##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the Quarter Ended December 31, 2001 Commission File No. 001-10887

JENNY CRAIG, INC.

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|                                            |  |                                     
|------------------------------------------- |  | ------------------------------------
|DELAWARE                                    |  | 33-0366188                          
|                                            |  |                                     
|(State of Incorporation)                    |  | (I.R.S. Employer Identification No.)
|                                           
|11355 NORTH TORREY PINES ROAD, LA JOLLA, CA |  | 92037                               
|                                            |  |                                     
|(Address of principal executive offices)    |  | (Zip Code)                          

Registrants telephone number, including area code(858) 812-7000

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 [    ]

Number of shares of common stock, $.000000005 par value, outstanding
as of the close of business on February 8, 2002- 20,688,971.

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TABLE OF CONTENTS



|                            |                                                                                               |                                                      |  |  |  |  |  | 
|--------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|                            | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                            |                                                                                               | CONSOLIDATED BALANCE SHEETS                         
|                            |                                                                                               | UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                            |                                                                                               | UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                            |                                                                                               | NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|                            | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                            | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II  OTHER INFORMATION
|                            | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                                 
|                            | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.                                                    
|SIGNATURE                  



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##### Table of Contents






ITEM 1. FINANCIAL STATEMENTS




JENNY CRAIG, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)

|                                                                    |                                                                                                                                                                   |                      |                            |         |        |          |        |              |        |             |  | 
|------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | -------------------------- | ------- | ------ | -------- | ------ | ------------ | ------ | ----------- |  | 
|                                                                    |                                                                                                                                                                   |                      |                            |         |        | June 30, |        | December 31,
|                                                                    |                                                                                                                                                                   |                      |                            |         |        | 2001     |        | 2001        
|                                                                    |                                                                                                                                                                   |                      |                            |         |        |          |        |             
|                                                                    |                                                                                                                                                                   |                      |                            |         |        |          |        |              |        | (unaudited)
|ASSETS                                                              |                                                                                                                                                                   |                      |                            |         |        |          |        |             
|Cash and cash equivalents                                           |                                                                                                                                                                   | $                    | 38,433                     |         |        |          | 51,028 |             
|Accounts receivable, net                                            |                                                                                                                                                                   |                      | 2,076                      |         |        |          | 2,280  |             
|Inventories                                                         |                                                                                                                                                                   |                      | 11,427                     |         |        |          | 11,160 |             
|Prepaid expenses and other assets                                   |                                                                                                                                                                   |                      | 3,441                      |         |        |          | 5,599  |             
|                                                                    |                                                                                                                                                                   |                      |                            |         |        |          |        |             
|                                                                    |                                                                                                                                                                   | Total current assets |                            |         | 55,377 |          |        |              | 70,067 |            
|Deferred tax assets                                                 |                                                                                                                                                                   |                      | 125                        |         |        |          | 125    |             
|Cost of reacquired area franchise
rights and other intangibles, net |                                                                                                                                                                   |                      | 7,460                      |         |        |          | 5,245  |             
|Property and equipment, net                                         |                                                                                                                                                                   |                      | 22,216                     |         |        |          | 14,051 |             
|Other assets                                                        |                                                                                                                                                                   |                      | 459                        |         |        |          | 493    |             
|                                                                    |                                                                                                                                                                   |                      |                            |         |        |          |        |             
|                                                                    |                                                                                                                                                                   | $                    | 85,637                     |         |        |          | 89,981 |             
|                                                                    |                                                                                                                                                                   |                      |                            |         |        |          |        |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                |                                                                                                                                                                   |                      |                            |         |        |          |        |             
|Accounts payable                                                    |                                                                                                                                                                   | $                    | 15,255                     |         |        |          | 15,766 |             
|Accrued liabilities                                                 |                                                                                                                                                                   |                      | 15,420                     |         |        |          | 12,607 |             
|Current installments of obligation under capital lease              |                                                                                                                                                                   |                      | 684                        |         |        |          | 714    |             
|Accrual for litigation judgment                                     |                                                                                                                                                                   |                      | 10,525                     |         |        |          | 1,375  |             
|Deferred service revenue                                            |                                                                                                                                                                   |                      | 10,423                     |         |        |          | 8,227  |             
|                                                                    |                                                                                                                                                                   |                      |                            |         |        |          |        |             
|                                                                    |                                                                                                                                                                   |                      | Total current liabilities  |         |        | 52,307   |        |              |        | 38,689      | 
|Note payable, excluding current installments                        |                                                                                                                                                                   |                      | 4,957                      |         |        |          |       |             
|Obligation under capital lease, excluding current installments      |                                                                                                                                                                   |                      | 1,048                      |         |        |          | 623    |             
|                                                                    |                                                                                                                                                                   |                      |                            |         |        |          |        |             
|                                                                    |                                                                                                                                                                   |                      | Total liabilities          |         |        | 58,312   |        |              |        | 39,312      | 
|                                                                    |                                                                                                                                                                   |                      |                            |         |        |          |        |             
|Stockholders equity:                                               |                                                                                                                                                                   |                      |                            |         |        |          |        |             
|                                                                    | Common stock $.000000005 par value, 100,000,000 shares
authorized; 27,580,260 shares issued; 20,688,971 shares
outstanding at June 30, 2001 and December 31, 2001 |                      |                            |        |        |          |        |             |       
|                                                                    | Additional paid-in capital                                                                                                                                        |                      |                            | 71,622  |        |          |        | 71,622       |       
|                                                                    | Retained earnings                                                                                                                                                 |                      |                            | 30,070  |        |          |        | 53,677       |       
|                                                                    | Accumulated other comprehensive income                                                                                                                            |                      |                            | 395     |        |          |        | 132          |       
|                                                                    | Treasury stock, at cost; 6,891,289 shares at June 30, 2001
and December 31, 2001                                                                                  |                      |                            | (74,762 | )      |          |        | (74,762      | )     
|                                                                    |                                                                                                                                                                   |                      |                            |         |        |          |        |             
|                                                                    |                                                                                                                                                                   |                      | Total stockholders equity |         |        | 27,325   |        |              |        | 50,669      | 
|Commitments and contingencies                                       |                                                                                                                                                                   |                      |                            |         |        |          |        |             
|                                                                    |                                                                                                                                                                   |                      |                            |         |        |          |        |             
|                                                                    |                                                                                                                                                                   | $                    | 85,637                     |         |        |          | 89,981 |             
|                                                                    |                                                                                                                                                                   |                      |                            |         |        |          |        |             

See accompanying notes to unaudited consolidated financial statements.

