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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(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, 2004



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



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NutriSystem, Inc.

(Exact name of Registrant as specified in its charter)



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



|                                         |  |           
|---------------------------------------- |  | ----------
|200 Welsh Road, Horsham, Pennsylvania    |  | 19044     
|(Address of principal executive offices) |  | (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 ̈No  x



Indicate the number of shares outstanding of each of the issuers classes of common stock as of May 6, 2004:



|                              |  |                  
|----------------------------- |  | -----------------
|Common Stock, $.001 par value |  | 29,060,587 shares



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##### Table of Contents

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                             |  | 16  
|                                                                                               | 
|Item 4 
Controls and Procedures                                                               |  | 16  
|                                                                                               | 
|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                                                                     |  | 17  
|                                                                                               | 
|Item 6 -
Exhibits and Reports on Form 8-K.                                                     |  | 17  
|                                                                                               | 
|SIGNATURES                                                                                     |  | 18  



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##### Table of Contents

NUTRISYSTEM, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



(Amounts in
thousands, except share data)



|                                                                                                                                                               |  |               |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                               |  | March 31,2004 |         |   | December 31,2003 |  
|                                                                                                                                                               |  | (Unaudited)   |         |   | (Audited)        |  
|ASSETS                                                                                                                                                         |  |               |         |   |                  |   |         |  
|CURRENT ASSETS:                                                                                                                                                |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                      |  | $             | 4,190   |   |                  | $ | 2,684   |  
|Restricted cash                                                                                                                                                |  |               |        |   |                  |   | 250     |  
|Trade receivables                                                                                                                                              |  |               | 1,136   |   |                  |   | 448     |  
|Inventories                                                                                                                                                    |  |               | 2,805   |   |                  |   | 4,524   |  
|Deferred tax asset                                                                                                                                             |  |               | 1,716   |   |                  |   | 1,716   |  
|Other current assets                                                                                                                                           |  |               | 386     |   |                  |   | 437     |  
|                                                                                                                                                               |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                                                           |  |               | 10,233  |   |                  |   | 10,059  |  
|                                                                                                                                                               |  |              
|FIXED ASSETS, net                                                                                                                                              |  |               | 785     |   |                  |   | 753     |  
|DEFERRED TAX ASSET                                                                                                                                             |  |               | 2,256   |   |                  |   | 2,753   |  
|OTHER ASSETS                                                                                                                                                   |  |               | 128     |   |                  |   | 123     |  
|                                                                                                                                                               |  |               |         |   |                  |   |         |  
|                                                                                                                                                               |  | $             | 13,402  |   |                  | $ | 13,688  |  
|                                                                                                                                                               |  |               |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                           |  |               |         |   |                  |   |         |  
|CURRENT LIABILITIES:                                                                                                                                           |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                                                                               |  | $             | 2,136   |   |                  | $ | 3,531   |  
|Accrued payroll and related benefits                                                                                                                           |  |               | 518     |   |                  |   | 189     |  
|Deferred revenue                                                                                                                                               |  |               |        |   |                  |   | 13      |  
|Other current liabilities                                                                                                                                      |  |               | 282     |   |                  |   | 662     |  
|                                                                                                                                                               |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                      |  |               | 2,936   |   |                  |   | 4,395   |  
|                                                                                                                                                               |  |              
|NON-CURRENT LIABILITIES                                                                                                                                        |  |               | 1       |   |                  |   | 2       |  
|                                                                                                                                                               |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                                                              |  |               | 2,937   |   |                  |   | 4,397   |  
|                                                                                                                                                               |  |               |         |   |                  |   |         |  
|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 28,951,909 at March 31, 2004 and 28,511,021
at December 31, 2003) |  |               | 29      |   |                  |   | 28      |  
|Additional paid-in capital                                                                                                                                     |  |               | 31,734  |   |                  |   | 31,238  |  
|Warrants                                                                                                                                                       |  |               | 209     |   |                  |   | 277     |  
|Accumulated deficit                                                                                                                                            |  |               | (21,507 | ) |                  |   | (22,252 | )
|                                                                                                                                                               |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                     |  |               | 10,465  |   |                  |   | 9,291   |  
|                                                                                                                                                               |  |               |         |   |                  |   |         |  
|                                                                                                                                                               |  | $             | 13,402  |   |                  | $ | 13,688  |  
|                                                                                                                                                               |  |               |         |   |                  |   |         |  



