---





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



(Mark One)

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



| |  | For the Quarterly Period Ended March 31, 2003
| |  | ---------------------------------------------



OR



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



| |  | For the Transition Period From
 to
| |  | ----------------------------------



Commission File Number 0-28551



---



NutriSystem,
Inc.

(Exact name of Registrant as specified in its charter)



|Delaware (State or other jurisdiction of incorporation or
organization)        |  | 23-3012204 (I.R.S. Employer Identification
No.)
|------------------------------------------------------------------------------ |  | -----------------------------------------------
|                                                                              
|202 Welsh Road, Horsham, Pennsylvania (Address of principal
executive offices) |  | 19044 (Zip Code)                               



(215)
706-5300

(Registrants telephone number, including area code)



---



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



Indicate by check mark whether the registrant is an
accelerated filer as defined in Rule 12b-2 of the Exchange Act.  Yes  x    No ̈



Indicate the number of shares outstanding of each of the issuers classes of common stock as of May 2, 2003:



|Common Stock, $.001 par value |  | 26,220,504 shares
|----------------------------- |  | -----------------





---



---



NutriSystem,
Inc.



INDEX TO FORM 10-Q



|                                                                                                 |  | Page
|------------------------------------------------------------------------------------------------ |  | ----
|PART I    FINANCIAL INFORMATION                                                                 |  |     
|                                                                                                
|Item 1    Financial Statements                                                                  |  |     
|                                                                                                
|Consolidated Balance Sheets                                                                      |  | 1   
|                                                                                                
|Consolidated Statements of Operations                                                            |  | 2   
|                                                                                                
|Consolidated Statements of Cash Flows                                                            |  | 3   
|                                                                                                
|Notes to Consolidated Financial Statements                                                       |  | 4   
|                                                                                                
|Item 2    Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10  
|                                                                                                
|Item 3    Quantitative and Qualitative Disclosure About Market Risk                             |  | 15  
|                                                                                                
|Item 4    Controls and Procedures                                                               |  | 15  
|                                                                                                
|PART II    OTHER INFORMATION                                                                    |  |     
|                                                                                                
|Item 1    Legal Proceedings                                                                     |  | 17  
|                                                                                                
|Item 2    Changes in Securities and Use of Proceeds                                             |  | 17  
|                                                                                                
|Item 3    Defaults Upon Senior Securities                                                       |  | 17  
|                                                                                                
|Item 4    Submission of Matters to a Vote of Security Holders                                   |  | 17  
|                                                                                                
|Item 5    Other Information                                                                     |  | 18  
|                                                                                                
|Item 6    Exhibits and Reports on Form 8-K                                                      |  | 18  
|                                                                                                
|SIGNATURES                                                                                       |  | 19  
|                                                                                                
|CERTIFICATIONS                                                                                   |  | 20  



---



NUTRISYSTEM,
INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



(Unaudited, amounts in thousands, except share data)



|                                                                                                                                                               |  | March 31, 2003 |         |   | December 31, 2002 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | -
|ASSETS                                                                                                                                                         |  |                |         |   |                   |  
|CURRENT ASSETS:                                                                                                                                                |  |                |         |   |                   |  
|Cash and cash equivalents                                                                                                                                      |  | $              | 4,386   |   |                   | $
|Restricted cash                                                                                                                                                |  |                | 325     |   |                   |  
|Trade receivables                                                                                                                                              |  |                | 555     |   |                   |  
|Inventories                                                                                                                                                    |  |                | 2,028   |   |                   |  
|Other current assets                                                                                                                                           |  |                | 468     |   |                   |  
|                                                                                                                                                               |  |                |         |   |                   |  
|Total current assets                                                                                                                                           |  |                | 7,762   |   |                   |  
|FIXED ASSETS, net                                                                                                                                              |  |                | 397     |   |                   |  
|GOODWILL                                                                                                                                                       |  |                | 290     |   |                   |  
|OTHER ASSETS                                                                                                                                                   |  |                | 139     |   |                   |  
|                                                                                                                                                               |  |                |         |   |                   |  
|                                                                                                                                                               |  | $              | 8,588   |   |                   | $
|                                                                                                                                                               |  |                |         |   |                   |  
|                                                                                                                                                              
|LIABILITIES AND STOCKHOLDERS
EQUITY                                                                                                                           |  |                |         |   |                   |  
|CURRENT LIABILITIES:                                                                                                                                           |  |                |         |   |                   |  
|Accounts payable                                                                                                                                               |  | $              | 1,565   |   |                   | $
|Accrued payroll and related benefits                                                                                                                           |  |                | 230     |   |                   |  
|Deferred revenue                                                                                                                                               |  |                | 172     |   |                   |  
|Other current liabilities                                                                                                                                      |  |                | 448     |   |                   |  
|                                                                                                                                                               |  |                |         |   |                   |  
|Total current liabilities                                                                                                                                      |  |                | 2,415   |   |                   |  
|NON-CURRENT LIABILITIES                                                                                                                                        |  |                | 273     |   |                   |  
|                                                                                                                                                               |  |                |         |   |                   |  
|Total liabilities                                                                                                                                              |  |                | 2,688   |   |                   |  
|                                                                                                                                                               |  |                |         |   |                   |  
|COMMITMENTS AND CONTINGENCIES (Note 4)                                                                                                                         |  |                |         |   |                   |  
|STOCKHOLDERS EQUITY:                                                                                                                                          |  |                |         |   |                   |  
|Preferred stock, $.001 par value (5,000,000 shares authorized, no shares
outstanding)                                                                          |  |                |        |   |                   |  
|Common stock, $.001 par value (100,000,000 shares authorized; shares issued and
outstanding 26,220,504 at March 31, 2003 and 26,218,937 at December 31, 2002) |  |                | 26      |   |                   |  
|Additional paid-in capital                                                                                                                                     |  |                | 27,963  |   |                   |  
|Warrants                                                                                                                                                       |  |                | 324     |   |                   |  
|Accumulated deficit                                                                                                                                            |  |                | (22,413 | ) |                   |  
|                                                                                                                                                               |  |                |         |   |                   |  
|Total stockholders equity                                                                                                                                     |  |                | 5,900   |   |                   |  
|                                                                                                                                                               |  |                |         |   |                   |  
|                                                                                                                                                               |  | $              | 8,588   |   |                   | $
|                                                                                                                                                               |  |                |         |   |                   |  