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JENNY CRAIG, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share amounts)

|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |     |  |         |         | 
|--------------------------------------- | ------------------------- |  | --------------------------------------------- | -------------------------- | - | ------------------ | ------ | ---------------- |  | ------ | ------- | ---- |  | ------- | ------- | --- |  | ------- | ------- | 
|                                        |                           |  |                                               |                            |   | Three Months Ended |        | Six Months Ended
|                                        |                           |  |                                               |                            |   | December 31,       |        | December 31,    
|                                        |                           |  |                                               |                            |   |                    |        |                 
|                                        |                           |  |                                               |                            |   | 2000               |        | 2001             |  | 2000   |         | 2001
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |     
|Revenues:                               |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        | Company-owned operations: |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |     | 
|                                        |                           |  | Product sales                                 |                            | $ | 51,672             |        |                  |  | 59,336 |         |      |  | 108,775 |         |     |  | 123,269 |        
|                                        |                           |  | Service revenue                               |                            |   | 4,090              |        |                  |  | 4,125  |         |      |  | 8,343   |         |     |  | 8,546   |        
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        |                           |  | 55,762                                        |                            |   |                    | 63,461 |                  |  |        | 117,118 |      |  |         | 131,815 |    
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        | Franchise operations:     |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |     | 
|                                        |                           |  | Product sales                                 |                            |   | 4,259              |        |                  |  | 4,503  |         |      |  | 8,510   |         |     |  | 8,997   |        
|                                        |                           |  | Royalties                                     |                            |   | 613                |        |                  |  | 703    |         |      |  | 1,324   |         |     |  | 1,467   |        
|                                        |                           |  | Initial franchise fees                        |                            |   | 50                 |        |                  |  |       |         |      |  | 125     |         |     |  | 25      |        
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        |                           |  | 4,922                                         |                            |   |                    | 5,206  |                  |  |        | 9,959   |      |  |         | 10,489  |    
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        | Licensing revenue         |  |                                               |                           |   |                    |        | 280              |  |        |         |     |  |         |         | 559 | 
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        |                           |  |                                               | Total revenues             |   |                    | 60,684 |                  |  |        | 68,947  |      |  |         | 127,077 |     |  |         | 142,863 | 
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|Costs and expenses:                     |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        | Company-owned operations: |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |     | 
|                                        |                           |  | Product                                       |                            |   | 52,074             |        |                  |  | 56,508 |         |      |  | 108,173 |         |     |  | 115,700 |        
|                                        |                           |  | Service                                       |                            |   | 3,094              |        |                  |  | 2,935  |         |      |  | 6,195   |         |     |  | 5,974   |        
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        |                           |  | 55,168                                        |                            |   |                    | 59,443 |                  |  |        | 114,368 |      |  |         | 121,674 |    
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        | Franchise operations:     |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |     | 
|                                        |                           |  | Product                                       |                            |   | 3,307              |        |                  |  | 3,329  |         |      |  | 6,359   |         |     |  | 6,557   |        
|                                        |                           |  | Other                                         |                            |   | 308                |        |                  |  | 288    |         |      |  | 564     |         |     |  | 556     |        
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        |                           |  | 3,615                                         |                            |   |                    | 3,617  |                  |  |        | 6,923   |      |  |         | 7,113   |    
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        |                           |  | 1,901                                         |                            |   |                    | 5,884  |                  |  |        | 5,786   |      |  |         | 14,076  |    
|General and administrative expenses     |                           |  | 5,653                                         |                            |   |                    | 6,437  |                  |  |        | 11,246  |      |  |         | 12,500  |    
|Litigation judgment                     |                           |  | 219                                           |                            |   |                    | 28     |                  |  |        | 438     |      |  |         | (9,150  | )  
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        |                           |  |                                               | Operating income (loss)    |   |                    | (3,971 | )                |  |        | (578    | )    |  |         | (5,898  | )   |  |         | 10,726  | 
|Other income, net, principally interest |                           |  | 412                                           |                            |   |                    | 374    |                  |  |        | 757     |      |  |         | 766     |    
|Gain on sale of building                |                           |  |                                              |                            |   |                    |       |                  |  |        |        |      |  |         | 12,385  |    
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        |                           |  |                                               | Income (loss) before taxes |   |                    | (3,559 | )                |  |        | (204    | )    |  |         | (5,141  | )   |  |         | 23,877  | 
|Income taxes                            |                           |  | 18,053                                        |                            |   |                    | 183    |                  |  |        | 18,207  |      |  |         | 270     |    
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        |                           |  | Net income (loss)                             |                            | $ | (21,612            | )      |                  |  | (387   | )       |      |  | (23,348 | )       |     |  | 23,607  |        
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    
|                                        |                           |  | Basic and diluted net income
(loss) per share |                            | $ | (1.04              | )      |                  |  | (0.02  | )       |      |  | (1.13   | )       |     |  | 1.14    |        
|                                        |                           |  |                                               |                            |   |                    |        |                  |  |        |         |      |  |         |         |    

See accompanying notes to unaudited consolidated financial statements.

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JENNY CRAIG, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)

|                                                                                                      |                                                  |                                                                                      |                                                               |                                           |         |                  |        |        |        |         |        |  
|----------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------------------------------------------------ | ------------------------------------------------------------- | ----------------------------------------- | ------- | ---------------- | ------ | ------ | ------ | ------- | ------ | -
|                                                                                                      |                                                  |                                                                                      |                                                               |                                           |         | Six Months Ended
|                                                                                                      |                                                  |                                                                                      |                                                               |                                           |         | December 31,    
|                                                                                                      |                                                  |                                                                                      |                                                               |                                           |         |                 
|                                                                                                      |                                                  |                                                                                      |                                                               |                                           |         | 2000             |        | 2001  
|                                                                                                      |                                                  |                                                                                      |                                                               |                                           |         |                  |        |       
|Cash flows from operating activities:                                                                 |                                                  |                                                                                      |                                                               |                                           |         |                  |        |       
|                                                                                                      |                                                  | Net income (loss)                                                                    |                                                               | $                                         | (23,348 | )                |        |        | 23,607 |        
|                                                                                                      |                                                  | Adjustments to reconcile net income (loss) to net cash
used in operating activities: |                                                               |                                           |         |                  |        |        |        |        
|                                                                                                      |                                                  |                                                                                      | Depreciation and amortization                                 |                                           |         | 2,740            |        |        |        | 3,594   |       
|                                                                                                      |                                                  |                                                                                      | Provision for deferred income taxes (benefit)                 |                                           |         | 17,560           |        |        |        |        |       
|                                                                                                      |                                                  |                                                                                      | Loss on write-off of cost of reacquired area franchise rights |                                           |         | 192              |        |        |        |        |       
|                                                                                                      |                                                  |                                                                                      | Gain on disposal of property and equipment                    |                                           |         | (63              | )      |        |        | (12,327 | )     
|                                                                                                      |                                                  |                                                                                      | Changes in assets and liabilities:                            |                                           |         |                  |        |        |        |         |       
|                                                                                                      |                                                  |                                                                                      |                                                               | Accounts receivable                       |         |                  | 3      |        |        |         | (204   | )
|                                                                                                      |                                                  |                                                                                      |                                                               | Inventories                               |         |                  | 1,204  |        |        |         | 267    |  
|                                                                                                      |                                                  |                                                                                      |                                                               | Prepaid expenses and other assets         |         |                  | 1,041  |        |        |         | (2,192 | )
|                                                                                                      |                                                  |                                                                                      |                                                               | Accounts payable                          |         |                  | 835    |        |        |         | 511    |  
|                                                                                                      |                                                  |                                                                                      |                                                               | Accrued liabilities                       |         |                  | (518   | )      |        |         | (2,813 | )
|                                                                                                      |                                                  |                                                                                      |                                                               | Accrual for litigation judgment           |         |                  | 438    |        |        |         | (9,150 | )
|                                                                                                      |                                                  |                                                                                      |                                                               | Deferred service revenue                  |         |                  | (565   | )      |        |         | (2,196 | )
|                                                                                                      |                                                  |                                                                                      |                                                               |                                           |         |                  |        |       
|                                                                                                      |                                                  |                                                                                      |                                                               | Net cash used in operating activities     |         |                  | (481   | )      |        |         | (903   | )
|                                                                                                      |                                                  |                                                                                      |                                                               |                                           |         |                  |        |       
|Cash flows from investing activities:                                                                 |                                                  |                                                                                      |                                                               |                                           |         |                  |        |       
|                                                                                                      | Purchase of property and equipment               |                                                                                      |                                                               | (557                                      | )       |                  |        | (2,968 | )     
|                                                                                                      | Proceeds from sale of building                   |                                                                                      |                                                               |                                          |         |                  |        | 20,318 |       
|                                                                                                      | Proceeds from maturity of short-term investments |                                                                                      |                                                               | 925                                       |         |                  |        |       |       
|                                                                                                      |                                                  |                                                                                      |                                                               |                                           |         |                  |        |       
|                                                                                                      |                                                  |                                                                                      |                                                               | Net
cash provided by investing activities |         |                  | 368    |        |        |         | 17,350 |  
|                                                                                                      |                                                  |                                                                                      |                                                               |                                           |         |                  |        |       
|Cash
flows from financing activities-
Principal payments on note payable and capital lease obligation |                                                  |                                                                                      | (409                                                          | )                                         |         |                  | (5,352 | )     
|                                                                                                      |                                                  |                                                                                      |                                                               |                                           |         |                  |        |       
|Effect of exchange rate changes on cash and cash
equivalents                                          |                                                  |                                                                                      | (2,132                                                        | )                                         |         |                  | 1,500  |       
|                                                                                                      |                                                  |                                                                                      |                                                               |                                           |         |                  |        |       
|Net
increase (decrease) in cash and cash equivalents                                                  |                                                  |                                                                                      | (2,654                                                        | )                                         |         |                  | 12,595 |       
|Cash and cash equivalents at beginning of period                                                      |                                                  |                                                                                      | 34,710                                                        |                                           |         |                  | 38,433 |       
|                                                                                                      |                                                  |                                                                                      |                                                               |                                           |         |                  |        |       
|Cash and cash equivalents at end of period                                                            |                                                  | $                                                                                    | 32,056                                                        |                                           |         |                  | 51,028 |       
|                                                                                                      |                                                  |                                                                                      |                                                               |                                           |         |                  |        |       
|Supplemental
disclosure of cash flow information-
Income taxes paid                                   |                                                  | $                                                                                    | 854                                                           |                                           |         |                  | 986    |       
|                                                                                                      | Interest paid                                    |                                                                                      | $                                                             | 285                                       |         |                  |        | 70     |       