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



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##### Table of Contents

NUTRISYSTEM, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS



(Unaudited, in thousands, except per share amounts)



|                                     |  |                            |        |      |   |        |  
|------------------------------------ |  | -------------------------- | ------ | ---- | - | ------ | -
|                                     |  | Three Months EndedMarch 31 |       
|                                     |  | 2004                       |        | 2003 |  
|REVENUES                             |  | $                          | 13,282 |      | $ | 7,196  |  
|                                     |  |                            |        |      |   |        |  
|COSTS AND EXPENSES:                  |  |                            |        |      |   |        |  
|Cost of revenues                     |  |                            | 6,658  |      |   | 4,131  |  
|Marketing                            |  |                            | 2,736  |      |   | 494    |  
|General and administrative           |  |                            | 2,585  |      |   | 1,767  |  
|Depreciation and amortization        |  |                            | 64     |      |   | 77     |  
|                                     |  |                            |        |      |   |        |  
|Total costs and expenses             |  |                            | 12,043 |      |   | 6,469  |  
|                                     |  |                            |        |      |   |        |  
|Operating income                     |  |                            | 1,239  |      |   | 727    |  
|                                     |  |                           
|EQUITY IN LOSSES OF AFFILIATE        |  |                            |       |      |   | (90    | )
|                                     |  |                           
|INTEREST INCOME, net                 |  |                            | 3      |      |   | 14     |  
|                                     |  |                            |        |      |   |        |  
|Income before income taxes           |  |                            | 1,242  |      |   | 651    |  
|                                     |  |                           
|INCOME TAXES                         |  |                            | 497    |      |   |       |  
|                                     |  |                            |        |      |   |        |  
|Net income                           |  | $                          | 745    |      | $ | 651    |  
|                                     |  |                            |        |      |   |        |  
|BASIC INCOME PER SHARE               |  | $                          | 0.03   |      | $ | 0.02   |  
|                                     |  |                            |        |      |   |        |  
|DILUTED INCOME PER SHARE             |  | $                          | 0.02   |      | $ | 0.02   |  
|                                     |  |                            |        |      |   |        |  
|WEIGHTED AVERAGE SHARES OUTSTANDING: |  |                            |        |      |   |        |  
|                                     |  |                           
|Basic                                |  |                            | 28,642 |      |   | 26,220 |  
|                                     |  |                           
|Diluted                              |  |                            | 32,094 |      |   | 26,842 |  



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



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NUTRISYSTEM, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



(Unaudited, in thousands)



|                                                                                  |  |                            |        |   |      |   |       |  
|--------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ----- | -
|                                                                                  |  | Three Months EndedMarch 31 |       
|                                                                                  |  | 2004                       |        |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                            |        |   |      |   |       |  
|Net income                                                                        |  | $                          | 745    |   |      | $ | 651   |  
|Adjustments to reconcile net income to net cash provided by operating activities- |  |                            |        |   |      |   |       |  
|Equity in losses of affiliate                                                     |  |                            |       |   |      |   | 90    |  
|Depreciation and amortization                                                     |  |                            | 64     |   |      |   | 77    |  
|Deferred tax expense                                                              |  |                            | 497    |   |      |   |      |  
|Loss on disposal of fixed assets                                                  |  |                            |       |   |      |   | 132   |  
|Stock-based costs                                                                 |  |                            | 199    |   |      |   |      |  
|Changes in operating assets and liabilities-                                      |  |                            |        |   |      |   |       |  
|Restricted cash                                                                   |  |                            | 250    |   |      |   |      |  
|Trade receivables                                                                 |  |                            | (688   | ) |      |   | (154  | )
|Inventories                                                                       |  |                            | 1,719  |   |      |   | 857   |  
|Other assets                                                                      |  |                            | 46     |   |      |   | 152   |  
|Accounts payable                                                                  |  |                            | (1,395 | ) |      |   | (20   | )
|Accrued payroll and related benefits                                              |  |                            | 329    |   |      |   | 88    |  
|Deferred revenue                                                                  |  |                            | (13    | ) |      |   | (334  | )
|Other liabilities                                                                 |  |                            | (379   | ) |      |   | (152  | )
|                                                                                  |  |                            |        |   |      |   |       |  
|Net cash provided by operating activities                                         |  |                            | 1,374  |   |      |   | 1,387 |  
|                                                                                  |  |                            |        |   |      |   |       |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                            |        |   |      |   |       |  
|Capital additions, net of proceeds from dispositions                              |  |                            | (96    | ) |      |   | (6    | )
|                                                                                  |  |                            |        |   |      |   |       |  
|Net cash used in investing activities                                             |  |                            | (96    | ) |      |   | (6    | )
|                                                                                  |  |                            |        |   |      |   |       |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                            |        |   |      |   |       |  
|Exercise of stock options and warrants                                            |  |                            | 228    |   |      |   |      |  
|                                                                                  |  |                            |        |   |      |   |       |  
|Net cash provided by financing activities                                         |  |                            | 228    |   |      |   |      |  
|                                                                                  |  |                            |        |   |      |   |       |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                           |  |                            | 1,506  |   |      |   | 1,381 |  
|                                                                                  |  |                           
|CASH AND CASH EQUIVALENTS, beginning of period                                    |  |                            | 2,684  |   |      |   | 3,005 |  
|                                                                                  |  |                            |        |   |      |   |       |  
|CASH AND CASH EQUIVALENTS, end of period                                          |  | $                          | 4,190  |   |      | $ | 4,386 |  
|                                                                                  |  |                            |        |   |      |   |       |  



