<PAGE>

                                 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 September 30, 2001

                                       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
                             ______________________

                               Nutri/System, Inc.
                               ------------------

               (Exact name of Registrant as specified in its charter)

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

                      202 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 the number of shares outstanding of each of the issuer's classes of
common stock as of October 31, 2001:

      Common Stock, $.001 par value                27,645,394 shares
<PAGE>

                               Nutri/System, Inc.

                               INDEX TO FORM 10-Q

<TABLE>
<CAPTION>

                                                                      Page
                                                                      ----
PART I - FINANCIAL INFORMATION
<S>                                                                     <C>
  Item 1 - Financial Statements (Unaudited)

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

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

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

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

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

  Item 3 - Quantitative and Qualitative Disclosure About Market Risk...  14

PART II - OTHER INFORMATION

  Item 1 - Legal Proceedings...........................................  15

  Item 2 - Changes in Securities and Use of Proceeds...................  15

  Item 3 - Defaults Upon Senior Securities.............................  15

  Item 4 - Submission of Matters to a Vote of Security Holders.........  15

  Item 5 - Other Information...........................................  15

  Item 6 - Exhibits and Reports on Form 8-K............................  15

SIGNATURES.............................................................  16
</TABLE>
<PAGE>

                      NUTRI/SYSTEM, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

              (Unaudited, dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                                       December 31,       September 30,
                                                                          2000                2001
                                                                       ------------       -------------
<S>                                                                  <C>                <C>
ASSETS
------
CURRENT ASSETS:
  Cash and cash equivalents                                            $     1,638         $     1,565
  Restricted cash                                                              525                 528
  Trade receivables, less allowance of
     $36 and $3 in 2000 and 2001, respectively                                 284                 510
  Inventories                                                                1,435               2,414
  Prepaid expenses and other current assets                                    414                 159
                                                                       -----------         -----------
                 Total current assets                                        4,296               5,176

FIXED ASSETS, net                                                            1,054                 880
INTANGIBLES, net                                                               395                 316
OTHER ASSETS                                                                   163                 208
                                                                       -----------         -----------
                                                                       $     5,908         $     6,580
                                                                       ===========         ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
  Accounts payable                                                     $     1,892         $     2,112
  Accrued payroll and related benefits                                         131                 186
  Net liabilities of discontinued operation                                    433                 163
  Other current liabilities                                                    406                 391
                                                                       -----------         -----------
        Total current liabilities                                            2,862               2,852
NON-CURRENT LIABILITIES                                                        145                 128
                                                                       -----------         -----------
        Total liabilities                                                    3,007               2,980
                                                                       -----------         -----------

COMMITMENTS AND CONTINGENCIES                                                   --                  --
STOCKHOLDERS' EQUITY:
  Preferred stock $.001 par value
    (5,000,000 shares authorized, no shares outstanding)                        --                  --
  Common stock, $.001 par value (100,000,000 shares
  authorized; shares outstanding - 28,735,794 at December 31, 2000
  and 27,645,394 at September 30, 2001)                                         29                  29
  Additional paid-in capital                                                29,272              29,297
  Warrants exercisable at $1 per share                                         324                 324
  Accumulated deficit                                                      (26,724)            (25,528)
  Treasury stock, at cost (1,090,400 shares at September 30, 2001)              --                (522)
                                                                       -----------         -----------
          Total stockholders' equity                                         2,901               3,600
                                                                       -----------         -----------
                                                                       $     5,908         $     6,580
                                                                       ===========         ===========
</TABLE>

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

                                       1
<PAGE>

                      NUTRI/SYSTEM, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                   Three Months Ended                    Nine Months Ended
                                                                      September 30                         September 30
                                                                -------------------------------------------------------------------
                                                                    2000                2001            2000                 2001
                                                                -----------            -------        ---------             -------
<S>                                                            <C>                    <C>             <C>                  <C>
REVENUES:
  Food sales                                                    $     5,086            $ 6,317        $  15,618             $19,492
  Other                                                                  12                 12              172                  39
                                                                -----------            -------        ---------             -------
                                                                      5,098              6,329           15,790              19,531
                                                                -----------            -------        ---------             -------

COSTS AND EXPENSES:
  Cost of revenues                                                    2,715              3,589            8,588              10,828
  Advertising and marketing                                           1,662                730            6,782               3,244
  General and administrative                                          1,560              1,620            4,183               4,904
  Depreciation and amortization                                          95                106              206                 311
  Non-cash compensation expense                                          10                  8               20                  25
                                                                -----------            -------        ---------             -------
                                                                      6,042              6,053           19,779              19,312
                                                                -----------            -------        ---------             -------