See accompanying notes to unaudited consolidated financial statements.

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JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001

1. The accompanying unaudited consolidated financial statements do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair presentation have
been included. Operating results for any interim period are not necessarily
indicative of the results for any other interim period or for the full year.
These statements should be read in conjunction with the June 30, 2001
consolidated financial statements.

2. In October 2001, the California Court of Appeal reversed a substantial
portion of an $8.7 million judgment rendered against the Company in 1999
arising from a dispute with a former landlord. The judgment, which included
compensatory and punitive damages for alleged fraud totaling $7.2 million, was
reversed and the award of damages for breach of the lease was reduced to
approximately $700,000. The appellate court also reversed the award of
$569,000 in attorneys fees to the plaintiff, and directed the trial court to
redetermine the proper amount in view of the reduced amount of damages awarded.
This reversal is the reason for both the decrease in the accrual for litigation
judgment on the accompanying consolidated balance sheet at December 31, 2001
and the $9,150,000 litigation judgment credit on the accompanying consolidated
statement of operations for the six months ended December 31, 2001.

3. In July 2001, the Company completed the sale of its corporate office
building for $21,000,000. Concurrent with the sale, the note payable, which
totaled $5,147,000 at June 30, 2001, was paid in full. A gain on the sale of
the building totaling $12,385,000 was recorded in the six months ended December
31, 2001. After repayment of the note payable and expenses of the sale, the
Company received net cash proceeds of $15,154,000.

4. The weighted average number of shares used to calculate basic net income
(loss) per share was 20,688,971 for all periods presented. Stock options had
the effect of increasing the number of shares used in the diluted net income
per share calculation by application of the treasury stock method by 92,714
shares for the six months ended December 31, 2001. The calculation of diluted
net loss per share for the three and six month periods ended December 31, 2000
and the three months ended December 31, 2001 excluded the effect of 2,285,100
and 2,172,300 stock options, respectively, as their effect would be
antidilutive.

5. Comprehensive income (loss) for the three and six month periods ended
December 31, 2000 and 2001 presented below includes foreign currency
translation items. There was no tax expense or tax benefit associated with the
foreign currency items.

|                                         |                             |   |                    |         |                  |  |      |      |      |  |         |         |   |  |        |        | 
|---------------------------------------- | --------------------------- | - | ------------------ | ------- | ---------------- |  | ---- | ---- | ---- |  | ------- | ------- | - |  | ------ | ------ | 
|                                         |                             |   | Three Months Ended |         | Six Months Ended
|                                         |                             |   | December 31,       |         | December 31,    
|                                         |                             |   |                    |         |                 
|                                         |                             |   | 2000               |         | 2001             |  | 2000 |      | 2001
|                                         |                             |   |                    |         |                  |  |      |      |     
|Net income (loss)                        |                             | $ | (21,612            | )       |                  |  | (387 | )    |      |  | (23,348 | )       |   |  | 23,607 |       
|Foreign currency translation
adjustments |                             |   | 273                |         |                  |  | 46   |      |      |  | (2,358  | )       |   |  | (263   | )     
|                                         |                             |   |                    |         |                  |  |      |      |     
|                                         | Comprehensive income (loss) |   | $                  | (21,339 | )                |  |      | (341 | )    |  |         | (25,706 | ) |  |        | 23,344 | 
|                                         |                             |   |                    |         |                  |  |      |      |      |  |         |         |   |  |        |       

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JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

6. The Company operates in the weight management industry.
Substantially all revenue results from the sale of weight management products
and services, whether the centre is operated by the Company or its franchisees.
The Companys reportable segments consist of Company-owned operations and
franchise operations, further segmented by geographic area. The following
presents information about the respective reportable segments ($ in thousands):