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



1



---



NUTRISYSTEM,
INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS



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



|                                     |  | Three Months Ended March 31
|------------------------------------ |  | ---------------------------
|                                     |  | 2003                       
|REVENUES                             |  | $                          
|                                     |  |                            
|COSTS AND EXPENSES:                  |  |                            
|Cost of revenues                     |  |                            
|Advertising and marketing            |  |                            
|General and administrative           |  |                            
|Warehouse closing costs              |  |                            
|Depreciation and amortization        |  |                            
|Non-cash compensation expense        |  |                            
|                                     |  |                            
|Total costs and expenses             |  |                            
|                                     |  |                            
|Operating income                     |  |                            
|EQUITY IN LOSSES OF AFFILIATE        |  |                            
|INTEREST INCOME, net                 |  |                            
|                                     |  |                            
|Income before income taxes           |  |                            
|INCOME TAXES                         |  |                            
|                                     |  |                            
|Net income                           |  | $                          
|                                     |  |                            
|BASIC AND DILUTED INCOME PER SHARE   |  | $                          
|                                     |  |                            
|WEIGHTED AVERAGE SHARES OUTSTANDING: |  |                            
|Basic                                |  |                            
|Diluted                              |  |                            



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



2



---



NUTRISYSTEM,
INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



(Unaudited, amounts in thousands)



|                                                                                  |  | Three Months Ended March 31 |      
|--------------------------------------------------------------------------------- |  | --------------------------- | -----
|                                                                                  |  | 2003                        |      
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                             |      
|Net income                                                                        |  | $                           | 651  
|Adjustments to reconcile net income to net cash provided by operating
activities- |  |                             |      
|Equity in losses of affiliate                                                     |  |                             | 90   
|Depreciation and amortization                                                     |  |                             | 77   
|Loss on disposals                                                                 |  |                             | 132  
|Other non-cash adjustments                                                        |  |                             | (5   
|Changes in operating assets and liabilities-                                      |  |                             |      
|Trade receivables                                                                 |  |                             | (154 
|Inventories                                                                       |  |                             | 857  
|Other assets                                                                      |  |                             | 152  
|Accounts payable                                                                  |  |                             | (20  
|Accrued payroll and related benefits                                              |  |                             | 88   
|Deferred revenue                                                                  |  |                             | (334 
|Other liabilities                                                                 |  |                             | (147 
|                                                                                  |  |                             |      
|Net cash provided by operating activities                                         |  |                             | 1,387
|                                                                                  |  |                             |      
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                             |      
|Capital additions, net of proceeds from dispositions                              |  |                             | (6   
|                                                                                  |  |                             |      
|Net cash used for investing activities                                            |  |                             | (6   
|                                                                                  |  |                             |      
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                             |      
|Treasury stock purchases, at cost                                                 |  |                             |     
|                                                                                  |  |                             |      
|Net cash used for financing activities                                            |  |                             |     
|                                                                                  |  |                             |      
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                           |  |                             | 1,381
|CASH AND CASH EQUIVALENTS, beginning of period                                    |  |                             | 3,005
|                                                                                  |  |                             |      
|CASH AND CASH EQUIVALENTS, end of period                                          |  | $                           | 4,386
|                                                                                  |  |                             |      



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



3



---



NUTRISYSTEM,
INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(In thousands, except share amounts)



(Unaudited)



1. BACKGROUND



Nature of the Business



NutriSystem, Inc. (a Delaware corporation) together with its subsidiaries
(the Company) provides weight loss programs and distributes pre-packaged foods. In September 2000, the Company changed its name from nutrisystem.com inc. to Nutri/System, Inc. and in 2003 the Company changed its name to NutriSystem, Inc.



NutriSystem, Inc. and its predecessor businesses,
including NutriSystem L.P. and NutriSystem Direct, L.L.C. (collectively, the Predecessor Businesses), have historically operated through Company-owned and franchised weight loss centers. Currently, the territories of the eight remaining
independent franchised weight loss centers encompass less than 1% of the United States population, approximately 30 independent center-based distributors operate without franchise agreements (case distributors) and there are no
Company-operated centers. In 1998, the Company initiated NutriSystem Direct, L.L.C., a marketing program using independent commissioned representatives. In late 1999, the Company began selling directly to the consumer through the Internet and by
telephone. In 2001, the Company began selling foods through QVC, a shopping television network. The Companys pre-packaged foods are now sold to weight loss program participants directly by Internet and telephone and through QVC, independent
commissioned representatives and franchised and case distributor weight loss centers.