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



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NUTRISYSTEM, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(In thousands, except share and per 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, 23 independent center-based distributors operate without franchise agreements
(Case Distributors) and there are no Company-operated or franchised weight loss 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 through the Internet, telephone, QVC, independent commissioned representatives 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. In September 2003, the Company completed a private placement that raised $2,300 from the sale of 2,300,000 shares of
common stock.



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, 2004 and for the three months ended March 31, 2004 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 these interim periods. The results of operations for the
three months ended March 31, 2004 and 2003 are not necessarily indicative of the results to be expected for any other interim period or the year ending December 31, 2004.



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Restricted Cash



Restricted cash represented minimum cash deposited in banks required under certain vendor arrangements. The restrictions were eliminated in January 2004.



Inventories



Inventories consist principally of packaged food held in the Companys warehouse, outside fulfillment locations 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.



Investment Carried Under the Equity Method



The Company has
invested $248 for a 25% interest in Imagine Weight Loss Center, LLC (Imagine), formerly known as Turning Point Weight Loss Centers, LLC, a start up company formed to provide diet and fitness programs in center locations. In addition to
the cash investments, the Company has provided indemnifications to certain affiliates of Imagine amounting to $52 and $159 at March 31, 2004 and 2003, respectively. For the three months ended March 31, 2004, the Company made no further investments
in Imagine. 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 portion of the losses incurred by
Imagine. The Companys share of the losses of Imagine have reduced the carrying value of the investment to zero and a liability of $52 at March 31, 2004 and December 31, 2003, is included in Other current liabilities for the
remaining outstanding indemnification. As of March 31, 2004, the Company had no commitment to make further investments in Imagine.



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, 2004 and December 31, 2003, 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 Case Distributors. For the three months ended March 31, 2004, the Company shipped products sold through QVC directly to the end-consumer and recognized revenues when the
Company shipped these products. In 2003, QVC shipped the Companys products and revenues for products distributed by QVC were recognized when QVC shipped the products from their distribution center to the end-consumer. Product inventory held by
QVC was carried in the Companys inventories and payments received from QVC in advance of shipments to the end-consumer were recorded as deferred revenue in the consolidated balance sheet.



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 Case Distributors and independent representatives. Revenues from shipping and handling charges
were $136 and $79 for the three months ended March 31, 2004 and 2003, respectively.



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##### Table of Contents

Marketing Expense



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. Direct-response advertising costs are capitalized if the primary purpose was
to elicit sales to customers who could be shown to have responded specifically to the advertising and results in probable future economic benefits. The capitalized costs are amortized to expense over the period during which the future benefits are
expected to be received. All other advertising costs are charged to expense as incurred. At March 31, 2004 and December 31, 2003, $60 and $90, respectively, of prepaid advertising was included in prepaid expenses. Advertising expense was $2,628 and
$397 during the three months ended March 31, 2004 and 2003, 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 the 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 the statement of operations in the period that includes the enactment date.



At December 31, 2002, deferred tax assets were offset by a full valuation allowance. In the second quarter of 2003, management determined
based on an analysis of the cumulative level of pretax profits over the past three years and projected level of profits that recognition of deferred tax assets was more likely than not. As a result, the valuation allowance was eliminated, a deferred
tax asset and liability were recorded on the consolidated balance sheet and an income tax benefit was recorded in the statement of operations (see Note 5).