|                         |                                 |               |  |                    |        |                    |  |        |        |      |  |        |        |   |  |        |         |    
|------------------------ | ------------------------------- | ------------- |  | ------------------ | ------ | ------------------ |  | ------ | ------ | ---- |  | ------ | ------ | - |  | ------ | ------- | ---
|                         |                                 |               |  | Three Months       |        | Six Months        
|                         |                                 |               |  | Ended December 31, |        | Ended December 31,
|                         |                                 |               |  |                    |        |                   
|                         |                                 |               |  | 2000               |        | 2001               |  | 2000   |        | 2001
|                         |                                 |               |  |                    |        |                    |  |        |        |     
|Revenue:                 |                                 |               |  |                    |        |                    |  |        |        |      |  |        |        |   |  |       
|                         | Company-owned operations:       |               |  |                    |        |                    |  |        |        |      |  |        |        |   |  |        |        
|                         |                                 | United States |  | $                  | 46,565 |                    |  |        | 53,691 |      |  |        | 98,298 |   |  |        | 112,407 |    
|                         |                                 | Foreign       |  |                    | 9,197  |                    |  |        | 9,770  |      |  |        | 18,820 |   |  |        | 19,408  |    
|                         | Franchise operations:           |               |  |                    |        |                    |  |        |        |      |  |        |        |   |  |        |        
|                         |                                 | United States |  |                    | 3,184  |                    |  |        | 3,560  |      |  |        | 6,686  |   |  |        | 7,210   |    
|                         |                                 | Foreign       |  |                    | 1,738  |                    |  |        | 1,646  |      |  |        | 3,273  |   |  |        | 3,279   |    
|                         | Licensing revenueUnited States |               |  |                   |        |                    |  | 280    |        |      |  |       |        |   |  | 559    |        
|Operating income (loss): |                                 |               |  |                    |        |                    |  |        |        |      |  |        |        |   |  |       
|                         | Company-owned operations:       |               |  |                    |        |                    |  |        |        |      |  |        |        |   |  |        |        
|                         |                                 | United States |  |                    | (4,801 | )                  |  |        | (1,989 | )    |  |        | (8,069 | ) |  |        | 7,918   | (1)
|                         |                                 | Foreign       |  |                    | 374    |                    |  |        | 561    |      |  |        | 897    |   |  |        | 808     |    
|                         | Franchise operations:           |               |  |                    |        |                    |  |        |        |      |  |        |        |   |  |        |        
|                         |                                 | United States |  |                    | (111   | )                  |  |        | 80     |      |  |        | 283    |   |  |        | 459     |    
|                         |                                 | Foreign       |  |                    | 567    |                    |  |        | 490    |      |  |        | 991    |   |  |        | 982     |    
|                         | Licensing revenue-United States |               |  |                   |        |                    |  | 280    |        |      |  |       |        |   |  | 559    |        
|Identifiable assets:     |                                 |               |  |                    |        |                    |  |        |        |      |  |        |        |   |  |       
|                         | United States                   |               |  | 65,707             |        |                    |  | 72,936 |        |      |  | 65,707 |        |   |  | 72,936 |        
|                         | Foreign                         |               |  | 16,330             |        |                    |  | 17,045 |        |      |  | 16,330 |        |   |  | 17,045 |        



---

|(1) |  | Includes the reversal of a litigation judgment totaling $9,150,000. See
note 2.
|--- |  | -------------------------------------------------------------------------------

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##### Table of Contents



JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

7. During the quarter ended December 31,
2001, the Company recorded a charge of $1,134,000 to reflect the
impairment of certain intangible assets associated with the
termination of the Balance Bar Company trademark license agreement.
The impairment charge was determined as the amount by which the
carrying amount of the assets exceeded the estimated future
undiscounted cash flows.

8. On January 27, 2002, the Company entered into a definitive merger agreement
providing for the acquisition of the Company by an investor group led by ACI
Capital Co., Inc., a private
investment firm. DB Capital Partners, the private equity arm of Deutsche Bank
is ACI Capitals partner in the transaction. The investor group will also
include Sidney and Jenny Craig. The merger agreement calls for Jenny Craig
stockholders to receive $5.30 per share in cash. Completion of the transaction
is subject to customary closing conditions, including approval by the
stockholders of Jenny Craig and the receipt of financing. The Company filed a
Report on Form 8-K on January 29, 2002 reporting that the Company entered into
the merger agreement and attaching the merger agreement and related documents as
exhibits.

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##### Table of Contents






|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
        FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Forward-Looking Statements

Information provided in this Report on Form 10-Q may contain, and the
Company may from time to time disseminate material and make statements which
may contain forward-looking information, as that term is defined by the
Private Securities Litigation Reform Act of 1995 (the Act). These
forward-looking statements may relate to anticipated financial performance,
business prospects and similar matters. The words expects, anticipates,
believes, and similar words generally signify a forward-looking statement.
These cautionary statements are being made pursuant to the provisions of the
Act and with the intention of obtaining the benefit of safe-harbor provisions
of the Act. The reader is cautioned that all forward-looking statements are
necessarily speculative and there are certain risks and uncertainties that
could cause actual events or results to differ materially from those referred
to in such forward-looking statements. Among the factors that could cause
actual results to differ materially are: increased competition; technological
and scientific developments, including appetite suppressants and other drugs
which can be used in weight-loss programs; increases in cost of food or
services; lack of market acceptance of additional products and services;
legislative and regulatory restrictions or actions; effectiveness of marketing
and advertising programs; prevailing domestic and foreign economic conditions;
and the risk factors set forth from time to time in the Companys annual
reports and other reports and filings with the SEC. The reader should carefully
review the cautionary statements contained under the caption Forward-Looking
Statements in Item 1 of the Companys Annual Report on Form 10-K for the year
ended June 30, 2001.

Quarter Ended December 31, 2001 as Compared to Quarter Ended December 31, 2000

The following table presents selected operating results for United States
Company-owned and foreign Company-owned operations for the quarters ended
December 31, 2000 and 2001 (U.S. $ in thousands):

|                           |  |                                 |        |                                 |  |        |        |      |  |      |    |        |  |  |       |  |  |  |       |   |  |  |    |  
|-------------------------- |  | ------------------------------- | ------ | ------------------------------- |  | ------ | ------ | ---- |  | ---- | -- | ------ |  |  | ----- |  |  |  | ----- | - |  |  | -- | -
|                           |  | U.S. Company Owned              |        | Foreign Company Owned          
|                           |  | Operations                      |        | Operations (1)                 
|                           |  | Three Months Ended December 31, |        | Three Months Ended December 31,
|                           |  |                                 |        |                                
|                           |  |                                 |        |                                 |  |        |        |      |  | %    |    |        |  |  |       |  |  |  |       | %
|                           |  | 2000                            |        | 2001                            |  | Change |        | 2000 |  | 2001 |    | Change
|                           |  |                                 |        |                                 |  |        |        |      |  |      |    |       
|Product sales              |  | $                               | 43,130 |                                 |  |        | 50,192 |      |  |      | 16 | %      |  |  | 8,542 |  |  |  | 9,144 |   |  |  | 7  | %
|Service revenue            |  |                                 | 3,435  |                                 |  |        | 3,499  |      |  |      | 2  | %      |  |  | 655   |  |  |  | 626   |   |  |  | -4 | %
|                           |  |                                 |        |                                 |  |        |        |      |  |      |    |        |  |  |       |  |  |  |       |   |  |  |    |  
|Total                      |  |                                 | 46,565 |                                 |  |        | 53,691 |      |  |      | 15 | %      |  |  | 9,197 |  |  |  | 9,770 |   |  |  | 6  | %
|Costs and expenses         |  |                                 | 47,035 |                                 |  |        | 51,010 |      |  |      | 8  | %      |  |  | 8,133 |  |  |  | 8,433 |   |  |  | 4  | %
|General and
administrative |  |                                 | 4,112  |                                 |  |        | 4,642  |      |  |      | 13 | %      |  |  | 690   |  |  |  | 776   |   |  |  | 12 | %
|Litigation judgment        |  |                                 | 219    |                                 |  |        | 28     |      |  |      |   |        |  |  |      |  |  |  |      |   |  |  |   |  
|                           |  |                                 |        |                                 |  |        |        |      |  |      |    |        |  |  |       |  |  |  |       |   |  |  |    |  
|Operating income (loss)    |  | $                               | (4,801 | )                               |  |        | (1,989 | )    |  |      |    |        |  |  | 374   |  |  |  | 561   |   |  |  |    |  
|                           |  |                                 |        |                                 |  |        |        |      |  |      |    |        |  |  |       |  |  |  |       |   |  |  |    |  
|Average number of centres  |  |                                 | 433    |                                 |  |        | 427    |      |  |      | -1 | %      |  |  | 113   |  |  |  | 115   |   |  |  | 2  | %
|                           |  |                                 |        |                                 |  |        |        |      |  |      |    |        |  |  |       |  |  |  |       |   |  |  |    |  