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



From 1993 to 2000, the Company, together with its Predecessor Businesses, incurred significant losses. In 2001, 2002 and in the first quarter of 2003, the Company generated net income of $1,249, $2,411 and $651, respectively. There
can be no assurance that the Company will be able to sustain profitability or, if necessary, obtain the capital to fund operating and investment needs in the future. However, based on the Companys ability to generate earnings in the past two
years, the variable nature of a portion of the Companys expenditures, the cash balance at March 31, 2003 and managements belief that additional equity financing, if required, can be raised, management believes that the Company has the
ability to continue operations into 2004.





2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Presentation of Financial Statements



The Companys consolidated financial statements include the accounts of NutriSystem, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.





Interim Financial Statements (Unaudited)



The accompanying consolidated financial statements as of March 31, 2003 and for the three months ended March 31, 2002 and 2003 are unaudited and, in the
opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Companys financial position and results of operations for





4



---



these interim periods. The
results of operations for the three months ended March 31, 2002 and 2003 are not necessarily indicative of the results to be expected for any other interim period or the year ending December 31, 2003.





Restricted Cash



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





Inventories



Inventories consist principally of packaged food held in the Companys warehouse or in a QVC distribution center (see Revenue Recognition below).
Inventories are valued at the lower of cost or market, with cost determined using the first-in, first-out (FIFO) method.





Fixed Assets



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





Goodwill



Goodwill represents the excess of the consideration paid over the fair value
of net assets acquired, and was generated from the acquisition of a minority interest in the Company. As of March 31, 2003 and December 31, 2002 goodwill was $527 and accumulated amortization was $237. Consistent with the Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142), effective January 1, 2002, the Company no longer amortizes goodwill on a periodic basis (see Recently Issued Accounting
Pronouncements below).





Investment Carried Under the Equity Method



For any investment where the Company has the ability to exercise significant influence over the operating and financial policies of the affiliate, the investment is accounted for under the equity
method. The Company invested $156 for a 25% interest in Turning Point Weight Loss Centers, LLC, a start up company formed to provide diet and fitness programs in center locations. In addition, the Company has provided indemnifications to certain
affiliates of Turning Point Weight Loss Centers, LLC amounting to $159 at March 31, 2003. For the three months ended March 31, 2003, the Company recorded a loss of $90 in the statement of operations under the caption Equity in losses of
affiliate, representing the Companys remaining net investment and a portion of the indemnification amount. As of March 31, 2003, the Company had no commitment to make further investments in Turning Point Weight Loss Centers, LLC.





Valuation of Long-Lived Assets



In
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets (SFAS 144), management continually evaluates whether events or circumstances have occurred that indicate that the remaining useful
lives of the Companys long-lived assets, primarily fixed assets, should be revised or that the remaining balance of such assets may not be recoverable using objective methodologies. Such methodologies include evaluations based on the
undiscounted cash flows generated by the underlying assets or other determinants of fair value. As of March 31, 2003 and December 31, 2002, respectively, management believes that no reductions to the remaining useful lives or write-downs of
long-lived assets are required.





Revenue Recognition



Revenues are recognized when the related products are shipped to the end-consumer or to franchise or case distributors. Revenues for products distributed through QVC are recognized when QVC ships the products from their distribution
center to the end-consumer. Product inventory held by QVC is carried in the Companys inventories and payments received from QVC in advance of shipments to the end-consumer are recorded as deferred revenue in the consolidated balance sheet.



5



---



Revenues are primarily from
pre-packaged food sales, which include amounts billed for shipping and handling, and are presented net of returns and free food products provided to consumers. Revenues also include the sale of print materials to franchisees and independent
distributors, as well as franchise royalty fees. Revenues from shipping and handling charges were $79 and $128 for the three months ended March 31, 2003 and 2002, respectively.





Advertising Costs



Advertising and marketing expense includes advertising, marketing and
promotional expenses and payroll related expenses for personnel engaged in these activities. The Company follows the American Institute of Certified Public Accountants (AICPA) Statement of Position 93-7, Reporting for Advertising
Costs to account for Internet site-linking arrangements. Internet advertising expense is recognized based on either the rate of delivery of a guaranteed number of impressions over the advertising contract term or on a cost per customer
acquired, depending upon the payment terms. All other advertising costs are charged to expense as incurred. At March 31, 2003 and December 31, 2002, $140 and $283, respectively, of prepaid advertising was included in prepaid expenses. Advertising
expense was $397 and $709 during the three months ended March 31, 2003 and 2002, respectively.





Income Taxes



Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.



As a result of a
merger transaction completed in 1999, the tax basis of the assets acquired from the Predecessor Businesses exceeded the financial statement carrying amount by $1,751, resulting in a net deferred tax asset of $790 as of the merger date. A valuation
allowance of $790 was recorded based on managements assessment that the net deferred tax asset will not be realized given the uncertainty of future operating results. To the extent that the existing deferred tax asset is realized, the related
tax benefit will be credited to equity. In addition, a full valuation allowance has been recorded for the other net deferred tax asset that exists at March 31, 2003 and December 31, 2002.





Fair Value of Financial Instruments



The carrying values of the Companys financial
instruments, including cash, cash equivalents, trade receivables and accounts payable, approximate their fair values due to the short-term nature of these instruments.





Net Income Per Common Share



Basic net income per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. For the three months ended March 31, 2003 and 2002, diluted net income per common share reflects the potential dilution from the exercise of outstanding options into common stock. For
the three months ended March 31, 2003 and 2002, common stock equivalents representing 1,958,683 and 2,025,183 shares of common stock, respectively, were excluded from weighted average shares for diluted net income per share purposes since their
effect would be anti-dilutive.





