash

Restricted cash represents minimum cash deposited in banks required under
certain vendor arrangements.

Inventories

Inventories consist principally of packaged food held in the Company's
warehouses. Inventories are priced using the lower of cost or market for which
cost is determined using the first-in, first-out (FIFO) method.

Intangibles

Intangible assets consist of goodwill which represents the excess of the
consideration paid over the fair value of net assets, and was generated from the
acquisition of the minority interest by the Company. Through December 31, 2001,
goodwill was $527 and the Company recorded amortization of $237. Consistent with
the Statement of the Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"), effective January 1, 2002, the
Company no longer amortizes goodwill on a periodic basis. See Recently Issued
Accounting Pronouncements below.

Advertising Costs

The Company follows the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 93-7, "Reporting on Advertising Costs"
to account for its Internet site linking agreements. Under SOP 93-7, the Company
amortizes the costs associated with its linking agreements over the contract
terms, with the amortization method primarily based on the rate of delivery of a
guaranteed number of impressions to be received during the contract term. To the
extent additional payments are required to be made based on factors such as
click-throughs and new customers generated, such payments are charged to expense
as incurred. All other advertising costs are expensed as incurred. At December
31, 2001 and March 31, 2002, $53 and $18, respectively, of prepaid advertising
was included in prepaid expenses. Advertising expense was $1,313 and $709 during
the three months ended March 31, 2001 and 2002, respectively.

Web Site Development Costs

Web site development costs are accounted for in accordance with SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." No significant website development costs were incurred and none
were capitalized in the three months ended March 31, 2001 and 2002.

Fixed Assets

Fixed assets are stated at cost. Depreciation, including amortization of capital
leases, is provided using the straight-line method over the estimated useful
lives of the related assets, which are generally three to seven years. Leasehold
improvements and equipment under capital leases are amortized on a straight-line
basis over the related lease terms. Expenditures for repairs and maintenance are
charged to expense as incurred while major renewals and improvements are
capitalized.

Valuation of Long-Lived Assets

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long Lived Assets" ("SFAS 144"), the Company continually evaluates whether
events or circumstances have occurred that indicate that the remaining useful
lives of its long-lived assets, primarily fixed assets and intangibles, should
be revised or that the remaining balance of such assets may not be recoverable
using objective methodologies. Such methodologies include evaluations based on
the undiscounted cash flows generated by the underlying assets or other
determinants of fair value. As of December 31, 2001 and March 31, 2002,
management believes that no reductions to the remaining useful lives or
write-downs of long-lived assets are required.

Revenue Recognition

Revenues are recognized when the related products are shipped. Revenues are
primarily from food sales which include amounts billed for shipping and handling
and are presented net of returns and free food products provided to consumers.
Revenues also include the sale of print materials to franchisees and independent
distributors as well as franchise royalty fees.

Income Taxes

Nutri/System, Inc. is a "C" corporation which is subject to corporate level
income taxes and provides for income taxes in the accompanying financial
statements in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities.

As a result of a merger transaction, the tax basis of the assets acquired from
the Predecessor Businesses exceeded the financial statement carrying amount by
$1,751, resulting in a net deferred tax asset of $790 as of September 30, 1999.
A valuation allowance of $790 was recorded based on management's current
assessment that the net deferred tax asset will not be realized given the
uncertainty of future operating results. To the extent that the existing
deferred tax asset is realized, the related tax benefit will be credited to
equity.

Stock Options

The Company accounts for stock option plans under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has adopted only the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation." See Note 5.

Fair Value of Financial Instruments

The carrying values of the Company's financial instruments, including cash, cash
equivalents, trade receivables, inventories and accounts payable, approximate
their fair values.

Net Income Per Common Share

The Company has presented net income per common share pursuant to SFAS No. 128,
"Earnings per Share," and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98. Basic income per common share was computed by
dividing net income applicable to common stockholders by the weighted average
number of shares of common stock outstanding. For the three months ending March
31, 2002, the impact of common stock equivalents resulted in an increase of 590
shares, representing about 2% of the basic weighted average shares outstanding
for the quarter.