---

|(1) |  | Foreign Company-owned operations reflect the Companys 87 centres in
Australia and 28 centres (26 centres in 2000) in Canada, with the Canadian
centres generating revenues of $2,346,000 and $2,998,000 in the quarters ended
December 31, 2000 and 2001, respectively, and an operating loss of $205,000 for
the quarter ended December 31, 2000 and operating income of $79,000 for the
quarter ended December 31, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Revenues from United States Company-owned operations, which represented
79% of the worldwide Company-owned centres at December 31, 2001, increased 15%
for the quarter ended December 31, 2001 compared to the quarter ended December
31, 2000. Average revenue per United States Company-owned centre increased from
$107,000 for the quarter ended December 31, 2000 to $126,000 for the quarter
ended December 31, 2001. Product sales, which consists primarily of food
products, from United States Company-owned operations increased 16% principally
due to a 5% increase in the number of active participants in the program
between the periods and a 6% increase in the average dollar amount of food
products purchased per participant. The increase in the average dollar amount
of food products purchased per participant resulted from the implementation of
an approximate 3% price increase on food items in May 2001 and the introduction
of the Ultimate Choice program, also in May 2001. The Ultimate Choice program
allows the participant more flexibility in selecting their individual food
items, which the Company believes has resulted in many participants choosing
products which they find more appealing and that have higher retail prices.
Service revenues from United States Company-owned operations increased 2%
principally due to an increase in the number of new participants enrolled in
the program.

Revenues from foreign Company-owned operations, which is derived from 87
centres in Australia and 28 centres (26 centres in 2000) in Canada, increased
6% for the quarter ended December 31, 2001 compared to the quarter ended
December 31, 2000 primarily due to a 2% increase in the number of foreign
Company-owned centres and improved performance of the Canadian centres. There
was a 3% weighted average decrease in the Australian and Canadian currencies in
relation to the U.S. dollar between the periods.

The Company has experienced reduced demand over the past several years.
The Company believes that increased competition from various sources, including
prescription and non-prescription pills, best selling diet books, and other do
it yourself methods have contributed to the Companys downward trend. Many of
these competitors claim to provide quick and easy weight loss or other
aggressive claims about the efficacy of their methods, are supported by a high
level of advertising, and are less expensive than the Companys program. The
Company cannot predict whether the current trend will continue in the future.

Costs and expenses of United States Company-owned operations increased 8%
for the quarter ended December 31, 2001 compared to the same quarter last year.
The 8% increase was primarily due to the increased variable costs, principally
the cost of goods sold and compensation, associated with the increased revenues
and a non-cash charge of $1,134,000 to reflect the impairment of certain
intangible assets associated with the termination of the Balance Bar trademark
license agreement. Costs and expenses of United States Company-owned
operations as a percentage of United States Company-owned revenues decreased
from 101% to 95% between the periods principally due to the lower proportion of
fixed costs when compared to the higher level of revenues.

After including the allocable portion of general and administrative
expenses, United States Company-owned operations had an operating loss of
$1,989,000 for the quarter ended December 31, 2001 compared to an operating
loss of $4,801,000 for the quarter ended December 31, 2000.

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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)

Costs and expenses of foreign Company-owned operations increased 4% for
the quarter ended December 31, 2001 compared to the quarter ended December 31,
2000, primarily due to the increased variable costs, principally the cost of goods sold and compensation,
associated with the higher revenues and the 2% increase in the number of
centres between the periods. After including the allocable portion of general
and administrative expenses, foreign Company-owned operations had operating
income of $561,000 for the quarter ended December 31, 2001 compared to
operating income of $374,000 for the quarter ended December 31, 2000.

Revenues from franchise operations increased 6% from $4,922,000 to
$5,206,000 for the quarters ended December 31, 2000 and 2001, respectively.
This increase was principally due to an increase in the revenues at franchised
centres which resulted in increased product sales and royalties for the
Company. As of December 31, 2001 there were 111 franchised centres in
operation, of which 73 were in the United States and 38 were in foreign
countries, principally Australia and New Zealand.

Costs and expenses of franchised operations, which consist primarily of
product costs, were essentially the same for the quarter ended December 31,
2001 compared to the same quarter last year. Franchise costs and expenses as a
percentage of franchise revenues remained relatively constant between the
periods.

The $280,000 of licensing royalties for the quarter ended December 31,
2001 are pursuant to a trademark license agreement entered into with Balance
Bar Company (subsequently acquired by Kraft Foods) and are based upon the
retail sales of certain products bearing the Companys brand. In December
2001, Balance Bar Company notified the Company that, in accordance with the
trademark license agreement, Balance Bar Company was terminating the agreement
with six months notice to the Company. In connection with the termination of
this agreement, the Company recorded a non-cash charge of $1,134,000 to reflect
the impairment of certain intangible assets associated with this agreement.

General and administrative expenses increased 14% from $5,653,000 to
$6,437,000 but remained constant at 9.3% of total revenues for the quarters
ended December 31, 2000 and 2001. The increase in general and administrative
expenses is principally due to increased legal and consulting expenses related
to the proposed sale of the Company and increased occupancy costs. The Company
is currently leasing, on a short-term basis, the corporate office building
which was sold in July 2001 pending the move to a smaller, less expensive
location.

The elements discussed above combined to result in an operating loss of
$578,000 for the quarter ended December 31, 2001 compared to an operating loss
of $3,971,000 for the quarter ended December 31, 2000.

Income taxes for the quarter ended December 31, 2001 includes income taxes
at an effective rate of 37% on the Companys foreign taxable income, and
reflects the utilization of net operating loss carryforwards available to
offset the Companys taxable income from United States operations. Income
taxes for the quarter ended December 31, 2000 includes income taxes at an
effective rate of 37% on the Companys foreign taxable income, but does not
reflect any benefit for the net operating loss incurred by the Companys United
States operations. During the quarter ended December 31, 2000, the Company
concluded that the deferred tax asset valuation allowance

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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)

should be increased
due to the uncertainty, at that time, of realizing certain tax loss
carryforwards and other deferred tax assets in accordance with Statement of
Financial Accounting Standards No. 109 Accounting for Income Taxes.
Accordingly, the Company recorded a non-cash charge of
$17,721,000 to provide a full valuation allowance for the balance of the U.S.
net deferred tax asset. Managements assessment was based principally on the
losses experienced by the Company in the U.S. for the first six months of
fiscal 2001, together with less than expected operating results in January
2001, following two consecutive profitable quarters ended March 31, 2000 and
June 30, 2000.