Fair Value of Financial Instruments



The carrying values of the Companys financial instruments, including cash, cash equivalents, trade receivables and accounts payable, approximate the 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, 2004 and 2003, diluted net income per common share reflects the potential dilution from the exercise of outstanding options and warrants into
common stock. For the three months ended March 31, 2004 and 2003, common stock equivalents representing 310,334 and 1,958,683 shares of common stock, respectively, were excluded from weighted average shares for diluted net income per share purposes
since the effect would be anti-dilutive.



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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, Accounting for Stock-Based Compensation, 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, Accounting for Stock-Based Compensation  An Amendment to FASB Statement No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting and has adopted only the disclosure requirements. 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:



|                                                                                                                      |  |                            |      |   |      |   |      |  
|--------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---- | - | ---- | - | ---- | -
|                                                                                                                      |  | Three Months EndedMarch 31 |     
|                                                                                                                      |  | 2004                       |      |   | 2003 |  
|Net income:                                                                                                           |  |                            |      |   |      |   |      |  
|As reported                                                                                                           |  | $                          | 745  |   |      | $ | 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 |  |                            | (75  | ) |      |   | (249 | )
|                                                                                                                      |  |                            |      |   |      |   |      |  
|Pro forma                                                                                                             |  | $                          | 670  |   |      | $ | 402  |  
|                                                                                                                      |  |                            |      |   |      |   |      |  
|Basic net income per share:                                                                                           |  |                            |      |   |      |   |      |  
|As reported                                                                                                           |  | $                          | 0.03 |   |      | $ | 0.02 |  
|                                                                                                                      |  |                            |      |   |      |   |      |  
|Pro forma                                                                                                             |  | $                          | 0.02 |   |      | $ | 0.02 |  
|                                                                                                                      |  |                            |      |   |      |   |      |  
|Diluted net income per share:                                                                                         |  |                            |      |   |      |   |      |  
|As reported                                                                                                           |  | $                          | 0.02 |   |      | $ | 0.02 |  
|                                                                                                                      |  |                            |      |   |      |   |      |  
|Pro forma                                                                                                             |  | $                          | 0.02 |   |      | $ | 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 EndedMarch 31 |  
|                         |  | 2004                       |   |  | 2003  |  
|Dividend yield           |  | None                       |   |  | None  |  
|Expected volatility      |  | 98.6                       | % |  | 107.4 | %
|Risk-free interest rate  |  | 3.3                        | % |  | 2.7   | %
|Expected life (in years) |  | 6.1                        |   |  | 5.3   |  



The weighted-average fair value of the
options issued in the three months ended March 31, 2004 and 2003, were $1.44 and $0.58, respectively.



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 to be cash equivalents. Cash equivalents at March 31, 2004 and December 31, 2003 consist of
$250 and $0, respectively, in certificates of deposit.



The Company made no
payments for income taxes and minimal interest payments for the three months ended March 31, 2004 and 2003, respectively.



Recently Issued Accounting Pronouncements



In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (FIN 46R) which
addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued January 2003. The Company will be required to apply FIN 46R to variable interests in variable interest entities (VIEs) created after December 31, 2003. For
variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before



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January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable,
fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The Company is evaluating the impact of applying FIN 46R to existing VIEs in which it has variable interests and has
not yet completed this analysis. At this time, it is anticipated that the adoption of FIN 46R will not have an impact on the Companys consolidated financial statements.



The FASB recently issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities and SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. In addition, the Emerging Issues Task Force recently issued EITF Issue 00-21, Revenue Arrangements with Multiple
Deliverables. The adoption of these accounting pronouncements did not have an impact on the Companys consolidated financial position or results of operations.



Use of Estimates



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



Certain Reclassifications



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



3. CAPITAL STOCK



Common Stock



The Company issued 266,666 and 1,667 shares of common stock in the first quarter of 2004 and 2003 respectively, upon the exercise of common
stock options and received proceeds of $184. Also, in the first quarter of 2004, the Company issued 61,000 shares of common stock as compensation to board members, certain consultants and spokespersons per their contract and issued 113,222 shares
upon the exercise of common stock warrants and received proceeds of $44.