Recently Issued Accounting Pronouncements

In 2002, the Company adopted SFAS 144. SFAS 144, which replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Assets to Be
Disposed of," changes the accounting for long-lived assets by requiring that all
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing or discontinued operations. The
adoption of SFAS 144 did not have an impact on the Company's consolidated
financial statements.

In 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This Statement, as amended by
SFAS No. 138, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The adoption of SFAS 133 did not have an
impact on the Company's consolidated financial statements.

The Company adopted SFAS No. 141, "Business Combinations" ("SFAS 141") in 2001
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") in 2002.
SFAS 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No.
142 specifies that goodwill and some intangible assets will no longer be
amortized but instead will be subject to periodic impairment testing. The
Company no longer amortizes goodwill and has determined that there has been no
impairment in its carrying value.

In 2000, the Company adopted the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). The bulletin draws on existing accounting rules and provides specific
guidance on how those accounting rules should be applied. The adoption of SAB
101 did not have a material impact on the Company's consolidated financial
position or results of operations.

Use of Estimates

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and operating expenses
during the reporting period. Actual results could differ from these estimates.

Certain Reclassifications

Certain prior year amounts have been reclassified to conform to the current year
presentation.

3. DISCONTINUED OPERATION

On August 25, 2000, the Company acquired certain assets of the Sweet Success
product line from Nestle USA, Inc. (the "Seller") in return for 900,000 shares
of the Company's common stock, representing 3.1% of the shares outstanding after
the transaction. The acquisition was recorded using the purchase method of
accounting. In the transaction, the Company acquired certain assets directly
related to the Sweet Success product line, including inventory, books and
records, contracts and intellectual property such as trademarks and product
specifications. The Company did not acquire any customer receivables or fixed
assets, and the Company did not assume any liabilities, beyond those obligations
associated with certain contracts, in connection with the acquisition. The
shares of common stock issued to the Seller are unregistered and restricted. The
Company entered into a registration rights agreement with the Seller that
provides demand registration rights after April 15, 2001.

As a result of a determination made in December 2000, the Company discontinued
sales of the Sweet Success product line by June 30, 2001. The results of the
Sweet Success product line have been reported separately as a discontinued
operation in the Company's consolidated financial statements. For the three
months ended March 31, 2001, Sweet Success generated sales of $3,082 and
operating income of $533. For the three months ended March 31, 2002, Sweet
Success was inactive. The net liabilities of the discontinued operation have
been recorded at their net realizable value under the caption "Net liabilities
of discontinued operation" in the accompanying consolidated balance sheet at
December 31, 2001 and March 31, 2002.

4. CAPITAL STOCK

Common Stock

The Company did not issue any shares of common stock in 2001 or in the first
quarter of 2002.

Treasury stock is accounted for using the cost method. During 2001, the Company
repurchased 1,670,400 shares of common stock for an aggregate cost of $723 (an
average price of $0.43 per share). For the first quarter ending March 31, 2002,
the company repurchased 355,000 additional shares of common stock for an
aggregate cost of $287 (an average price of $0.81 per share). The Company
accounts for the repurchased shares as treasury stock.

Preferred Stock

The Company has also authorized 5,000,000 shares of preferred stock issuable in
series upon resolution of the Board of Directors. Unless otherwise required by
law, the Board of Directors can, without stockholder approval, issue preferred
stock in the future with voting and conversion rights that could adversely
affect the voting power of the common stock. The issuance of preferred stock may
have the effect of delaying, averting or preventing a change in control of the
Company.