On January 27, 2002, the Company entered into a definitive merger
agreement providing for the acquisition of the Company by an investor group led
by ACI Capital Co., Inc., a private investment firm. DB Capital Partners, the
private equity arm of Deutsche Bank is ACI Capitals partner in the
transaction. The investor group will also include Sidney and Jenny Craig. The
merger agreement calls for Jenny Craig stockholders to receive $5.30 per
share in cash. Completion of the transaction is subject to customary closing
conditions, including approval by the stockholders of Jenny Craig and the
receipt of financing.  The Company filed a Report on Form 8-K on January
29, 2002 reporting that the Company entered into the merger agreement and
attaching the merger agreement and related documents as exhibits.

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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)

Six Months Ended December 31, 2001 as Compared to Six Months Ended December 31,
2000

The following table presents selected operating results for United States
Company-owned and foreign Company-owned operations for the six month periods
ended December 31, 2000 and 2001 (U.S. $ in thousands):

|                           |  |                               |        |                               |  |        |         |      |  |      |    |        |  |  |        |  |  |  |        |   |  |  |     |  
|-------------------------- |  | ----------------------------- | ------ | ----------------------------- |  | ------ | ------- | ---- |  | ---- | -- | ------ |  |  | ------ |  |  |  | ------ | - |  |  | --- | -
|                           |  | U.S. Company Owned            |        | Foreign Company Owned        
|                           |  | Operations                    |        | Operations (1)               
|                           |  | Six Months Ended December 31, |        | Six Months Ended December 31,
|                           |  |                               |        |                              
|                           |  |                               |        |                               |  |        |         |      |  | %    |    |        |  |  |        |  |  |  |        | %
|                           |  | 2000                          |        | 2001                          |  | Change |         | 2000 |  | 2001 |    | Change
|                           |  |                               |        |                               |  |        |         |      |  |      |    |       
|Product sales              |  | $                             | 91,386 |                               |  |        | 105,083 |      |  |      | 15 | %      |  |  | 17,389 |  |  |  | 18,186 |   |  |  | 5   | %
|Service revenue            |  |                               | 6,912  |                               |  |        | 7,324   |      |  |      | 6  | %      |  |  | 1,431  |  |  |  | 1,222  |   |  |  | -15 | %
|                           |  |                               |        |                               |  |        |         |      |  |      |    |        |  |  |        |  |  |  |        |   |  |  |     |  
|Total                      |  |                               | 98,298 |                               |  |        | 112,407 |      |  |      | 14 | %      |  |  | 18,820 |  |  |  | 19,408 |   |  |  | 3   | %
|Costs and expenses         |  |                               | 97,805 |                               |  |        | 104,531 |      |  |      | 7  | %      |  |  | 16,563 |  |  |  | 17,143 |   |  |  | 4   | %
|General and
administrative |  |                               | 8,124  |                               |  |        | 9,108   |      |  |      | 12 | %      |  |  | 1,360  |  |  |  | 1,457  |   |  |  | 7   | %
|Litigation judgment        |  |                               | 438    |                               |  |        | (9,150  | )    |  |      |   |        |  |  |       |  |  |  |       |   |  |  |    |  
|                           |  |                               |        |                               |  |        |         |      |  |      |    |        |  |  |        |  |  |  |        |   |  |  |     |  
|Operating income (loss)    |  | $                             | (8,069 | )                             |  |        | 7,918   |      |  |      |    |        |  |  | 897    |  |  |  | 808    |   |  |  |     |  
|                           |  |                               |        |                               |  |        |         |      |  |      |    |        |  |  |        |  |  |  |        |   |  |  |     |  
|Average number of centres  |  |                               | 434    |                               |  |        | 428     |      |  |      | -1 | %      |  |  | 113    |  |  |  | 115    |   |  |  | 2   | %
|                           |  |                               |        |                               |  |        |         |      |  |      |    |        |  |  |        |  |  |  |        |   |  |  |     |  



---

|(1) |  | Foreign Company-owned operations reflect the Companys 87 centres in
Australia and 28 centres (26 centres in 2000) in Canada, with the Canadian
centres generating revenues of $4,757,000 and $6,278,000 for the six months
ended December 31, 2000 and 2001, respectively, and an operating loss of
$337,000 for the six months ended December 31, 2000 and operating income of
$109,000 for the six months ended December 31, 2001.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenues from United States Company-owned operations, which represented
79% of the worldwide Company-owned centres at December 31, 2001, increased 14%
for the six months ended December 31, 2001 compared to the six months ended
December 31, 2000. Average revenue per United States Company-owned centre
increased from $226,000 for the six months ended December 31, 2000 to $262,000
for the six months ended December 31, 2001. Product sales, which consists
primarily of food products, from United States Company-owned operations
increased 15% principally due to a 5% increase in the number of active
participants in the program between the periods and a 6% increase in the
average dollar amount of food products purchased per participant. The increase
in the average dollar amount of food products purchased per participant
resulted from the implementation of an approximate 3% price increase on food
items in May 2001 and the introduction of the Ultimate Choice program, also in
May 2001. The Ultimate Choice program allows the participant more flexibility
in selecting their individual food items, which the Company believes has
resulted in many participants choosing products which they find more appealing
and that have higher retail prices. Service revenues from United States
Company-owned operations increased 6% principally due to an increase in the
number of new participants enrolled in the program.

Revenues from foreign Company-owned operations, which is derived from 87
centres in Australia and 28 centres (26 centres in 2000) in Canada, increased
3% primarily due to a 2% increase in the number of foreign Company-owned
centres and improved performance of the Canadian centres. There was a 6%
weighted average decrease in the Australian and Canadian currencies in relation
to the U.S. dollar between the periods.

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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)

Costs and expenses of United States Company-owned operations increased 7%
for the six months ended December 31, 2001 compared to the same period last
year. The 7% increase was
primarily due to the increased variable costs, principally the cost of goods
sold and compensation, associated with the increased revenues and a non-cash
charge of $1,134,000 to reflect the impairment of certain intangible assets
associated with the termination of the Balance Bar trademark license agreement.
Costs and expenses of United States Company-owned operations as a percentage
of United States Company-owned revenues decreased from 99% to 93% between the
periods principally due to the lower proportion of fixed costs when compared to
the higher level of revenues.

In October 2001, the California Court of Appeal reversed a substantial
portion of an $8.7 million judgment rendered against the Company in 1999
arising from a dispute with a former landlord. The judgment, which included
compensatory and punitive damages for alleged fraud totaling $7.2 million, was
reversed and the award of damages for breach of the lease was reduced to
approximately $700,000. The appellate court also reversed the award of
$569,000 in attorneys fees to the plaintiff, and directed the trial court to
redetermine the proper amount in view of the reduced amount of damages awarded.
This appellate reversal is the reason for both the decrease in the accrual for
litigation judgment on the accompanying consolidated balance sheet at December
31, 2001 and the $9,150,000 litigation judgment credit on the accompanying
consolidated statement of operations for the six months ended December 31,
2001.

After including the allocable portion of general and administrative
expenses, United States Company-owned operations had operating income of
$7,918,000 for the six months ended December 31, 2001 compared to an operating
loss of $8,069,000 for the six months ended December 31, 2000.