Cash Flow Information



For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less as cash equivalents. Cash equivalents at March 31, 2003 and
December 31, 2002 consist of $0 and $200 in certificates of deposit, respectively.



The Company made payments for income taxes of $11 and $5 for the three months ended March 31, 2003 and 2002, respectively. Payments for interest were $0 and $1 for the three months ended March 31, 2003 and 2002,
respectively.



6



---



Recently Issued Accounting
Pronouncements



In December 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation  an Amendment to FASB Statement No. 123, which amends SFAS 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on report results. Management has elected to continue to apply the intrinsic-value based method of
accounting under Accounting Principals Board (APB) Opinion No. 25, Accounting for stock issued to Employees and related interpretations. The disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, are included in Note 2.



In 2003, the Company adopted SFAS No. 146, Accounting for Exit or
Disposal Activities (SFAS 146). SFAS 146 addresses the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS 146 also addresses recognition of certain
costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees and termination of benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. Adoption of SFAS 146 did not have an impact on the consolidated financial position or results of operations of the Company.





Use of Estimates



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





Certain Reclassifications



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





2. STOCK OPTIONS



The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, to account for its
fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS 123 established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS 123, as amended in SFAS 148, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above,
and has adopted only the disclosure requirements of SFAS 123.



Had compensation cost for the Companys common stock options been determined based upon the fair value of the options at the date of grant, as prescribed under SFAS 123, as amended by SFAS 148, the Companys net income and
net income per share would have been changed to the following pro forma amounts:



7



---



|                                                                                                                      |  | Three Months Ended March 31 |     
|--------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----
|                                                                                                                      |  | 2003                        |     
|Net income:                                                                                                           |  |                             |     
|As reported                                                                                                           |  | $                           | 651 
|Add stock-based employee compensation expense included in reported net income, net of
tax                             |  |                             |    
|Impact of total stock-based compensation expense determined under fair-value based
method for all rewards, net of tax |  |                             | (249
|                                                                                                                      |  |                             |     
|Pro forma                                                                                                             |  | $                           | 402 
|                                                                                                                      |  |                             |     
|Basic net income per share:                                                                                           |  |                             |     
|As reported                                                                                                           |  | $                           | 0.02
|                                                                                                                      |  |                             |     
|Pro forma                                                                                                             |  | $                           | 0.02
|                                                                                                                      |  |                             |     
|Diluted net income per share:                                                                                         |  |                             |     
|As reported                                                                                                           |  | $                           | 0.02
|                                                                                                                      |  |                             |     
|Pro forma                                                                                                             |  | $                           | 0.01
|                                                                                                                      |  |                             |     



In calculating pro forma
compensation, the fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model and the following weighted-average assumptions:



|                         |  | Three Months Ended March 31 |  
|------------------------ |  | --------------------------- | -
|                         |  | 2003                        |  
|Dividend yield           |  | None                        |  
|Expected volatility      |  | 107.4                       | %
|Risk-free interest rate  |  | 2.7                         | %
|Expected life (in years) |  | 5.3                         |  



The weighted-average
fair value of the options issued in the three months ended March 31, 2003 and 2002, were $0.58 and $0.32, respectively.





3. CAPITAL STOCK



Common Stock



The Company did not issue any shares of common stock in the first quarter of
2002 and issued 1,667 shares of common stock upon the exercise of common stock options in the first quarter of 2003.



Treasury stock is accounted for using the cost method. In 2002 the Company repurchased 869,791 shares of common stock for an aggregate cost of $695 (an
average price of $0.80 per share). For the first quarter ended March 31, 2003, 100 shares were repurchased for $0.71 per share. To date, all treasury stock has been retired. Management has been authorized to repurchase up to 5,000,000 shares of
common stock, and through March 31, 2003 a total of 2,540,291 shares have been repurchased.



8



---



Preferred Stock



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





4. CONTINGENCIES



In July 2002, six franchise operators filed a suit against the Company
alleging that the Company has violated the terms of its franchise agreements and certain other trade laws. The suit requests an undefined amount of damages. Management plans to vigorously contest this suit. While at this point the loss, if any, can
not be reasonably estimated, management, after consultation with legal counsel, believes that the outcome of such matter will not have a material adverse effect on the Companys consolidated financial position, results of operations or cash
flows in future years.





5. INCOME TAXES



At December 31, 2002, the Company had net operating loss carryforwards of approximately $5 million for federal and state tax purposes. As a result of a change of control transaction which occurred in December 2002, approximately $2
million of the net operating loss carryforwards are subject to usage limitations pursuant to the rules of Internal Revenue Code section 382. Net operating losses will begin to expire in 2014. The net operating loss carryforwards offset the $651 of
income before income taxes for the three months ended March 31, 2003. In addition, deferred income taxes were recorded for other differences in bases of assets and liabilities for financial reporting and income tax purposes. A valuation allowance
was established for the net deferred tax asset based on managements assessment that the net deferred tax asset will not be realized given the uncertainty of future operating results. To the extent that the deferred tax assets are realized,
$790 of the related tax benefit would be recorded as a credit to equity.



Starting in 2001, the Company offset taxable income for federal tax purposes with net operating loss carryforwards. For state tax purposes, there is a limitation on the amount of net operating loss carryforwards that can be utilized
in a given year to offset state taxable income. However, the state taxable income in 2001 and 2002 was below the annual limitation.