5. STOCK OPTIONS AND WARRANTS

Stock Option Plans

In August 1999, the Company adopted the 1999 Equity Incentive Plan and in June
2000, the Company adopted the 2000 Equity Incentive Plan, under which options to
purchase shares of the Company's common stock could be granted to key employees.
Currently, 1,000,000 and 4,100,000 shares of common stock may be issued pursuant
to the 1999 Equity Incentive Plan and the 2000 Equity Incentive Plan,
respectively. Under the terms of the 2000 Equity Incentive Plan, the number of
shares reserved can be adjusted quarterly so that the total number of shares
subject to outstanding options plus the shares available for grant will equal
14% of the then-outstanding shares of the Company's common stock. These options
could be either incentive stock options or nonqualified stock options. In June
2000, the Company also adopted the 2000 Equity Incentive Plan for Outside
Directors and Consultants (the "Director Plan"), under which nonqualified stock
options to purchase shares of the Company's common stock could be granted to
non-employee directors and consultants to the Company. A maximum of 500,000
shares of common stock may be issued pursuant to the Director Plan. Under each
of the plans, the Board of Directors determines the term of each option, but no
option can be exercisable more than ten years from the date the option was
granted. The Board also determines the option exercise price per share and
vesting provisions.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------

Except for the historical information contained herein, this Report on
Form 10-Q contains certain forward-looking statements that involve substantial
risks and uncertainties. When used in this Report, the words "anticipate,"
"believe," "estimate," "expect", and similar expressions, as they relate to
Nutri/System, Inc. or its management, are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include those set forth in "Business--Risk Factors" as
disclosed in the Company's Form 10K filed March 1, 2002 with the Securities and
Exchange Commission. Accordingly, there is no assurance that the results in the
forward-looking statements will be achieved.

The following discussion should be read in conjunction with the
financial information included elsewhere in this Report on Form 10-Q. Dollar
amounts are stated in thousands except share data.

Background

Nutri/System provides weight loss programs and distributes pre-packaged
foods. The Company was formed to combine the well-established Nutri/System name
and proven weight loss program with the Internet as a medium of communication.
The Nutri/System diet program was originally developed by the Company's
Predecessor Businesses that operated through company-owned and franchised weight
loss centers. Currently, nine owners of independent, franchised weight loss
centers remain, with territories encompassing less than 1% of the United States
population. In 1998, the Company initiated NutriSystem Direct, L.L.C., a direct
marketing program of independent distributors of the Company's diet program. In
2001, the Company began selling foods through QVC, a shopping television
network. The Company's pre-packaged foods are now sold to weight loss program
participants through the Internet, QVC, independent distributors and the
remaining franchised weight loss centers. In September 2000, the Company changed
its name from nutrisystem.com inc. to Nutri/System, Inc.

Since the Nutri/System businesses began in 1972, they have operated in
various organizational and legal structures and they were subject to a
bankruptcy proceeding in 1993, which was discharged in 1994. In August 1999,
Ansama, a non-operating public corporation, entered into an Asset Purchase
Agreement to acquire the operating assets and certain liabilities of
Nutri/System L.P. for $3,000 and a Stock Exchange and Purchase Agreement to
acquire the beneficial interests in NutriSystem Direct, L.L.C. for $400 and
17,500,000 shares of Ansama common stock. Ansama was subsequently merged into
the Company and the Company assumed the Asset Purchase Agreement and the Stock
Exchange and Purchase Agreement. In order to fund its cash obligations of $3,400
under the Asset Purchase and Stock Exchange and Purchase Agreements and the
planned marketing program and technology investment, the Company completed a
private placement of 7,637,400 shares of common stock in October 1999, which,
net of related expenses, resulted in proceeds of $7,574. In March 2000, the
Company completed a private placement of 500,000 shares of common stock, which
resulted in net proceeds of $2,462. In 2000, the Company also issued a total of
115,000 shares of common stock valued at an aggregate of $625 to service
providers. During 2001, the Company repurchased 1,670,400 shares of common stock
for an aggregate cost of $723 (an average price of $0.43 per share). For the
first quarter ending March 31, 2002, the Company repurchased 355,000 additional
shares of common stock for an aggregate cost of $287 (an average price of $0.81
per share).

From 1993 to 2000, the Company, together with its Predecessor
Businesses, incurred significant losses, including net losses of $9,633 and
$13,984 in 1999 and 2000, respectively. In 2001, the Company generated net
income of $1,249 and in the first quarter of 2002, the Company generated net
income of $1,736. There can be no assurance that the Company will be able to
sustain profitability or, if necessary, obtain the capital to fund operating and
investment needs in the future. However, based on the Company's ability to
generate earnings recently, the variable nature of a portion of the Company's
expenditures, the cash balance at March 31, 2002 and management's belief that
additional equity financing, if required, can be raised, the Company believes
that it has the ability to continue operations into 2003.