Costs and expenses of foreign Company-owned operations increased 4% for
the six months ended December 31, 2001 compared to the six months ended
December 31, 2000 primarily due to the increased variable costs, principally
the cost of goods sold and compensation, associated with the higher revenues
and the 2% increase in the number of centres between the periods. After
including the allocable portion of general and administrative expenses, foreign
Company-owned operations had operating income of $808,000 for the six months
ended December 31, 2001 compared to operating income of $897,000 for the six
months ended December 31, 2000.

Revenues from franchise operations increased 5% from $9,959,000 to
$10,489,000 for the six months ended December 31, 2000 and 2001, respectively.
This increase was principally due to an increase in the revenues at franchised
centres which resulted in increased product sales and royalties for the
Company. As of December 31, 2001 there were 111 franchised centres in
operation, of which 73 were in the United States and 38 were in foreign
countries, principally Australia and New Zealand.

Costs and expenses of franchised operations, which consist primarily of
product costs, increased 3% from $6,923,000 to $7,113,000 for the six months
ended December 31, 2000 and 2001, respectively, principally because of the
increased level of franchise operations. Franchise costs and expenses as a
percentage of franchise revenues remained relatively constant between the
periods.

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---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)

The $559,000 of licensing royalties for the six months ended December 31,
2001 are pursuant to a trademark license agreement entered into with Balance
Bar Company (subsequently acquired by Kraft Foods) and are based upon the
retail sales of certain products bearing the
Companys brand. In December 2001, Balance Bar Company notified the Company
that, in accordance with the trademark license agreement, Balance Bar Company
was terminating the agreement with six months notice to the Company. In
connection with the termination of this agreement, the Company recorded a
non-cash charge of $1,134,000 to reflect the impairment of certain intangible
assets associated with this agreement.

General and administrative expenses increased 11% from $11,246,000 to
$12,500,000 but decreased from 8.8% to 8.7% of total revenues for the six
months ended December 31, 2000 and 2001, respectively. The increase in general
and administrative expenses is principally due to increased legal and
consulting expenses related to the proposed sale of the Company and increased
occupancy costs. The Company is currently leasing, on a short-term basis, the
corporate office building which was sold in July 2001 pending the move to a
smaller, less expensive location.

The elements discussed above combined to result in operating income of
$10,726,000 for the six months ended December 31, 2001 compared to an operating
loss of $5,898,000 for the six months ended December 31, 2000.

Income taxes for the six months ended December 31, 2001 includes income
taxes at an effective rate of 37% on the Companys foreign taxable income, and
reflects the utilization of net operating loss carryforwards available to
offset the Companys taxable income from United States operations. Income
taxes for the six months ended December 31, 2000 includes income taxes at an
effective rate of 37% on the Companys foreign taxable income, but does not
reflect any benefit for the net operating loss incurred by the Companys United
States operations. During the six months ended December 31, 2000, the Company
concluded that the deferred tax asset valuation allowance should be increased
due to the uncertainty, at that time, of realizing certain tax loss
carryforwards and other deferred tax assets in accordance with Statement of
Financial Accounting Standards No. 109 Accounting for Income Taxes.
Accordingly, the Company recorded a non-cash charge of $17,721,000 to provide a
full valuation allowance for the balance of the U.S. net deferred tax asset.
Managements assessment was based principally on the losses experienced by the
Company in the U.S. for the first six months of fiscal 2001, together with less
than expected operating results in January 2001, following two consecutive
profitable quarters ended March 31, 2000 and June 30, 2000.

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)

Liquidity and Capital Resources

The Company has historically financed its operations through cash flow
from operations, supplemented by a note payable obtained in 1996 (which was
paid off in the quarter ended September 30, 2001) to partially finance the
Companys purchase of its corporate office building and by a capital lease for
computer equipment related to Y2K remediation in 2000.

At December 31,
2001, the Company had cash and cash equivalents totaling $51,028,000 compared to $38,433,000 at June 30,
2001, reflecting an increase during the six month period ended December 31,
2001 of $12,595,000. The increase in cash and cash equivalents resulted
principally from the net proceeds, after debt repayment and selling expenses,
of the Companys sale of its corporate office building offset, in part, by
purchases of property and equipment totaling $2,968,000.

The Companys principal cash commitments at December 31, 2001 are as
follows:



| |  | Operating lease payments on premises from which the Companys centre
operations are conducted totaling approximately $29,934,000, of which
approximately $16,078,000 is payable in calendar year 2002 and
approximately $9,014,000 is payable in calendar 2003. Management
expects that in the normal course of business, leases that expire
will be renewed or replaced by other leases.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | The litigation judgment of approximately $700,000 plus simple interest at
10% and attorneys fees to be determined by the trail court.                                                                                                                                                                                                                                                   
| 
| |  | Debt service with respect to the capital lease principal totaling
$1,337,000, plus related interest.                                                                                                                                                                                                                                                                                     
| 
| |  | In the normal course of its business the Company acquires property and
equipment, including replacing assets which are no longer useful. This
may include moving the location of a centre or remodeling existing
centres.                                                                                                                                                                

The Company believes that its available cash and cash equivalents, together
with its cash flow from operations, are adequate for its needs in the
foreseeable future.

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)

Effects of Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued
Statement No. 141, Business Combinations, and Statement No. 142, Goodwill
and Other Intangible Assets. Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated after
June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. Statement 142 will require that goodwill
and intangible assets with indefinite useful lives no longer be amortized,
but instead be tested for impairment at least annually in accordance with
the provisions of Statement 142. Statement 142 will also require that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of.

The Company is required to adopt the provisions of Statement 141
immediately, and Statement 142 is required for fiscal years beginning after
December 15, 2001. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be amortized
prior to the adoption of Statement 142.

Statement 141 will require, upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were
acquired in a prior purchase business combination, and to make any
necessary reclassifications in order to conform with the new criteria in
Statement 141 for recognition apart from goodwill. Upon adoption of
Statement 142, the Company will be required to reassess the useful lives
and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the
end of the first interim period after adoption. In addition, to the extent
an intangible asset is identified as having an indefinite useful life, the
Company will be required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption
and recognized as the cumulative effect of a change in accounting principle
in the first interim period.

In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether
there is an indication that goodwill is impaired as of the date of
adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Companys
consolidated statement of operations.

Because of the extensive effort needed to comply with adopting
Statements 141 and 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Companys financial statements
at the date of this report, including whether any transitional impairment
losses will be required to be recognized as the cumulative effect of a
change in accounting principle.

In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 (SFAS No. 143), Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)

and
for the associated asset retirement costs. The standard applies to tangible
long-lived assets that
have a legal obligation associated with their retirement that results from the
acquisition, construction or development or normal use of the asset. SFAS No.
143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is added to
the carrying amount of the associated asset and this additional carrying amount
is depreciated over the remaining life of the asset. The liability is accreted
at the end of each period through charges to operating expense. The provisions
of SFAS No. 143 are required to be applied during the quarter ending March 31,
2003. At this time, the Company does not anticipate that the adoption of SFAS
No. 143 will have a material effect on the Companys consolidated financial
statements.

In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, it retains many of the fundamental provisions of
SFAS No. 121, including the recognition and measurement of the impairment of
long-lived assets to be held and used, and the measurement of long-lived assets
to be disposed of by sale. SFAS No. 144 also supersedes the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30 (APB No.
30), Reporting the Results of OperationsReporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in APB No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. At this time, the Company does not
anticipate that the adoption of SFAS No. 144 will have a material effect on the
Companys consolidated financial statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to a variety of risks, including changes in
interest rates affecting the return on its investments and the cost of its
debt, and foreign currency fluctuations.