Treasury stock is accounted for using the cost method. In 2003, the Company purchased 220,100 shares of common stock for an aggregate cost of $123 (an average price of $0.56 per share). For the first quarter ended March 31, 2004, there were
no treasury stock transactions. 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, 2004 a total of 2,760,291 shares have been repurchased.



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 had violated the terms of its franchise agreements and certain other trade laws. In September 2003, the parties to the
dispute reached a settlement under the auspices of the District Court overseeing the action. In December 2003, the settlement was finalized. As a result of the suit, the Company recorded a charge of $302 in 2003 reflecting the incremental costs of
the



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settlement and defense costs, net of insurance proceeds of $75. In the first quarter of 2003, the Company had no expense
related to this suit. Under the terms of the settlement, the plaintiffs have terminated their franchise agreements and now operate as Case Distributors.



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. In addition, deferred income taxes were
recorded for other differences in bases of assets and liabilities for financial reporting and income tax purposes. Through March 2003, a valuation allowance had been maintained for the deferred tax asset based on managements assessment that
the deferred tax asset would not be realized given the historical taxable levels of income (loss), the uncertainty of future operating results, tax planning strategies, and the expiration date of net operating loss carryforwards. In the second
quarter of 2003, management determined based on an analysis of the cumulative level of pretax profits over the past three years, projected levels of profits, schedule of reversal of deferred taxes, and tax strategies that recognition of the benefits
related to deferred tax assets was more likely than not. As a result, the valuation allowance was eliminated, a deferred tax asset was recorded on the consolidated balance sheet and an income tax benefit was recorded. A portion of the deferred tax
asset recognized arose prior to a 1999 merger transaction; in order to reflect the recognition of the deferred tax asset on the previously recorded merger transaction, the Company eliminated $290 of goodwill and credited equity by $790.



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 is
below the annual limitation. At March 31, 2004, the Company had net operating loss carryforwards of approximately $7 million.



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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 29, 2004 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 per share data and new customer data.



Background



NutriSystem, Inc. provides weight loss programs and distributes pre-packaged
foods. The NutriSystem diet program was originally developed by the Companys predecessor businesses that operated through company-owned and franchised weight loss centers. Currently, there are no Company-operated centers and the Company
terminated its last franchise agreements in 2003. There are 23 independent center-based distributors who operate without franchise agreements (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 channel) and through independent commissioned representatives (Field Sales), Case
Distributors and QVC. 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.



Since the NutriSystem businesses began in 1972, the businesses have operated in various organizational and legal structures
and 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 September 2003, the Company completed a private placement that raised $2,300 from the sale of 2,300,000 shares of common stock. The Company issued a total of 115,000 and 41,000
shares of common stock valued at an aggregate of $625 and $61 to service providers in 2000 and 2003, respectively. In 2001, 2002, and 2003, the Company repurchased 2,760,291 shares of common stock for an aggregate cost of $1,541 (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.



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.



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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, 2003. 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.



Reserves for Returns. Management reviews the reserves for customer
returns at each reporting period and adjusts them to reflect data available at that time. To estimate a return for reserves, management considers return rates in preceding periods and changes in product offerings or marketing methods that might
impact returns going forward. 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, 2004 and 2003 were $1,220 and $421, respectively.



Impairment of Fixed Assets. Management continually assesses the impairment of long-lived assets 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. Future events could cause management to conclude that impairment indicators exist and the carrying values of fixed assets
may be impaired. Any resulting impairment loss would be limited to the value of net fixed assets, which was $785 at March 31, 2004.



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 $7 million as of March 31, 2004. As a result of a change of control transaction which occurred in December 2002, approximately $2 million of the NOLs are subject to usage limitations pursuant to the rules of
Internal Revenue Code section 382. Through March 2003, a valuation allowance had been maintained for the deferred tax asset based on managements assessment that the deferred tax asset would not be realized given the historical taxable levels
of income (loss), the uncertainty of future operating results, tax planning strategies, and the expiration date of net operating loss carryforwards. In the second quarter of 2003, management determined that recognition of the benefits related to
deferred tax assets was more likely than not based on an analysis of the cumulative level of pretax profits over the past three years, projected levels of profits, schedule of reversal of deferred taxes, and tax strategies. As a result, the
valuation allowance was eliminated, a deferred tax asset was recorded on the consolidated balance sheet and an income tax benefit was recorded in the statement of operations.



Currently, the Company is recording 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. For the three months ended March 31, 2004, the Company
recorded income tax expense of $497.