     Operating income (loss) from continuing operations                (944)               276           (3,989)                219

OTHER INCOME                                                             84                 77               84                  77

INTEREST INCOME, net                                                     43                 17              144                  87
                                                                -----------            -------        ---------             -------
        Income (loss) before discontinued operation                    (817)               370           (3,761)                383

DISCONTINUED OPERATION

   Income (loss) from discontinued operation                           (126)                --             (126)                813
                                                                -----------            -------        ---------             -------
        Net income (loss)                                       $      (943)           $   370        $  (3,887)            $ 1,196
                                                                ===========            =======        =========             =======

BASIC AND DILUTED INCOME (LOSS) PER SHARE
   Continuing operations                                              (0.03)              0.01           ( 0.14)               0.01
   Discontinued operation                                                --                 --               --                0.03
                                                                -----------            -------        ---------             -------
                                                                $     (0.03)           $  0.01        $   (0.14)            $  0.04
                                                                ===========            =======        =========             =======

BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING                28,149             27,831           27,761              28,345
                                                                -----------            -------        ---------             -------
</TABLE>

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

                                       2
<PAGE>

                      NUTRI/SYSTEM, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                       (Unaudited, dollars in thousands)

<TABLE>
<CAPTION>
                                                                                  Nine Months Ended
                                                                                    September 30
                                                                           --------------------------------
                                                                               2000                2001
                                                                           ------------         -----------
<S>                                                                        <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                        $     (3,887)        $     1,196
  Adjustments to reconcile net income (loss) to net cash (used in)
     provided by operating activities-
     Discontinued operation net (income) loss                                       126                (813)
     Net cash from discontinued operation                                           492                 543
     Depreciation and amortization                                                  206                 311
     Loss on disposals                                                                7                  16
     Other non-cash expense                                                         645                  25

  Changes in operating assets and liabilities-
     Restricted cash                                                               (265)                 (3)
     Trade receivables                                                              (49)               (226)
     Inventories                                                                 (1,305)               (979)
     Prepaid expenses and other assets                                              155                 210
     Accounts payable                                                             1,359                 220
     Accrued payroll and related benefits                                           136                  55
     Other liabilities                                                               39                 (23)
                                                                           ------------         -----------

              Net cash (used in) provided by operating activities                (2,341)                532
                                                                           ------------         -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital additions                                                             (900)                (83)
                                                                           ------------         -----------

              Net cash used in investing activities                                (900)                (83)
                                                                           ------------         -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Issuance of common shares, net of costs                                      2,482                  --
     Stock purchases of common shares, at cost                                       --                (522)
                                                                           ------------         -----------

              Net cash provided by (used in) financing activities                 2,482                (522)
                                                                           ------------         -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS                                            (759)                (73)

CASH AND CASH EQUIVALENTS,
 beginning of period                                                              2,902               1,638
                                                                           ------------         -----------
CASH AND CASH EQUIVALENTS,
 end of period                                                             $      2,143         $     1,565
                                                                           ============         ===========
</TABLE>

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

                                       3
<PAGE>

                      NUTRI/SYSTEM, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     (In thousands, except share amounts)

                                  (Unaudited)

1. BACKGROUND

Nature of the Business

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

Nutri/System, Inc. and its predecessor businesses, including Nutri/System L.P.
and NutriSystem Direct, L.L.C. (collectively, the "Predecessor Businesses"),
have historically operated through Company-owned and franchised weight loss
centers.  Currently, the territories of the remaining independent franchised
weight loss centers encompass less than 1% of the United States population and
there are no Company-operated centers.  Generally, the Company's pre-packaged
foods are sold to weight loss program participants through the Internet,
independent distribution and through franchised weight loss centers.  In the
second and third quarters of 2001, the Company also sold foods through QVC, a
shopping television network.