Discontinued Operation

such as trademarks and product specifications. The Company did not acquire any
customer receivables or fixed assets, and the Company did not assume any
liabilities, beyond those obligations associated with certain contracts, in
connection with the acquisition. The shares of common stock issued to the Seller
are unregistered and restricted. The Company entered into a registration rights
agreement with the Seller that provides demand registration rights after April
15, 2001.

As a result of a determination made in December 2000, the Company
discontinued sales of the Sweet Success product line in June 2001. Under
existing market conditions, the Company was unable to obtain the funding
required to rebuild the Sweet Success brand through consumer promotion. However,
over the course of 2000 and 2001 the Company was able to generate $1,753 in net
positive cash flow from the product line, consisting of $7,773 in operating
losses offset by $8,197 in non-cash expenses and a positive $1,329 in cash
generated from reductions in working capital. In 2000 and 2001, the Sweet
Success product line resulted a positive $1,212 and $541 net cash flow,
respectively, as cash generated through the operation of the product line and
the disposal of inventory exceeded payments related to the shut down of the
product line.

The results of the Sweet Success product line have been reported separately
as a discontinued operation in the accompanying consolidated financial
statements. For the three months ending March 31, 2001, Sweet Success generated
sales of $3,082 and operating income of $533. In the three months ending March
31, 2002, Sweet Success did not have any operating activity. The net liabilities
of the discontinued operation have been recorded at their net realizable value
under the caption "Net liabilities of discontinued operation" in the
accompanying consolidated balance sheet at December 31, 2001 and March 31, 2002.

Results of Operations

Revenues and expenses consist of the following components:

Revenues. Revenues consist primarily of food sales and franchise royalty
fees. Food sales include sales of food, supplements, shipping and handling
charges billed to members and sales credits and adjustments, including product
returns. Internet revenues began with the launch of the web site in October
1999. No revenue is recorded for food products provided at no charge as part of
promotions. Revenues from product sales are recorded when shipped.

Cost of Revenues. Cost of revenues consists primarily of the cost of the
products sold, incoming and outgoing shipping costs, charge card discounts and
packing material. Cost of products sold includes products provided at no charge
as part of promotions. Cost of direct sales includes the fees paid to
independent distributors.

Advertising and Marketing Expense. Advertising and marketing expense
includes advertising, marketing and promotional expenses and payroll related
expenses for personnel engaged in these activities. The Company follows the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position 93-7, "Reporting for Advertising Costs" to account for Internet
site-linking arrangements. Internet advertising expense is recognized based on
either the rate of delivery of a guaranteed number of impressions over the
advertising contract term or on a cost per customer acquired, depending upon the
payment terms. All other advertising costs are expensed as incurred.

General and administrative expenses. General and administrative expenses
consist of payroll and related expenses for administrative, information
technology, fulfillment and customer service personnel, facility expenses, web
site development costs, professional service fees and other general corporate
expenses. Web site development costs are accounted for in accordance with the
AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use."

Non-cash compensation expense. Non-cash compensation expense recorded in
2000 and 2001 represents the amortization of deferred compensation related to
stock options granted to management, directors and consultants over a one to
four-year vesting period.

Interest income/expense. Interest consists of interest income earned on
cash balances, net of interest expense.

Income taxes. Effective with the Merger on September 27, 1999, the Company
became subject to corporate level income taxes. No income tax benefit on the
excess of the tax basis of assets over the financial reporting carrying amount
has been recorded from September 1999 through 2001, in light of the uncertainty
of future operating results.

Internet Operations

The Company launched its web site on October 15, 1999. In pursuing its
Internet business strategy, the Company's primary financial objectives are to
generate growth while maintaining profit margins. The Company measures growth in
terms of the number of new customers, revenues per customer and total revenues.
A customer is defined as an individual who has purchased food through the web
site. Profit margins are measured in terms of gross margin (revenues less cost
of revenues as a percentage of revenues), and total advertising and marketing
expense as a percentage of revenues.