9



---



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



Except for the historical information contained herein, this Report on Form 10-Q contains certain forward-looking statements that
involve substantial risks and uncertainties. When used in this Report, the words anticipate, believe, estimate, expect and similar expressions, as they relate to NutriSystem, Inc. or its management,
are intended to identify such forward-looking statements. The Companys actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause
or contribute to such differences include those set forth in BusinessRisk Factors as disclosed in the Companys Form 10K filed March 19, 2003 with the Securities and Exchange Commission. Accordingly, there is no assurance that
the results in the forward-looking statements will be achieved.



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



Background



NutriSystem, Inc. (a Delaware corporation) together with its
subsidiaries (NutriSystem or the Company) provides weight loss programs and distributes pre-packaged foods. The NutriSystem diet program was originally developed by the Companys predecessor businesses, including
Nutri/System L.P. and Nutri/System Direct, L.L.C. (collectively, the Predecessor Businesses), that operated through company-owned and franchised weight loss centers. Currently, the territories of the eight remaining independent
franchised weight loss centers encompass less than 1% of the United States population and there are no company-owned centers. In addition, there are approximately 30 independent center-based distributors that operate without franchise agreements.
These distributors are referred to as case distributors. In 1998, the Company initiated Nutri/System Direct, L.L.C., a marketing program using independent commissioned representatives. In late 1999, the Company began selling directly to the consumer
through the Internet and by telephone. In 2001, the Company began selling foods through QVC, a television shopping network. The Companys pre-packaged foods are now sold to weight loss program participants directly via the Internet and
telephone (the Direct sales channel) and through QVC and independent commissioned representatives (the Field Sales channel) and franchised and case distributor weight loss centers (the Franchise channel). In
September 2000, the Company changed its name from nutrisystem.com inc. to Nutri/System, Inc. and the Company changed its name to NutriSystem, Inc. in 2003.



Since the NutriSystem businesses began in 1972, they have operated in various organizational and legal structures and they were subject to
a bankruptcy proceeding in 1993, which was discharged in 1994. In August 1999, Ansama, a non-operating public corporation, entered into an Asset Purchase Agreement to acquire the operating assets and certain liabilities of Nutri/System L.P. for
$3,000 and a Stock Exchange and Purchase Agreement to acquire the beneficial interests in NutriSystem Direct, L.L.C. for $400 and 17,500,000 shares of Ansama common stock. Ansama was subsequently merged into the Company and the Company assumed the
Asset Purchase Agreement and the Stock Exchange and Purchase Agreement. In order to fund its cash obligations of $3,400 under the Asset Purchase and Stock Exchange and Purchase Agreements and the planned marketing program and technology investment,
the Company completed a private placement of 7,637,400 shares of common stock in October 1999, which, net of related expenses, resulted in proceeds of $7,574. In March 2000, the Company completed a private placement of 500,000 shares of common
stock, which resulted in net proceeds of $2,462. In 2000, the Company also issued a total of 115,000 shares of common stock valued at an aggregate of $625 to service providers. In 2001, 2002 and the first quarter of 2003, the Company repurchased
2,540,291 shares of common stock for an aggregate cost of $1,418 (an average price of $0.56 per share).



In December 2002, HJM Holdings LLC and NewSpring Ventures, L.P. collectively acquired 58.4% of the outstanding shares of common stock from
existing stockholders effecting a change in control of the Company. The Company was not a party to the transaction.



Since 1993, the Company, together with its Predecessor Businesses, incurred significant losses, including net losses of $9,633 and $13,984
in 1999 and 2000, respectively. In 2001, 2002 and in the first quarter of 2003, the





10



---



Company generated net income
of $1,249, $2,411 and $651, respectively, including income from discontinued operations of $813 in 2001 and $200 in 2002. There can be no assurance that the Company will be able to sustain profitability or, if necessary, obtain the capital to fund
operating and investment needs in the future. However, based on the Companys ability to generate earnings in the last two years, the variable nature of a portion of the Companys expenditures, the cash balance at December 31, 2002 and
managements belief that additional equity financing, if required, can be raised, management believes that the Company has the ability to continue operations into 2004.



Critical Accounting Policies and Estimates



The Companys consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management develops, and changes periodically, these estimates
and assumptions based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.



The Companys significant accounting policies are
described in Note 2 to the consolidated financial statements included in Item 8 of its Form 10-K for the year ended December 31, 2002. Management considers the following policies to be the most critical in understanding the more complex judgments
that are involved in preparing the consolidated financial statements and the uncertainties that could impact results of operations, financial position and cash flows. These critical accounting policies and estimates have been discussed with the
Companys audit committee.



Revenue
Recognition. The Company recognizes revenues, net of a reserve for returns, when the related products are shipped to the end-consumer or to franchise or case distributors. Revenues for products distributed through QVC are recognized when QVC
ships the products from their distribution center to the end-consumer. Management reviews the return reserves at each reporting period and adjusts them to reflect data available at that time. To the extent the estimate of returns is inaccurate,
management will adjust the reserve, which will impact the amount of product sales revenue recognized in the period of the adjustment. Returns for the quarters ended March 31, 2003 and 2002 were $421 and $646, respectively.



Valuation of Fixed Assets and Goodwill. The Company
records fixed assets and goodwill at cost. Fixed assets are being amortized on a straight-line basis over the estimated useful life of those assets. Under the guidance of SFAS 142, goodwill is no longer being amortized. In conjunction with
acquisitions of businesses or product rights, management allocates the purchase price based upon the relative fair values of the assets acquired and liabilities assumed. Management continually assesses the impairment of long-lived assets and
goodwill whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operating
performance of the Companys fixed assets and acquired businesses and products. Future events could cause management to conclude that impairment indicators exist and the carrying values of fixed assets or goodwill may be impaired. Any resulting
impairment loss could have a material adverse impact on the Companys financial position and results of operations.