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

Since 1993, the Company, including its Predecessor Businesses, has incurred
significant losses and, as of September 30, 2001, has an accumulated deficit of
$25,528.  The Company intends to continue to invest in marketing and promotion
and in the development of its web site and its administrative organization.  As
a result, the Company believes that it may incur further operating losses in the
foreseeable future.  In order to make the future investments necessary to expand
its business as described above and to meet its cash flow requirements, the
Company may need to raise capital through the sale of additional equity in a
private offering.  Based on the variable nature of a portion of the Company's
expenditures, the cash balance at September 30, 2001 and management's belief
that additional equity financing can be raised, the Company believes that it has
the ability to continue in operations through 2002.  Achieving and maintaining
profitability depends upon the Company's ability to: (1) reduce advertising and
marketing spending per customer acquired, and (2) generate and sustain increased
revenue levels.  There can be no assurance that the Company will be able to
obtain the necessary capital to fund operating and investment needs or to
generate sufficient revenues to achieve or sustain profitability in the future.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of Financial Statements

As of December 31, 2000 and September 30, 2001, the Company's consolidated
financial statements include the accounts of Nutri/System, Inc. and its wholly
owned subsidiaries.

All significant intercompany accounts and transactions have been eliminated.

Interim Financial Statements

                                       4
<PAGE>

The accompanying consolidated financial statements as of September 30, 2001 and
for the three and nine months ended September 30, 2000 and 2001 are unaudited
and, in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the Company's
financial position and results of operations for those interim periods.  The
results of operations for the three and nine months ended September 30, 2000 and
2001 are not necessarily indicative of the results to be expected for any other
interim period or the year ending December 31, 2001.

Cash Flow Information

For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments purchased with original maturities of three months
or less as cash equivalents.  The Company made no payments for income taxes
during the nine months ended September 30, 2000 or 2001.  Payments for interest
were $3 and $4 for the nine months ended September 30, 2000 and 2001.

Restricted Cash

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

Inventories

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

Intangibles

Intangible assets consist of goodwill which represents the excess of the
consideration paid over the fair value of net assets, and was generated from the
acquisition of the minority interest by the Company.  Goodwill is stated at cost
and amortized on a straight-line basis over five years.  Goodwill was $527 at
December 31, 2000 and September 30, 2001 and accumulated amortization was $132
and $211, respectively.

Advertising Costs

The Company follows the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP"), 93-7 "Reporting for Advertising Costs"
to account for its Internet site linking agreements.  Under SOP 93-7, the
Company amortizes the costs associated with its linking agreements over the
contract terms, with the amortization method primarily based on the rate of
delivery of a guaranteed number of impressions to be received during the
contract term.  To the extent additional payments are required to be made based
on factors such as click-throughs and new customers generated, such payments are
charged to expense as incurred.  All other advertising costs are expensed as
incurred.  At December 31, 2000 and September 30, 2001, $254 and $58,
respectively, of prepaid advertising were included in prepaid expenses.
Advertising expense was $6,631 and $3,152 during the nine months ended September
30, 2000 and 2001, respectively.

Web Site Development Costs

Web site development costs are accounted for in accordance with SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use."  No website development costs were capitalized in the nine months
ended September 30, 2000 and 2001.

Fixed Assets

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

                                       5
<PAGE>

Valuation of Long-Lived Assets

The Company continually evaluates whether events or circumstances have occurred
that indicate that the remaining useful lives of its long-lived assets,
primarily fixed assets and intangibles, should be revised or that the remaining
balance of such assets may not be recoverable using objective methodologies.
Such methodologies include evaluations based on the undiscounted cash flows
generated by the underlying assets or other determinants of fair value.  As of
December 31, 2000 and September 30, 2001, management believes that no reductions
to the remaining useful lives or write-downs of long-lived assets are required
other than those recorded in connection with the discontinued operation.  See
Note 3.

Revenue Recognition

Revenues, which are generally related to food sales, are recognized when
products are shipped. Food sales include amounts billed for shipping and
handling and are presented net of promotional free food products provided to
consumers.

Income Taxes

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

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

Stock Options

The Company accounts for stock option plans under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."  See Note 4.

Fair Value of Financial Instruments

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

Net Income and Loss Per Common Share

The Company has presented net income and loss per common share pursuant to SFAS
No. 128, "Earnings per Share," and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98.  Basic income and loss per common share was computed
by dividing net income and loss applicable to common stockholders by the
weighted average number of shares of common stock outstanding.  The impact of
common stock equivalents has not been included in the weighted average shares
for diluted loss per share purposes since its effect would be anti-dilutive.

Recently Issued Accounting Pronouncement

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

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and
Other Intangible Assets" (effective for the Company on January 1, 2002).  SFAS
No. 141 prohibits pooling-of-interests accounting for acquisitions.  SFAS No.
142 specifies that goodwill and

                                       6
<PAGE>

some intangible assets will no longer be amortized but instead will be subject
to periodic impairment testing. The Company is in the process of evaluating the
financial statement impact of adoption of SFAS No. 142.