Results of Operations



Revenues and expenses consist of the following
components:



Revenues. Revenues consist primarily of
food sales. 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, including the write-off of obsolete packaging and product, 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 distributors.



Marketing Expense. 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



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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. Direct-response advertising costs are capitalized if the primary purpose was to elicit sales to customers who could be shown to have responded specifically to the advertising and results in probable future economic benefits.
The capitalized costs are amortized to expense over the period during which the future benefits are expected to be received. 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.



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



Income Taxes. The Company is 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 was recorded from September 1999 to March 2003 in light
of the historical taxable levels of income (loss), the uncertainty of future operating results, tax planning strategies, and the expiration date of net operating loss carryforwards. In the second quarter of 2003, management determined that
recognition of the benefits related to deferred tax assets was more likely than not based on an analysis of the cumulative level of pretax profits over the past three years, projected levels of profits, schedule of reversal of deferred taxes, and
tax strategies. As a result, the valuation allowance was eliminated, a deferred tax asset was recorded on the consolidated balance sheet and an income tax benefit was recorded in the statement of operations.



Overview of the Direct Channel



The Company began selling directly to consumers when it launched its web
site on October 15, 1999. In the first quarter of 2004 versus 2003, the Direct channel represented 74% and 56%, respectively, of the Companys net revenues. 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 new customer is defined as a first time purchaser through the Direct channel.
Profit margins are measured in terms of gross margin (revenues less cost of revenues) and total advertising and marketing expense as a percentage of revenues.



In January 2004 the Company merged duplicate customer profiles that had been created over time. This reduced new customer counts by approximately 10%
in 2003 and by a smaller amount in prior years, and it increased the sales per customer, as cumulative customer purchases were also aggregated. Merging duplicate profiles also raised the amount of sales that were attributed by customers acquired in
prior periods. The changes affected customer counts and had no impact on the Companys audited financial statements.



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SELECTED FINANCIAL AND OPERATING STATISTICS FOR DIRECT SALES



(in thousands, except new customer data)



|                                  |  |                            |        |   |      |   |       |  
|--------------------------------- |  | -------------------------- | ------ | - | ---- | - | ----- | -
|                                  |  | Three Months EndedMarch 31 |       
|                                  |  | 2004                       |        |   | 2003 |  
|Revenues                          |  | $                          | 9,777  |   |      | $ | 4,059 |  
|                                  |  |                           
|Cost of revenues                  |  |                            | 4,277  |   |      |   | 1,785 |  
|                                  |  |                            |        |   |      |   |       |  
|Gross margin                      |  | $                          | 5,500  |   |      | $ | 2,274 |  
|% of revenue                      |  |                            | 56.3   | % |      |   | 56.0  | %
|                                  |  |                           
|Marketing                         |  | $                          | 2,694  |   |      | $ | 494   |  
|% of revenue                      |  |                            | 27.6   | % |      |   | 12.2  | %
|                                  |  |                           
|New customers                     |  |                            | 19,264 |   |      |   | 6,500 |  
|                                  |  |                           
|Marketing/ new customer           |  | $                          | 140    |   |      | $ | 76    |  
|                                  |  |                           
|New customer revenue/new customer |  | $                          | 365    |   |      | $ | 305   |  



Direct revenues
increased 140.9% from the first quarter of 2003 to the first quarter of 2004. 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). The increase in Direct revenues in the first quarter of 2004 was primarily attributable to the increase in new customers. From the first quarter of 2003 to the first quarter of
2004, the number of new customers acquired increased by 12,764, or 196.4%, primarily as a result of higher marketing spending and excellent consumer response to the new NutriSystem Nourish program. Marketing and advertising spending in the first
quarter 2004 was $2,694, more than five times the spending in the same period last year. The spending increase supported the launch of the new NutriSystem Nourish program. The marketing per new customer, or customer acquisition cost, increased from
quarter to quarter as well, from $76 in 2003 to $140 in 2004. Management attributes the increase to a) low levels of advertising in 2003 which caused a larger portion of new customers to be sourced through referral or other free means,
and b) television, which has a relatively high customer acquisition cost, made up a high proportion of advertising in 2004.



Customers that made their first purchase in the first quarter generated $7.0 million in revenues in the first quarter of 2004 and $2.0 million in revenues
in the first quarter of 2003. Revenue generated from each new customer increased 19.7% from $305 in the first quarter of 2003 to $365 in the first of 2004. Revenues obtained from each new customer was higher in the first quarter of 2004 than 2003
because the proportion of customers 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, 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.