At December 31, 2001, the Company maintains a portion of its cash and cash
equivalents in financial instruments with original maturities of three months
or less. The Company also, at times, maintains a short-term investment
portfolio containing financial instruments with original maturities of greater
than three months but less than twelve months. These financial instruments,
principally comprised of high quality commercial paper, are subject to interest
rate risk and will decline in value if interest rates increase. Due to the
short duration of these financial instruments, an immediate 10% increase in
interest rates would not have a material effect on the Companys financial
condition or results of operations. The Company has not used derivative
financial instruments in its investment portfolio.

The Companys long-term debt at December 31, 2001 is comprised of a fixed
rate capital lease agreement covering certain computer hardware with a total
balance of $1,337,000. Due to the relative immateriality of the long-term
debt, an immediate 10% change in interest rates would not have a material
effect on the Companys financial condition or results of operations.

Approximately 14% of the Companys revenues for the quarter ended December
31, 2001 were generated from foreign operations, located principally in
Australia and Canada. In the quarter ended December 31, 2001, the Company was
subjected to a 3% weighted average decrease in the Australian and Canadian
currencies in relation to the U.S. dollar compared to the quarter ended
December 31, 2000. Currently, the Company does not enter into forward exchange
contracts or other financial instruments with respect to foreign currency.

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PART II  OTHER INFORMATION




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



| |  | The Companys 2001 Annual Meeting of Stockholders was held on November
8, 2001. At the meeting the stockholders of the Company elected the
eight incumbent directors for terms of one year each and until their
successors are duly elected and qualified, ratified the appointment of
KPMG LLP as the independent certified public accountants of the Company
and its subsidiaries for the fiscal year ending June 30, 2002, and
approved an amendment to the Companys 1991 Stock Option Plan.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The results of the vote to elect the eight directors were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                           

|                   |  |              |            |                        |  |  |         | 
|------------------ |  | ------------ | ---------- | ---------------------- |  |  | ------- | 
|                   |  | SHARES VOTED |            | SHARES FOR WHICH      
|NAME               |  | FOR          |            | AUTHORITY WAS WITHHELD
|                   |  |              |            |                       
|Sidney Craig       |  |              | 19,933,487 |                        |  |  | 41,496  | 
|Jenny Craig        |  |              | 19,933,987 |                        |  |  | 40,996  | 
|Scott Bice         |  |              | 19,936,547 |                        |  |  | 38,436  | 
|Patricia Larchet   |  |              | 19,731,737 |                        |  |  | 243,246 | 
|Marvin Sears       |  |              | 19,936,297 |                        |  |  | 38,686  | 
|Andrea Van de Kamp |  |              | 19,936,537 |                        |  |  | 38,446  | 
|Duayne Weinger     |  |              | 19,934,848 |                        |  |  | 40,135  | 
|Robert Wolf        |  |              | 19,935,747 |                        |  |  | 39,236  | 



| |  | The results of the vote to ratify the appointment of KPMG LLP as
independent certified public accountants of the Company and its
subsidiaries for the fiscal year ending June 30, 2002 were as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|SHARES VOTED FOR |  | SHARES VOTED AGAINST |  | SHARES ABSTAINING
|---------------- |  | -------------------- |  | -----------------
|                 |  |                      |  |                  
|19,958,847       |  | 6,315                |  | 9,821            



| |  | The results of the vote to approve the amendment to the Companys
1991 Stock Option Plan were as follows:
| |  | ---------------------------------------------------------------------------------------------------------



|SHARES VOTED FOR |  | SHARES VOTED AGAINST |  | SHARES ABSTAINING
|---------------- |  | -------------------- |  | -----------------
|                 |  |                      |  |                  
|18,194,948       |  | 1,766,155            |  | 13,880           

There were no broker non-votes on any of the matters submitted to a vote of
security holders.

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PART II  OTHER INFORMATION (continued)




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.



| | (a) |  | Exhibits                                                                                        |                                                                                                                                                                                                                                                          
| | --- |  | ----------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | 2.                                                                                              | Agreement and Plan of Merger dated as of January 27,
      2002 among Jenny Craig, Inc., J Holdings Corp. and J Acquisition Corp. (incorporated
      by reference to Exhibit 2.1 to the Report on Form 8-K of the Company
      dated January 27, 2002).
|
| | (b) |  | No reports on Form 8-K have been filed
      during the quarter for which this report is filed.

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SIGNATURE

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.

| |                                                           |                   
| | --------------------------------------------------------- | ------------------
| | JENNY CRAIG, INC.                                        
|
| | By:                                                       | /S/ James S. Kelly
| |                                                          
| | James S. Kelly
Vice President
and Chief Financial Officer

Date: February 13, 2002

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EXHIBIT 2

The Following Schedules were attached to the Agreement and Plan of Merger dated
as of January 27, 2002 among Jenny Craig, Inc., J Holdings Corp. and J
Acquisition Corp. (filed as Exhibit 2 to this Report on Form 10-Q by
incorporation by reference to Exhibit 2.1 to the Report on Form 8-K of the
Company dated January 27, 2002):



| | a. |  | Schedule 3.2  Capitalization                                                                      
| | -- |  | ---------------------------------------------------------------------------------------------------
|
| | b. |  | Schedule 3.4  Consents and Approvals; No Violations                                               
|
| | c. |  | Schedule 3.6  No Undisclosed Liabilities                                                          
|
| | d. |  | Schedule 3.7  Absence of Certain Changes                                                          
|
| | e. |  | Schedule 3.8  Employee Benefit Plans; ERISA                                                       
|
| | f. |  | Schedule 3.9  Labor Matters                                                                       
|
| | g. |  | Schedule 3.10  Litigation                                                                         
|
| | h. |  | Schedule 3.11  Permits; No Default; Compliance with
Applicable Laws                               
|
| | i. |  | Schedule 3.12  Taxes                                                                              
|
| | j. |  | Schedule 3.13(a)  Real Property Ownership                                                         
|
| | k. |  | Schedule 3.13(b)  Real Property Leases                                                            
|
| | l. |  | Schedule 3.13(c)  Real Property Leases                                                            
|
| | m. |  | Schedule 3.14  Environmental Matters                                                              
|
| | n. |  | Schedule 3.15  Material Contracts                                                                 
|
| | o. |  | Schedule 3.16  Intellectual Property                                                              
|
| | p. |  | Schedule 3.19  Related Party Transactions                                                         
|
| | q. |  | Schedule 3.20(a)  Relationships with Franchisees                                                  
|
| | r. |  | Schedule 3.20(b)  Relationships with Franchisees                                                  
|
| | s. |  | Schedule 3.20(c)  Relationships with Franchisees                                                  
|
| | t. |  | Schedule 3.22  Insurance                                                                          
|
| | u. |  | Schedule 4.9  Estimated Transaction Fees                                                          
|
| | v. |  | Schedule 5.1(a)  List of Certain Jenny Craig, Inc.
Executives Whom Cannot Receive Salary Increases
|
| | w. |  | Schedule 5.11(b)  Wire Instructions                                                               

Jenny Craig, Inc. will furnish supplementary copies of any of the foregoing to
the Securities and Exchange Commission at its request.