Use of Estimates

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

Certain Reclassifications

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

3.   DISCONTINUED OPERATION

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

As a result of a determination made in December 2000, the Company discontinued
sales of the Sweet Success product line in June 2001.  The results of the Sweet
Success product line have been reported separately as a discontinued operation
in the Company's consolidated financial statements.  Under the Company's
ownership for the first six months ending June 30, 2001, Sweet Success generated
sales of $3,350 and generated operating income of $813.  The net assets and
liabilities of the discontinued operation have been recorded at their net
realizable value in the accompanying consolidated balance sheet at December 31,
2000 and September 30, 2001 consist of the following:


                                      December 31, 2000    September 30, 2001

     Receivables                          $     --             $     --
     Inventories                             1,544                   --
     Other assets                               24                   --
                                          --------             --------

        Total assets                         1,568                   --

     Accounts payable                           41                   --
     Other current liabilities               1,960                  163
                                          --------                -----
        Total liabilities                    2,001                  163
                                          --------             --------
        Net assets (liabilities) of
          discontinued operation          $   (433)            $   (163)
                                          ========             ========

4.   CAPITAL STOCK

Common Stock

In October 1999, the Company completed a private placement of 7,637,400 shares
of common stock, which, net of related expenses, resulted in proceeds of $7,574.
In October 2000, the vast majority of these shares became eligible for sale
under Rule 144 of the Securities Act of 1933.  In March 2000, the Company
completed a private placement of

                                       7
<PAGE>

500,000 shares of common stock, which resulted in net proceeds of $2,462. The
Company issued 65,000 shares valued at $5.00 per share in March 2000 and 50,000
shares valued at $6.00 per share in May 2000 in payments to service providers.
In August 2000, the Company issued 900,000 shares valued at $9,365 in the
aggregate or $10.41 per share (assuming a 10% discount for illiquity on the
closing date) in connection with the acquisition of certain assets of the Sweet
Success product line. The Company also issued the following shares of stock in
2000 upon the exercise of common stock warrants: 3,000 in March, 17,000 in
September and 22,391 in October. The Company issued 1,666 shares upon the
exercise of common stock options in November 2000.

Treasury stock is accounted for using the cost method.  In the first nine months
of 2001, the Company repurchased 1,090,400 shares of common stock for an
aggregate cost of $522 (an average price of $0.48 per share) and accounted for
the repurchased shares as treasury stock.

Preferred Stock

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

5.   STOCK OPTIONS AND WARRANTS

Stock Option Plans

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

                                       8
<PAGE>

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

     Except for the historical information contained herein, this Report on Form
10-Q contains certain forward-looking statements that involve substantial risks
and uncertainties. When used in this Report, the words "anticipate," "believe,"
"estimate," "expect", and similar expressions, as they relate to Nutri/System,
Inc. or its management, are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these forward-
looking statements. Factors that could cause or contribute to such differences
include those set forth in "Business--Risk Factors" as disclosed in the
Company's Form 10K filed March 30, 2001 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.

Background

     Nutri/System provides weight loss programs and distributes pre-packaged
foods.  The Company was formed to combine the well-established Nutri/System name
and proven weight loss program with the Internet as a medium of communication.
The Nutri/System diet program was originally developed by the Company's
Predecessor Businesses that operated through company-owned and franchised weight
loss centers.  Currently, 10 owners of independent, franchised weight loss
centers remain, with territories encompassing less than 1% of the United States
population.  In 1998, the Company initiated NutriSystem Direct, L.L.C., a direct
marketing program of independent distributors of the Company's diet program.
The Company's pre-packaged foods are now sold to weight loss program
participants through the Internet, independent distributors and the remaining
franchised weight loss centers.  In the second and third quarters of 2001, the
Company also sold foods through QVC, a shopping television network.  In
September 2000, the Company changed its name from nutrisystem.com inc. to
Nutri/System, Inc.