Revenues for customers that initially purchased in a prior quarter
contributed $2.8 million to total revenues in the first quarter 2004 and $2.1 million in the first quarter of 2003. The increase in 2004 is attributable to a) the higher number of cumulative customers over time, b) the popularity of the new
NutriSystem Nourish program, and c) the higher advertising spending.



Gross margin as a percentage of revenues increased slightly from 56.0% in the first quarter of 2003 to 56.3% in the first quarter of 2004, primarily based on price increases offset by a higher proportion of sales under the autoship program,
whereby product is sold at a 10% to 15% discount, and higher food costs for the new program.



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Overview of Television Infomercial Distribution



In the second quarter of 2001, the Company began distribution of its
proprietary prepackaged food through QVC, the shopping television network. In the first quarter of 2004, this channel represented 20% of the Companys net revenue as compared to 29.5% of the Companys net revenue in the first quarter of
2003. 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 $2,656 and $2,123 for the three months ended March 31, 2004 and 2003, respectively. Sales increased from 2003 to 2004 because the Company aired more shows on
QVC and sales per minute of air-time increased.



Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003



Revenues. Revenues increased from $7,196 for the first quarter ended March 31, 2003 to $13,282 for the first quarter ended March 31, 2004. The
revenue increase of $6,086, or 84.6%, resulted from increased sales to Direct ($5,718), QVC ($533) and the Field Sales channel ($50) offset by a decrease in net sales by Case Distributors ($215). In the first quarter of 2004, Direct sales accounted
for 74% of total revenues, while QVC, Field Sales and Case Distributor revenues accounted for 20%, 4% and 2% of total revenues, respectively. In the first quarter of 2003, these percentages were 56%, 30%, 7% and 7% of total revenues, respectively.



Costs and Expenses. Cost of revenues increased $2,527
from $4,131 to $6,658 for the quarters ended March 31, 2003 and 2004, respectively. Gross margin as a percent of revenues was 42.6% and 49.9% for the quarters ended March 31, 2003 and 2004, respectively. The increase in margin was primarily
attributable to the swing in the mix from QVC, which generates a lower gross margin, to Direct which generates a higher gross margin. Advertising and marketing expenses increased $2,242 from $494 to $2,736 from the first quarter of 2003 to the first
quarter 2004. All advertising spending promoted the Direct sales, and the increase in advertising is attributable to increased spending for advertising media ($1,891), Internet advertising ($146), promotional advertising ($94), market research and
consulting ($66), production of television advertising ($34) and payroll related to marketing and advertising ($11). General and administrative expenses ($1,767 and $2,585 in the first quarter of 2003 and 2004, respectively) increased $818
attributable to higher costs associated with the increase in revenues, especially compensation ($456) and outside fulfillment costs ($360). In the first quarter of 2004, the Company began to outsource some of its fulfillment. In March 2003, the
Company closed its fulfillment center in Reno after determining it was not operating cost effectively and recorded warehouse closing costs of $198. The Company also incurred stock-based costs ($94) as compensation to certain consultants and
spokespersons. 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 investment in an affiliate. There was no additional
investment made in the first quarter of 2004.



Interest
Income. Interest income, net of interest expense, decreased $11 from $14 in the first quarter of 2003 to $3 in the first quarter of 2004 primarily due to lower cash balances.



Income taxes. In the first quarter of 2004, the Company recorded a $497 of income taxes due to the income for the
current reporting period. There was no income taxes in the first quarter of 2003 as the deferred tax asset had a full valuation allowance.



Net Income. In the first quarter of 2004, net income increased by $94 from net income of $651 for the first quarter of 2003 to net income of $745
for the first quarter of 2004. The increase in net income is primarily due to higher gross profit from increased revenues offset by higher advertising and marketing spending and the income tax provision.



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Contractual Obligations and Commercial Commitments



As of March 31, 2004, 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.



During the three months ended March 31, 2004, there were no items that significantly impacted the Companys commitments and contingencies as
disclosed in the notes to the consolidated financial statements for the year ended December 31, 2003 as filed on Form 10-K. In addition, the Company has no significant off balance sheet arrangements.