Income Taxes. NutriSystem experienced losses in 1999 and 2000. As a result, the Company has federal and state tax net operating
loss (NOL) carryforwards of approximately $5,000 as of December 31, 2002. These NOLs offset the $651 of income before income taxes for the three months ended March 31, 2003. As a result of a change of control transaction which occurred in
December 2002, approximately $2,000 of the NOLs are subject to usage limitations pursuant to the rules of Internal Revenue Code section 382. Generally accepted accounting principles require the Company to record a valuation allowance against
the deferred tax asset associated with this NOL carryforward if it is more likely than not that the Company will not be able to utilize the NOL carryforward to offset future taxes. Due to the size of the NOL carryforward in relation to the
Companys history of operating results, the Company has not recognized a net deferred tax asset.



Prior to 2001, the Company and the Predecessor Businesses incurred net losses for over eight years. Continued profitability in future
periods could cause management to conclude that it is more likely than not that the Company will realize all or a portion of the NOL carryforward. Upon reaching such a conclusion, which is subject to managements judgment, the Company would
immediately record the estimated net realizable value of the deferred tax asset at that time





11



---



and would then begin to
provide for income taxes at a rate equal to the combined federal and state effective rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause the Companys provision for income taxes to vary
significantly from period to period.



Results
of Operations



Revenues and expenses consist
of the following components:



Revenues.
Revenues consist of food sales and franchise royalty fees. Food sales include sales of food, supplements, shipping and handling charges billed to customers and sales credits and adjustments, including product returns. No revenue is recorded for food
products provided at no charge as part of promotions.



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



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



General and Administrative Expenses. General and administrative expenses consist of payroll and related expenses for administrative, information technology, fulfillment and customer service
personnel, facility expenses, web site development costs, professional service fees and other general corporate expenses.



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



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



Income Taxes. Effective with the merger on September 27, 1999 (see Background for discussion), the
Company became subject to corporate level income taxes. No income tax benefit on the excess of the tax basis of assets over the financial reporting carrying amount has been recorded from September 1999 to date in light of the uncertainty of future
operating results.



The Direct Channel



The Company began selling directly to
consumers when it launched its web site on October 15, 1999. For the Direct channel of distribution, the Companys primary financial objectives are to generate growth while maintaining profit margins. The Company measures growth in terms of the
number of new customers, revenues per customer and total revenues. A customer is defined as an individual who has purchased food directly from the Company through the web site or by telephone. Profit margins are measured in terms of gross margin
(revenues less cost of revenues as a percentage of revenues) and total advertising and marketing expense as a percentage of revenues. In the following table, cost of revenues for 2002 have been restated to conform to current cost allocation
methodologies.



12



---



SELECTED
FINANCIAL AND OPERATING STATISTICS FOR DIRECT SALES



(in thousands, except customer data)



|                                       |  | Three Months Ended March 31 |      
|-------------------------------------- |  | --------------------------- | -----
|                                       |  | 2003                        |      
|Revenues                               |  | $                           | 4,059
|                                      
|Cost of revenues                       |  |                             | 1,785
|                                       |  |                             |      
|Gross margin                           |  | $                           | 2,274
|% of revenue                           |  |                             | 56.0 
|                                      
|Advertising and marketing              |  | $                           | 494  
|% of revenue                           |  |                             | 12.2 
|New customers                          |  |                             | 7,331
|                                      
|Advertising and marketing/new customer |  | $                           | 67   
|                                      
|New customer revenue/new customer      |  | $                           | 297  



Direct
revenues decreased 23.5% from the first quarter of 2002 to the first quarter of 2003. Direct revenues are largely a function of the number of new customers acquired, the revenues generated from each new customer and the revenues generated from
returning customers (customers that initially purchased food in a prior period). From the first quarter of 2002 to the first quarter of 2003, the number of new customers acquired dropped by 4,119, or 36.0%, while the revenue generated from each new
customer increased 3.8% from $286 in 2002 to $297 in 2003. Returning customers generated $2.0 million in revenues in 2002 and $1.9 million in revenues in 2003. The decline in Direct revenues was primarily attributable to the drop in new customers.
The decline in new customers was caused by a large reduction in advertising and marketing spending, which dropped by $242, or 32.9% from 2002 to 2003. Revenues obtained from each new customer was higher in the first quarter of 2003 than 2002 because
the proportion of customer purchasing under the autoship program increased; under the autoship program the customer receives monthly product shipments automatically until they notify the Company they wish to end shipments. Measured on a quarterly
basis, new customer revenue per new customer captures only the revenue generated by these customers in the quarter  management anticipates many of these customers will make additional purchases in future quarters.



Television Infomercial Distribution



In the second quarter of 2001, the Company began distribution
of its proprietary prepackaged food through QVC, the shopping television network. On the QVC network, the Company reaches a large, incremental audience in a 50 minute, infomercial format that enables the Company to convey fully the benefits of the
NutriSystem diet foods. Under the terms of the Companys agreement with QVC, QVC viewers purchase NutriSystem products directly from QVC and are not directed to the NutriSystem web site. Retail prices (including shipping and handling) offered
on QVC to consumers are similar to prices offered on the web site. The Company generates a lower gross margin (as a percent of sales) on sales to QVC relative to direct sales, but QVC sales require no incremental advertising and marketing expense
and, management believes, exposure on QVC raises consumer awareness of the NutriSystem brand. Net sales through the television infomercial distribution channel were $2,123 for the three months ended March 31, 2003 versus $3,951 for the comparable
period in 2002. Sales declined from 2002 to 2003 because the Company aired fewer shows on QVC and sales per minute of air-time declined.