     Since the Nutri/System businesses began in 1972, they have operated in
various organizational and legal structures and they were subject to a
bankruptcy proceeding in 1993, which was discharged in 1994. In August 1999,
Ansama, a non-operating public corporation, entered into an Asset Purchase
Agreement to acquire the operating assets and certain liabilities of
Nutri/System L.P. for $3,000 and a Stock Exchange and Purchase Agreement to
acquire the beneficial interests in NutriSystem Direct, L.L.C. for $400 and
17,500,000 shares of Ansama common stock.  Ansama was subsequently merged into
the Company and the Company assumed the Asset Purchase Agreement and the Stock
Exchange and Purchase Agreement.  In order to fund its cash obligations of
$3,400 under the Asset Purchase and Stock Exchange and Purchase Agreements and
the planned marketing program and technology investment, the Company completed a
private placement of 7,637,400 shares of common stock in October 1999, which,
net of related expenses, resulted in proceeds of $7,574.  In March 2000, the
Company completed a private placement of 500,000 shares of common stock, which
resulted in net proceeds of $2,462.  In 2000, the Company also issued a total of
115,000 shares of common stock valued at an aggregate of $625 to service
providers. In the first nine months of 2001, the Company repurchased 1,090,400
shares of common stock for an aggregate cost of $522 (an average price of $0.48
per share).

     The net proceeds of the private placement and other equity sale
transactions described above are being used for working capital and for
investments consistent with the Company's business strategy, including marketing
and promotion, web site enhancements and the development of administrative
infrastructure.  To date the Company, together with its Predecessor Businesses,
has incurred significant losses and, as of September 30, 2001, had an
accumulated deficit of $25,528.  The Company believes that potential profit
margins and revenue growth justify the expenditures required to pursue its
business strategy.  In order to make the future investments necessary to expand
its business as described above and to meet its cash flow requirements, the
Company may need to raise capital through the sale of additional equity in a
private offering.  Based on the variable nature of a portion of the Company's
expenditures, the cash balance at September 30, 2001 and management's belief
that additional equity financing, if required, can be raised, the Company
believes that it has the ability to continue in operations into 2002.  Achieving
and maintaining profitability depends primarily upon the Company's ability to:
(1) reduce advertising and marketing spending per new customer acquired, and (2)
generate and sustain increased revenue levels.  There can be no assurance that
the Company will be able to obtain the necessary capital to fund operating and
investment needs or to generate sufficient revenues to achieve or sustain
profitability in the future.

Discontinued Operation

     On August 25, 2000, the Company acquired certain assets of the Sweet
Success product line from Nestle USA,

                                       9
<PAGE>

Inc. (the "Seller") in return for 900,000 shares of the Company's common stock,
representing 3.1% of the shares outstanding after the transaction. Sweet Success
is a diet meal replacement product line distributed in traditional retail
outlets such as drug and grocery stores and price clubs. In the transaction, the
Company acquired certain assets directly related to the Sweet Success product
line, including inventory, books and records, contracts and intellectual
property such as trademarks and product specifications. The Company did not
acquire any customer receivables or fixed assets, and the Company did not assume
any liabilities, beyond those obligations associated with certain contracts, in
connection with the acquisition. The shares of common stock issued to the Seller
are unregistered and restricted. The Company entered into a registration rights
agreement with the Seller that provides demand registration rights after April
15, 2001.

     As a result of a determination made in December 2000, the Company
discontinued sales of the Sweet Success product line in June 2001.  Under
existing market conditions, the Company was unable to obtain the funding
required to rebuild the Sweet Success brand through consumer promotion.
However, the Company was able to generate $1,212 in net positive cash flow in
2000 from the product line, consisting of $8,586 in operating losses offset by
$8,197 in non-cash expenses and a positive $1,601 in cash generated from
reductions in working capital.  In the first nine months of 2000 and 2001, the
Sweet Success product line resulted a positive $492 and $543 net cash flow,
respectively, as cash generated through the disposal of inventory exceeded
payments related to the operation and shut down of the product line.

     The results of the Sweet Success product line have been reported separately
as a discontinued operation in the accompanying consolidated financial
statements.  Under the Company's ownership for the quarters ending March 31,
June 30, and September 30, 2001, Sweet Success generated sales of $3,082, $268
and $0, respectively.

Results of Operations

     In pursuing its business strategy, the Company's primary financial
objectives are to generate growth while maintaining profit margins.  The Company
measures growth in terms of the number of new customers, revenues per customer
and total revenues.  A customer is defined as an individual who has purchased
food through the web site.  Profit margins are measured in terms of gross margin
(revenues less cost of revenues as a percentage of revenues), and total
advertising and marketing expense as a percentage of revenues.  In order to
remove the effects of seasonality, current period results are compared to the
same period in prior years.