SELECTED FINANCIAL AND OPERATING STATISTICS

Three Months Ended
March 31
2001 2002
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Revenues (000's) $ 5,598 $ 5,309

Cost of revenues (000's) 2,767 2,449
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Gross margin (000's) $ 2,831 $ 2,860
% of revenue 50.6% 53.9%

Advertising and marketing (000's) $ 1,357 $ 736
% of revenue 24.2% 13.9%

New customers 16,385 11,450

Advertising and marketing/ $ 83 $ 64
new customer

Total revenues/new customer $ 342 $ 464

Internet revenues decreased 5.2% from the first quarter of 2001 to the
first quarter of 2002. Internet revenues are largely a function of the number of
new customers acquired, the revenues generated from each new customer and the
revenues generated from returning customers (customers that initially purchased
food in a prior year). From the first quarter of 2001 to the first quarter of
2002, the number of new customers acquired dropped by 4,935 or 30.1%. The
decline in new customers was caused by a large reduction in advertising and
marketing spending, which declined by $621 or 45.8% from the first quarter of
2001 to 2002. Total revenues per new customer increased 35.7% from $342 for the
first quarter in 2001 to $464 for the first quarter of 2002. The increase in
total revenues per new customer is primarily attributable to a) an increase in
the average weeks on program per new customer and b) revenues generated by
returning customers that totaled approximately $2 million in the first quarter
of 2002 as compared to $1.5 million in the first quarter of 2001.

The 45.8% decline in advertising spending from March 31, 2001 to 2002 was
attributable to (a) a $562 decline in television advertising and (b) the virtual
elimination of cost per impression Internet banner advertising. Advertising
spending as a percent of sales declined from 24.2% in 2001 to 13.9% in 2002, and
advertising spending per new customer acquired declined from $83 in 2001 to $64
in 2002, a drop of 22.9%. The Company believes it obtains new customers through
a) word-of-mouth referrals generated by an expanding base of former clients, b)
people who learned about Nutri/System while watching QVC (see below), c)
Internet advertising and Internet searches and d) television advertising.

Television Infomercial Distribution

In the second quarter of 2001, the Company began distribution of its
proprietary prepackaged food through QVC, the shopping television network. On
the QVC network, the Company reaches a large, incremental audience in a 50
minute, infomercial format that enables the Company to convey fully the benefits
of the Nutri/System diet foods.

Under the terms of the Company's agreement with QVC, QVC viewers purchase
Nutri/System products directly from QVC and are not directed to the Nutri/System
web site. Retail prices (including shipping and handling) offered on QVC to
consumers are similar to prices offered on the web site. The Company generates a
lower gross margin (as a percent of sales) on sales to QVC relative to Internet
sales, but QVC sales require no incremental advertising and marketing expense
and, the Company believes, exposure on QVC raises consumer awareness of the
Nutri/System brand.

Three Months Ended March 31, 2001 Compared to Three Months Ended March
31, 2002

Revenues. Revenues increased from $6,981 for the quarter ended March
31, 2001 to $10,439 for the quarter ended March 31, 2002. The revenue increase
of $3,458, or 49.5%, resulted from sales to QVC ($3,951). Offset by this
increase was a decline in Internet food sales of $289 and a decrease in sales of
$204 through the franchise network and N/S Direct. In the first quarter of 2002,
Internet sales accounted for 51% of total revenues, while QVC, N/S Direct and
franchise revenues accounted for 38%, 6% and 5% of total revenues, respectively.

Costs and Expenses. Cost of revenues increased $2,181 from $3,829 to
$6,010 for the quarters ended March 31, 2001 and 2002, respectively. Gross
margin as a percent of revenues was 45.2% and 42.4% for the quarters ended March
31, 2001 and 2002, respectively. Sales to QVC generate a lower gross margin than
sales made by the web site directly, and QVC sales reduced the overall gross
margin percent in the quarter ended March 31, 2002 relative to the same quarter
in 2001. Offset by this decrease, Internet and Direct gross margin as a percent
of sales resulted in a slight increase while franchise gross margin remained the
same. Advertising and marketing expenses decreased $621 from $1,357 to $736 from
the first quarter of 2001 to the first quarter 2002. All advertising spending
promoted the Internet operations, and, as discussed above, the decline in
advertising is attributable to a large decrease in television advertising
spending and the elimination of Internet banner advertising. General and
administrative expenses ($1,620 and $1,824 in the first quarter 2001and 2002,
respectively) increased $204 but declined as a percent of sales from 23% to 17%
from 2000 to 2001. The Company incurred high expenses in a variety of areas
related to expanded operations including compensation, rent and insurance.