13



---



Three
Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002



Revenues. Revenues decreased from $10,439 for the first quarter ended March 31, 2002 to $7,196 for the first quarter ended March 31, 2003. The revenue decrease of $3,243, or 31.1%, resulted from
decreased sales to QVC ($1,828), Direct ($1,250), and the Franchise and Field Sales channels ($165). In the first quarter of 2003, Direct sales accounted for 56% of total revenues, while QVC, Field sales and franchise revenues accounted for 30%, 7%
and 7% of total revenues, respectively. In 2001, these percents were 51%, 38%, 6% and 5%, respectively.



Costs and Expenses. Cost of revenues decreased $1,879 from $6,010 to $4,131 for the quarters ended March 31, 2002 and 2003,
respectively. Gross margin as a percent of revenues was 42.4% and 42.6% for the quarters ended March 31, 2002 and 2003, respectively. Advertising and marketing expenses decreased $242 from $736 to $494 from the first quarter of 2002 to the first
quarter 2003. All advertising spending promoted the Direct sales, and, as discussed above, the decline in advertising is attributable to a large decrease in television and direct mail advertising spending. General and administrative expenses ($1,824
and $1,569 in the first quarter 2002 and 2003, respectively) decreased $255 attributable to lower costs, especially compensation, associated with the decline in revenues. In the first quarter ended March 31, 2003, the Company closed the Reno
distribution center in order to reduce fulfillment costs. This resulted in warehouse closing costs of $198 primarily consisting of a loss on disposal of assets ($132), remaining lease payments ($49) and other costs ($17). For the quarter ended March
31, 2003, the Company recorded a loss of $90 under the caption Equity in losses of affiliate, representing the Companys remaining net investment in an affiliate and a portion of the amount of indemnifications provided in connection
with this investment.



Interest Income.
Interest income net of interest expense increased $10 from $4 in 2002 to $14 in 2003 primarily due to higher cash balances, change in bank accounts offering higher interest rates and lower interest expense.



Net Income. From the first quarter 2002 to the first
quarter 2003, net income decreased by $1,085 from net income of $1,736 to net income of $651. The decrease in net income is due to lower revenues offset by lower advertising spending.



Liquidity, Capital Resources and Other Financial Data



At March 31, 2003, the Company had net working capital of
$5,347. Cash and cash equivalents were $4,386, an increase of $1,381 from the balance of December 31, 2002. The Companys principal source of liquidity is from cash flow from operations. The Company currently has no bank debt or term or
revolving credit facilities to fund operations or investment opportunities.



In the three months ended March 31, 2003, the Company generated cash flow of $1,387 from operations, primarily attributable to net income adjusted for non-cash items supplemented by a decrease in
working capital, the most significant component being a decrease in inventories of $857. This decrease in inventories is due to the seasonality of the business; inventories are purchased in the fourth quarter in anticipation of the historically
higher sales level in the following first quarter of the subsequent year.



In the three months ended March 31, 2003, net cash used in investing activities was $6, which primarily consisted of capital expenditures of $19 offset by proceeds from the sale of Reno warehouse assets of $13.



In the three months ended March 31, 2003, there was no cash
generated by or used in financing activities.



As
of March 31, 2003, the Companys principal commitments consisted of obligations under operating leases and severance payments to a former executive of the Company. Although the Company has no material commitments for capital expenditures, it
anticipates continuing requirements for capital expenditures consistent with anticipated growth in operations, infrastructure and personnel approximately consistent with prior periods.



In pursuing its business strategy, it is possible that the Company may require additional cash for operating
and investing activities. The Company expects future cash requirements, if any, to be funded from operating cash flow and financing activities, which may include additional private offerings of equity securities. Based on the Companys ability
to generate earnings in 2001, 2002 and in the first quarter of 2003, the variable nature of a portion of the Companys expenditures, the cash balance at March 31, 2003 and managements belief that additional equity financing, if required,





14



---



can be raised, management
believes that the Company has the ability to continue operations into 2004. However, there can be no assurance that the Company will be able to sustain profitability or, if necessary, obtain the capital to fund operating and investment needs in the
future. There are no credit facilities available to fund working capital or investment needs.



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



Factors Affecting Business and Prospects



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



Inflation



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





Recently Issued Accounting Pronouncements



In December 2002, the Financial Accounting Standards Board
(FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation  an Amendment to FASB Statement No. 123, which amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on report results. Management has elected to continue to apply the intrinsic-value based method of accounting under
Accounting Principals Board (APB) Opinion No. 25, Accounting for stock issued to Employees and related interpretations. The disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, are included in Note 2.



In 2003, the Company adopted SFAS No. 146, Accounting
for Exit or Disposal Activities (SFAS 146). SFAS 146 addresses the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS 146 also addresses
recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees and termination of benefits provided to employees that are involuntarily terminated under the terms of
a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. Adoption of SFAS 146 did not have an impact on the consolidated financial position or results of operations of the Company.





Item 3. Quantitative and Qualitative Disclosure About Market Risk



The Company does not hold any investments in market risk sensitive instruments. Accordingly, management believes that it is not subject to any material risks arising from changes in interest rates,
foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk instruments. The Company does not have any funded debt outstanding at March 31, 2003 and its cash and cash equivalents of $4,386 are
maintained in bank accounts. As such, a change in interest rates of 1 percentage point would not have a material impact on the Companys operating results and cash flows.