     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 members and sales credits and adjustments, including product returns.
Internet revenues began with the launch of the web site in October 1999.  No
revenue is recorded for food products provided at no charge as part of
promotions.  Revenues from product sales are recorded when shipped.

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

     Advertising and Marketing Expense.  Advertising and marketing expense
includes advertising, market research, 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.  Generally Internet advertising expense is
recognized based on the rate of delivery of a guaranteed number of impressions
over the advertising contract term.  All other advertising costs are expensed as
incurred.

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

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

                                       10
<PAGE>

     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 has been recorded given the uncertainty of future
operating results.

Internet Operations

     The Company launched its web site on October 15, 1999.  Developing Internet
operations is central to the Company's business strategy.  However, because of
the web site's limited operating history, historical period-to-period
comparisons, while helpful in evaluation, should not be relied upon as an
indication of future performance.


                              INTERNET OPERTATIONS

                  SELECTED FINANCIAL AND OPERATING STATISTICS

<TABLE>
<CAPTION>

                                                          Three Months Ended           Nine Months Ended
                                                             September 30                September 30
                                                          2000          2001           2000         2001
                                                        --------      --------       --------     --------
<S>                                                     <C>           <C>            <C>          <C>
Revenues (000's)                                        $  3,788      $  5,293       $ 10,671     $ 15,899

Cost of revenues (000's)                                   1,767         2,799          4,940        8,067
                                                        --------      --------       --------     --------

  Gross margin (000's)                                  $  2,021      $  2,494       $  5,731     $  7,832
    % of revenue                                            53.4%         47.1%          53.7%        49.3%

Advertising and marketing (000's)                       $  1,662      $    730       $  6,782     $  3,244
% of revenue                                                43.9%         13.8%          63.6%        20.4%

New customers (Note 1)                                    12,472        10,248         38,304       37,207

Advertising and marketing/new
customer (Note 1)                                       $    133      $     71       $    177     $     87

Revenues/new customer (Note 1)                          $    304      $    379       $    279     $    367
</TABLE>

Note 1: The indicated statistics exclude any customers and revenues associated
with sales to QVC.

     In the second quarter of 2001, the Company began distribution of its
proprietary prepackaged food through QVC, the shopping television network.  On
the QVC network, the Company reaches a large, incremental audience in a 50
minute, infomercial format that enables the Company to convey fully the benefits
of the Nutri/System diet foods.  Under the terms of the Company's agreement with
QVC, QVC viewers purchase Nutri/System products directly from QVC and are not
directed to the Nutri/System web site.  Retail prices (including shipping and
handling) offered on QVC to consumers are similar to prices offered on the web
site.  The Company generates a lower gross margin (as a percent of sales) on
sales to QVC relative to web site sales, but QVC sales require no incremental
advertising and marketing expense and, the Company believes, exposure on QVC
raises consumer awareness of the Nutri/System brand.  Reflected in the three
months and nine months ending September 30, 2001 results is $1,408 and $2,236,
respectively, in QVC sales (valued at the Company's selling price to QVC)
generated from eight 50 minute QVC shows.

                                       11
<PAGE>

     Over the course of 2001, the Company also increased its marketing to
dieters that prefer ordering food by telephone rather than through the Internet.
Currently, approximately 10% of new customers interact with Nutri/System by
telephone.  Margins on telephone sales are approximately the same as Internet-
generated sales.

     Revenues generated through Internet operations, including QVC and telephone
orders discussed above, increased 39.7% from the third quarter of 2000 to the
third quarter of 2001.  The spending on advertising and marketing required to
generate those sales declined 56.1% in the same period, resulting in a decline
in advertising and marketing cost as a percentage of revenues from 43.9% in the
third quarter of 2000 to 13.8% in the third quarter of 2001.  Revenues increased
as a result of greater advertising effectiveness and the addition of QVC as a
distribution channel.  Advertising and marketing per new customer (customer
acquisition cost) declined 46.6% from $133 to $71 from the third quarter 2000 to
2001.  The Company believes the sharp increase in advertising effectiveness was
a result of a) curtailing spending for ineffective advertising media, b) higher
spending for effective media, c) lower pricing on Internet advertising, d)
greater brand awareness among likely consumers in 2001, e) the acquisition of
customers through word-of-mouth referrals generated by the expanding base of
former clients, and f) clients returning to the program in 2001 after having
success with the online program earlier in 2000.