Interest Income. Interest income net of interest expense decreased $35
from $39 in 2001 to $4 in 2002 primarily due to lower interest rates and average
cash balances.

Net Income. From March 31, 2001 to 2002, the Company improved its net
results by $1,099 from net income of $637 to net income of $1,736. The increase
in net income is primarily attributable to increased sales via QVC coupled with
a decrease in advertising spending. For the three months ended March 31, 2001,
the Company's net income included income from discontinued operations of $533,
and the Company generated income before discontinued operations and income taxes
of $104.

Liquidity, Capital Resources and Other Financial Data

At March 31, 2002, the Company had net working capital of $3,830. Cash
and cash equivalents were $3,521. The Company's principal source of liquidity is
from cash flow from operations. The Company currently has no bank debt or term
or revolving credit facilities to fund operating cash flow or investment
opportunities.

In the three months ended March 31, 2002, the Company generated a
positive cash flow of $2,716 from operations, primarily attributable to net
income adjusted for non-cash items partially offset by increases in working
capital.

In the three months ended March 31, 2002, net cash used by investing
activities was $26, which primarily consisted of capital expenditures incurred
to increase web site capacity.

In the three months ended March 31, 2002, net cash used in financing
activities amounted to $287, representing the purchase of 355,000 shares of
common stock in open market and privately negotiated transactions.

Over the first nine months of 2001, the Company eliminated virtually
all marketing agreements requiring future minimum fixed fees. As of March 31,
2002, the Company's principal commitments consisted of obligations under
operating leases. Although the Company has no material commitments for capital
expenditures, it anticipates continuing requirements for capital expenditures
consistent with anticipated growth in operations, infrastructure and personnel.

Based on the Company's ability to generate earnings in 2001 and in the
first quarter ended March 31, 2002, the variable nature of a portion of the
Company's expenditures, the cash balance at March 31, 2002 and management's
belief

that additional equity financing, if required, can be raised, the Company
believes that it has the ability to continue operations into 2003. However,
there can be no assurance that the Company will be able to sustain profitability
or, if necessary, obtain the capital to fund operating and investment needs in
the future. There are no credit facilities available to fund working capital or
investment needs.

There are no current plans or discussions in process relating to any
material acquisition that is probable in the foreseeable future.

Factors Affecting Business and Prospects

The Company expects to experience significant fluctuations in future
quarterly operating results due to a variety of factors, many of which are
outside its control.

Inflation

The Company's financial statements are presented on a historical cost
basis and do not fully reflect the impact of prior years' inflation. While the
U.S. inflation rate has been modest for several years, inflation issues may
impact business in the future. The ability to pass on inflation costs is an
uncertainty due to general economic conditions and competitive situations.

Recently Issued Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosure About Market Risk
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The Company does not hold any investments in market risk sensitive
instruments. Accordingly, the Company believes that it is not subject to any
material risks arising from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices or other market changes that affect
market risk instruments.

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings
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None

Item 2. Changes in Securities and Use of Proceeds
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None

Item 3. Defaults Upon Senior Securities
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None

Item 4. Submission of Matters to a Vote of Security Holders
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None

Item 5. Other Information
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None

Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------

a. Exhibits:

None

b. Reports on Form 8-K:

None

SIGNATURES

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

Nutri/System, Inc.

BY: /S/ BRIAN D. HAVESON April 24, 2002
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Brian D. Haveson
President and Chief Executive Officer

BY: /S/ JAMES D. BROWN April 24, 2002
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James D. Brown
Chief Financial Officer and Principal Accounting Officer

Exhibit Index
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None