Item 4. Controls and Procedures



Within ninety days prior to the filing of this report, the Companys Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of the Companys disclosure controls and
procedures, which are designed to insure that the Company records, processes, summarizes and reports in a timely and





15



---



effective manner the
information required to be disclosed in the reports filed with or submitted to the Securities and Exchange Commission. Based upon this evaluation, they concluded that, as of the date of the evaluation, the Companys disclosure controls are
effective. Since the date of this evaluation, there have been no significant changes in the Companys internal controls or in other factors that could significantly affect those controls.



16



---



PART
IIOTHER INFORMATION



Item 1. Legal Proceedings



On July 3, 2002, certain franchise operators filed a suit against the Company and certain of its affiliates alleging that the Company has violated the terms of its franchise agreements and certain other trade laws. The suit was filed
in the Circuit Court of the First Judicial Circuit, County of Jackson, State of Illinois. It requests an undefined amount of damages. Management has indicated its plans to vigorously contest this suit and believes that the loss, if any, resulting
from the suit will not have a material impact on the Companys consolidated financial position, results of operations or cash flows in future years.



Item 2. Changes in Securities and Use of Proceeds



None



Item 3. Defaults Upon Senior Securities



None



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



NutriSystem held its Annual Meeting of Stockholders on April 23, 2003.



| | (1) |  | The stockholders elected each of the six nominees to the Board of Directors for a one-year term:
| | --- |  | ------------------------------------------------------------------------------------------------



|DIRECTOR                  |  | FOR        |  | ABSTAIN
|------------------------- |  | ---------- |  | -------
|Michael J. Hagan          |  | 19,709,979 |  | 210    
|Djordje (George) Jankovic |  | 19,709,456 |  | 733    
|Ian J. Berg               |  | 19,709,979 |  | 210    
|Warren V. (Pete) Musser   |  | 19,709,979 |  | 210    
|Brian P. Tierney          |  | 19,709,979 |  | 210    
|Michael A. DiPiano        |  | 19,709,956 |  | 233    



| | (2) |  | The stockholders ratified the appointment of KPMG LLP as independent auditors of the Company:
| | --- |  | ---------------------------------------------------------------------------------------------



|FOR     |  | 19,702,460 |  |  |  |  |  |  |  | 
|------- |  | ---------- |  |  |  |  |  |  |  | 
|AGAINST |  | 223        |  |  |  |  |  |  |  | 
|ABSTAIN |  | 7,506      |  |  |  |  |  |  |  | 
|        |  |            |  |  |  |  |  |  |  | 
|TOTAL   |  | 19,710,189 |  |  |  |  |  |  |  | 



| | (3) |  | The stockholders elected to amend the Companys 2000 Equity Incentive Plan for Directors and Outside Consultants.
| | --- |  | -----------------------------------------------------------------------------------------------------------------



|FOR     |  | 19,604,623 |  |  |  |  |  | 
|------- |  | ---------- |  |  |  |  |  | 
|AGAINST |  | 98,060     |  |  |  |  |  | 
|ABSTAIN |  | 7,506      |  |  |  |  |  | 
|        |  |            |  |  |  |  |  | 
|TOTAL   |  | 19,710,189 |  |  |  |  |  | 



| | (4) |  | The stockholders elected to change the name of the Company to NutriSystem, Inc.
| | --- |  | -------------------------------------------------------------------------------



|FOR     |  | 19,669,960 |  | 
|------- |  | ---------- |  | 
|AGAINST |  | 40,223     |  | 
|ABSTAIN |  | 6          |  | 
|        |  |            |  | 
|TOTAL   |  | 19,710,189 |  | 





17



---



Item 5. Other Information



None



Item 6. Exhibits and Reports on Form 8-K



a. Exhibits:



99.1 Certifying
Statement of the Chief Executive Officer pursuant to Section 1350 of Title 18 of the United States Code



99.2 Certifying Statement of the Chief Financial Officer pursuant to Section 1350 of Title 18 of the United States Code



b. Reports on Form 8-K:



Report dated May 5, 2003 on press release setting forth
NutriSystems earnings for the first quarter of 2003.



18



---



SIGNATURES



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



NutriSystem, Inc.





|   
|---
|By:
|   



|   
|---
|By:
|   



19



---



Statement of
Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



I, Michel J. Hagan, certify that:



|1) |  | I have reviewed this quarterly report on Form 10-Q of NutriSystem, Inc.;
|-- |  | ------------------------------------------------------------------------



|2) |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3) |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4) |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5) |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6) |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: May 2, 2003



|                                        
|----------------------------------------
|/s/    MICHAEL J.
HAGAN                 
|Michael J. Hagan Chief Executive Officer



20



---



Statement of
Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



I, James D. Brown, certify that:



|7) |  | I have reviewed this quarterly report on Form 10-Q of NutriSystem, Inc.;
|-- |  | ------------------------------------------------------------------------



|8) |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|9) |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10) |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11) |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|12) |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: May 2, 2003



|                                      
|--------------------------------------
|/s/    JAMES D.
BROWN                 
|James D. Brown Chief Financial Officer



21



---



Exhibit Index



|No.  |  | Description                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------------------
|    
|99.1 |  | Certifying Statement of the Chief Executive Officer pursuant to Section 1350 of Title
18 of the United States Code
|    
|99.2 |  | Certifying Statement of the Chief Financial Officer pursuant to Section 1350 of Title
18 of the United States Code



22