     Relative to the third quarter of 2000, the Company spent approximately
$1,100 less in Internet and direct mail advertising and $220 more in television
advertising in the third quarter of 2001.  Over the course of 2000, the Company
concluded that television advertising was more cost effective than most forms of
Internet and radio advertising.  By evaluating a variety of Internet advertising
opportunities and by obtaining more favorable pricing, the Company identified
selected Internet advertising programs that it deems cost effective.  Because
target consumers had virtually no awareness of the online version of the
Nutri/System diet plan when it started in October 1999, all promotion in 2000
had the effect of increasing brand awareness that, the Company believes, will
support revenue growth and advertising effectiveness going forward.

     Excluding QVC-related sales, total revenue per new customer acquired
increased 24.7% from $304 in the third quarter of 2000 to $379 in the third
quarter of 2001.  Total revenue per new customer acquired increased as the
Company generated high repeat sales from new customers and obtained sales from
an ever increasing pool of prior customers returning to start new diets.

     While Internet revenues increased, gross margin as a percentage of sales
decreased from 53.4% in the third quarter of 2000 to 47.1% in the third quarter
of 2001.  This decline is primarily related to the lower margins generated from
the $1,408 in sales to QVC.  Offsetting its lower margins, QVC sales require no
incremental advertising and increase exposure to the Nutri/System brand.

     Internet results for the first nine months of 2001 also showed significant
improvement over the same period in 2000. Revenues increased 49.0% from the
first nine months of 2000 to the first nine months of 2001.  The spending on
advertising and marketing declined 52.2% in the same period, resulting in a
decline in advertising and marketing cost as a percentage of revenues from 63.6%
in the first nine months of 2000 to 20.4% in the first nine months of 2001.
Advertising and marketing per new customer (customer acquisition cost) declined
50.8% from $177 to $87 from the first nine months of 2000 to 2001.  Gross margin
as a percentage of sales decreased from 53.7% in the first nine months of 2000
to 49.3% in the first nine months of 2001, primarily as a result of QVC.

Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 2001

     Revenues.  Revenues increased from $5,098 for the quarter ended September
30, 2000 to $6,329 for the quarter ended September 30, 2001.  The revenue
increase of  $1,231, or 24.1%, resulted primarily from an increase in revenue in
the Internet operations including sales to QVC ($1,505) offset by decreased
revenue in the Direct and Franchise operations ($274).

     Costs and Expenses.   Cost of revenues increased from $2,715 to $3,589 for
the quarters ended September 30, 2000 and 2001, respectively.  Gross margin
(revenues less cost of revenues as a percentage of revenues) was 46.7% and 43.3%
for the quarters ended September 30, 2000 and 2001, respectively.  Sales to QVC
generate a lower gross margin than sales made by the web site directly, and QVC
sales reduced the overall gross margin percent in the quarter ended September
30, 2001 relative to the same quarter in 2000.  Advertising and marketing
expense decreased from $1,662 to $730 from the third quarter of 2000 to the
third quarter of 2001. Virtually all advertising in these quarters promoted the
Internet program.  General and administrative expenses increased from $1,560 to
$1,620 from the third quarter of 2000 compared to the third quarter of 2001.
This increase of $60 is due primarily to an increase in compensation expense

                                       12
<PAGE>

($110) and other costs that were connected to establishing the Internet
business, offset by a decrease in professional services ($57) and outside
services ($45).

     Interest Income.  Interest income (net of interest expense) decreased $26
from $43 in the third quarter of 2000 to $17 in the third quarter of 2001
primarily due to lower cash balances and decreased interest earned on cash
balances  due to lower interest rates.

     Net Income and Loss.  The Company incurred a net loss of $943 for the
quarter ended September 30, 2000 as compared to net income of $370 for the
quarter ended September 30, 2001. This variance of $1,313 was due primarily to
increased Internet sales and decreased advertising costs and to a lesser degree
the loss associated with the discontinued Sweet Success product line.

Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
2001

     Revenues.  Revenues increased from $15,790 for the for the nine months
ended September 30, 2000 to $19,531 for the nine months ended September 30,
2001.  The revenue increase of $3,741, or 23.7%, resulted primarily from the
growth of Internet food sales ($5,228), offset by lower franchise and Direct
food sales and franchise royalty revenue.