Liquidity, Capital Resources and Other Financial Data



At March 31, 2004, the Company had net working capital of $7,297. Cash and
cash equivalents were $4,190, an increase of $1,506 from the balance at December 31, 2003. The Companys principal source of liquidity during this period 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, 2004, the Company generated cash flow of $1,374 from operations, primarily attributable to net income adjusted for non-cash charges incurred. Net changes in operating assets and
liabilities reduced cash flow from operations by $131 in the first quarter ended March 31, 2004 with changes in components generally due to the seasonality of the business.



In the three months ended March 31, 2004, net cash used in investing activities was $96, which consisted of capital
expenditures consistent with anticipated growth in operations, infrastructure and personnel.



In the three months ended March 31, 2004, net cash provided by financing activities was $228, representing proceeds from the exercise of common stock options and warrants.



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
or debt financing. Based on the Companys ability to generate earnings in 2001, 2002 and the first quarter of 2004, the variable nature of a portion of the Companys expenditures, the cash balance at March 31, 2004 and managements
belief that additional equity financing, if required, can be raised, management believes that the Company has the ability to continue operations through 2005. 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. Currently, there is no credit facility in place 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.



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Recently Issued Accounting Pronouncements



In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, (FIN 46R) which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued January 2003. The Company will be required to apply FIN 46R to variable
interests in variable interest entities (VIEs) created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be
consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the
balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the
assets, liabilities and noncontrolling interest of the VIE. The Company is evaluating the impact of applying FIN 46R to existing VIEs in which it has variable interests and has not yet completed this analysis. At this time, it is anticipated that
the adoption of FIN 46R will not have an impact on the Companys consolidated financial statements.



The FASB recently issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities and SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. In addition, the Emerging Issues Task Force recently issued EITF Issue 00-21, Revenue Arrangements with Multiple Deliverables.
The adoption of these accounting pronouncements did not have an impact on the Companys consolidated financial position or results of operations.



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, 2004 and
its cash and cash equivalents of $4,190 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



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 as of the end of the period covered by this
Report. Based upon this evaluation, they concluded that, as of the date of the evaluation the Companys disclosure controls and procedures as of the end of the period covered by this Report have been designed and are functioning effectively to
provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms. Management believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instance of fraud, if any, within a company have been detected. 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.



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PART II  OTHER INFORMATION



Item 1. Legal Proceedings



In July 2002, six franchise operators filed a suit against the Company alleging that the Company had violated the terms of its franchise agreements and certain other trade laws. In September 2003, the parties to the dispute reached a
settlement under the auspices of the District Court overseeing the action. In December 2003, the settlement was finalized.



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



None



Item 5. Other Information



None



Item 6. Exhibits and Reports on Form 8-K



|a. | Exhibits:
|-- | ---------



|     |  |                                                                                                                   
|---- |  | ------------------------------------------------------------------------------------------------------------------
|     | 
|31.1 |  | Certifying Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002     
|     | 
|31.2 |  | Certifying Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002     
|     | 
|32.1 |  | Certifying Statement of the Chief Executive Officer pursuant to Section 1350 of Title 18 of the United States Code
|     | 
|32.2 |  | 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 April 28, 2004 on press release setting forth NutriSystems earnings for the first quarter of 2004.



Report dated April 28, 2004 on press release issued by HJM Holdings, LLC
(HJM) terminating the lock up and voting arrangements between HJM and NewSpring Ventures, L.P. related to their NutriSystem, Inc. shares.



17



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##### Table of Contents

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: |  | /S/ MICHAEL J. HAGAN                                     |  | May 6, 2004
|    |  | Michael J. Hagan                                         |  |            
|    |  | Chairman of the Board and Chief Executive Officer        |  |            
|    |  |                                                         
|BY: |  | /S/ JAMES D. BROWN                                       |  | May 6, 2004
|    |  | James D. Brown                                           |  |            
|    |  | Chief Financial Officer and Principal Accounting Officer |  |            



18



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##### Table of Contents

Exhibit Index



|     |  |                                                                                                                   
|---- |  | ------------------------------------------------------------------------------------------------------------------
|No.  |  | Description                                                                                                       
|     | 
|31.1 |  | Certifying Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002     
|     | 
|31.2 |  | Certifying Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002     
|     | 
|32.1 |  | Certifying Statement of the Chief Executive Officer pursuant to Section 1350 of Title 18 of the United States Code
|     | 
|32.2 |  | Certifying Statement of the Chief Financial Officer pursuant to Section 1350 of Title 18 of the United States Code



19