     Costs and Expenses.  Cost of revenues increased from $8,588 to $10,828 for
the nine months ended September 30, 2000 and 2001, respectively. Gross margin
(revenues less cost of revenues as a percentage of revenues) was 45.6% and 44.6%
for the nine months ended September 30, 2000 and 2001, respectively. Gross
margin increased in 2001 as sales generated by the Company's web site increased.
Offsetting this was the impact of lower margin sales to QVC and price
promotions, which lowered gross margin. Advertising and marketing expense
decreased from $6,782 to $3,244 from the first nine months of 2000 to the first
nine months of 2001. Virtually all advertising in these quarters promoted the
Internet program. General and administrative expenses increased from $4,183 to
$4,904 from the first nine months of 2000 compared to the first nine months of
2001. This increase of $721 is due primarily to an increase in compensation
expense ($726), rent ($96) and other costs that were connected to the Internet
business, offset by a decrease in professional services ($200).

     Interest Income.  Interest income (net of interest expense) decreased $57
from $144 in the first nine months of 2000 to $87 in the first nine months of
2001 primarily due to lower cash balances and decreased interest earned on cash
balances due to lower interest rates.

     Net Income and Loss.  The Company incurred a net loss of $3,887 for the
nine months ended September 30, 2000 as compared to net income of $1,196 for the
nine months ended September 30, 2001. This variance of $5,083 was due primarily
to increased Internet sales and decreased advertising costs as well as income
from the discontinued Sweet Success product line.


Liquidity, Capital Resources and Other Financial Data

     At September 30, 2001, the Company had net working capital of $2,324. Cash
and cash equivalents were $1,565. The Company's principal source of liquidity
was the cash obtained from private placement transactions completed in 2000
coupled with a positive cash flow from operations for the first nine months of
2001. The Company currently has no bank debt or term or revolving credit
facilities to fund operating cash flow or investment opportunities.

     In the nine months ended September 30, 2001, the Company generated a
positive cash flow of $532 from operations, primarily attributable to net income
adjusted for non-cash items partially offset by increases in working capital.

     In the nine months ended September 30, 2001, net cash used by investing
activities was $83, which primarily consisted of capital expenditures incurred
to increase web site capacity.

     In the nine months ended September 30, 2001, net cash used in financing
activities amounted to $522, representing common stock purchased in open market
and privately negotiated transactions.

     Over the first nine months of 2001, the Company eliminated virtually all
remaining marketing agreements requiring future minimum fixed fees.  As of
September 30, 2001, the Company's principal commitments consisted of

                                       13
<PAGE>

obligations under operating leases. Although the Company has no material
commitments for capital expenditures, it anticipates continuing requirements for
capital expenditures consistent with anticipated growth in operations,
infrastructure and personnel.

     In pursuing its business strategy, the Company anticipates it may require
additional cash for operating and investing activities. The Company expects
future cash requirements, if any, to be funded from financing activities, which
may include additional private offerings of equity securities. Based on the
variable nature of a portion of the Company's expenditures, the cash balance at
September 30, 2001 and management's belief that additional equity financing can
be raised, the Company anticipates that it has the ability to continue
operations through the year 2002. However, there can be no assurance that the
Company will be able to raise the necessary capital or generate sufficient
revenues to achieve or sustain profitability in the future. There are no credit
facilities available to fund working capital or investment needs.

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

Factors Affecting Business and Prospects

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

Inflation

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

Recently Issued Accounting Pronouncements

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


Item 3.  Quantitative and Qualitative Disclosure About Market Risk

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

                                       14
<PAGE>

                          PART II -- OTHER INFORMATION


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

         None

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:

         None

b.  Reports on Form 8-K:

         Report filed on September 18, 2001 on promotion agreement signed on
  September 9, 2001 between Nutri/System, Inc. and QVC.

                                       15
<PAGE>

                                   SIGNATURES

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

Nutri/System, Inc.

BY: /S/ BRIAN D. HAVESON                           October 31, 2001
    --------------------                           ----------------
Brian D. Haveson
President and Chief Executive Officer

BY: /S/ JAMES D. BROWN                             October 31, 2001
    ------------------                             ----------------
James D. Brown
Chief Financial Officer and Principal Accounting Officer

                                       16
<PAGE>

                                 Exhibit Index
                                 -------------

  No.
  ---
  10.15    Promotion agreement signed on September 9, 2001 between Nutri/System,
           Inc. and QVC. *
_______
* Incorporated by reference to exhibit 99.3 of the Company's Report on Form 8-K
filed on September 18, 2001 (file number 000-28551).

                                       17