NUTRISYSTEM COM INC - 10-K Annual Report

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

FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended DECEMBER 31, 2000

[ ] 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)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 706-5300

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $.001 par value

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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 20, 2001: $8,253,473

Number of shares outstanding the Registrant's Common Stock,
$.001 par value, as of March 20, 2001: 28,735,794

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for Nutri/System, Inc.'s Annual
Meeting of Stockholders to be held on May 11, 2001 are incorporated by reference
into Part III of this Form 10-K.

NUTRI/SYSTEM, INC.

TABLE OF CONTENTS

Page
----

Item 1. Business........................................................ 3

Item 2. Properties...................................................... 10

Item 3. Legal Proceedings............................................... 10

Item 4. Submission of Matters to a Vote of Security Holders............. 10

Executive Officers of the Registrant............................ 10

Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters............................................. 12

Item 6. Selected Consolidated Financial Data............................ 12

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 15

Item 7a. Quantitative and Qualitative Disclosure About Market Risk....... 20

Item 8. Financial Statements and Supplementary Data..................... 20

Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 20

Item 10. Directors and Executive Officers of the Registrant.............. 21

Item 11. Executive Compensation.......................................... 21

Item 12. Securities Ownership of Certain Beneficial Owners and Management 21

Item 13. Certain Relationships and Related Transactions.................. 21

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 22

2

PART I

ITEM 1. BUSINESS

BACKGROUND

Nutri/System, Inc. (a Delaware corporation) together with its subsidiaries
("Nutri/System" or the "Company") 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, including Nutri/System L.P. and Nutri/System
Direct, L.L.C. (collectively, the "Predecessor Busisnesses"), that operated
through company-owned and franchised weight loss centers. Currently, 11 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
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 million and a Stock Exchange and Purchase Agreement to
acquire the beneficial interests in NutriSystem Direct, L.L.C. for $400,000 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.

On August 25, 2000, the Company acquired certain assets of the Sweet
Success line of diet meal replacement products. In December 2000, the Company
determined that it would be unable to obtain the funding required to rebuild the
Sweet Success brand and concluded that it would sell or discontinue sales of the
products by June 30, 2001. Sweet Success is reflected in the Consolidated
Financial Statements as a discontinued operation.

INDUSTRY

Weight loss is a challenge for a significant portion of the American
population. Recent studies cited by the Journal of the American Medical
Association reported that approximately 100 million Americans are overweight.
Furthermore, the incidence of obesity in the United States, as defined by
federal guidelines, increased between 1980 and 1999 from 15% to 27% of the adult
population. Many medical studies have documented a link between obesity and a
variety of health concerns. With obesity rates escalating, Americans are
increasingly at risk for diseases such as diabetes, certain cancers and various
forms of heart disease that may be linked to obesity.

The weight loss industry consists of a wide variety of diet foods and meal
replacement bars and shakes, appetite suppressants, nutritional supplements,
pharmaceutical products and weight loss programs. The domestic market for
weight loss programs, diet foods and diet related books and other information,
excluding vitamins, supplements and minerals, was estimated by Market Data
Enterprises, Inc. to be in excess of $7 billion in the year 2000.

PRODUCTS, SERVICES AND MARKET POSITION

Nutri/System is a leading online diet and weight loss company. Through its
web site, www.nutrisystem.com, Nutri/System provides a comprehensive weight
management program, including individualized diet and exercise plans,
pre-packaged, private label food, online counseling, support groups, bulletin
boards and chat rooms. The Company's online program addresses many of the most
common limitations of traditional weight loss programs, including high
initiation and recurring membership fees, the inconvenience of traveling to
weight loss centers for scheduled appointments and lack of privacy. The
Company's program allows members to participate conveniently and privately from
their own homes or offices and incorporates the use of pre-packaged,
shelf-stable private label food, which has been developed under the guidance of
its team of registered nutritionists. Nutri/System currently offers menu
customization from over 100 food selections, which members can order 24 hours a
day, seven days a week.

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The Nutri/System online diet program is well positioned to pursue the
weight loss market from a number of perspectives, including:

Brand identity. For 29 years, the Nutri/System name has been recognized as
a leader in the weight loss industry. This strong brand recognition has
substantially enhanced the effectiveness of advertising promotions. While other
online companies have had to expend substantial capital to create a brand name,
the Company's well-established Nutri/System name provides it with a valuable
asset.

An alternative to center based programs. The Company's program embraces
the important aspects of the weight management experience and appeals to members
through a variety of valuable features. With trained counselors available 117
hours a week to answer questions, members are able to receive the guidance and
support they need. The Nutri/System program offers support channels where
members can voluntarily interact through hosted chat rooms and bulletin boards.
As part of the program, counselors custom design and recommend an exercise
program to help each member achieve his or her weight loss and fitness goals.
These services are complemented with relevant information on diet, nutrition,
exercise and well-being. The Company believes members find these features useful
and worthwhile; currently, members spend an average of over 18 minutes per
session at the Nutri/System web site.

Value for clients. Membership in the Nutri/System program is free and a
full day's supply of entrees and snacks currently are priced at less than $8.00
a day, while the competition charges membership fees as high as $300.00 with
food costs over $10.00 a day. Nutri/System's free membership encourages
customers who refuse to adopt a fee-based program to embrace its innovative
program where they receive information, community features and support and
counseling at no cost.

Barriers to entry. The Company's largest weight loss competitors have yet
to offer their programs online. Concerned by cannibalization of their center-
based programs and food sales as well as territorial exclusivity rights of
franchisees, to date these competitors have limited their online sites primarily
to descriptions of their programs and referrals to bricks and mortar locations
providing their traditional service.

Cost and scalability. By utilizing the Internet to process transactions
(such as order entry and processing) and provide services to members (such as
real-time counseling, integrated chat and bulletin boards, newsletters and
personal reminders), the Company believes it can expand operations to serve more
members more quickly and at a lower incremental cost than if it were operating a
traditional center-based diet program.

MARKETING AND ADVERTISING

The Nutri/System name has been established over the course of almost 30
years. The Company's marketing objective is to leverage Nutri/System's
established brand cost effectively to build participation in the Company's web
site and sales of its food program. The Company uses a combination of online
and traditional offline marketing and advertising strategies, including a
before-and-after campaign. The Company uses multiple marketing channels to
reduce reliance on any one source of customers, lower customer acquisition costs
and maximize brand awareness.

Offline advertising. Offline advertising has become the primary means for
driving qualified customers to the Company's web site and increasing awareness
of the online program. Nutri/System reaches its target audience through a
combination of television, direct mail and radio. On television, direct
response-focused advertisements capitalize on the Nutri/System brand name and
use the proven "before and after" promotional message. Direct mail is a
companion to the media advertising and consists of mailings to the Nutri/System
database of more than 500,000 customers of the Predecessor Businesses as well as
members who have visited the Company's web site previously.

Online advertising. The Company's online advertising strategy includes the
use of banner, keyword and sponsorship placements, email newsletters, targeted
direct email programs and affiliate programs. Nutri/System advertises on sites
that target consumers seeking weight loss and weight management. The
effectiveness of each site and banner is measured and analyzed to optimize the
cost and performance of the campaign. Since the start of its online advertising
activities, the Company has moved aggressively to eliminate or substantially
renegotiate rates for sites that have not proven cost effective.

The Internet also provides Nutri/System with the ability to market to its
current email database which, as of March 2001, consisted of over 500,000 email
addresses. The Company's email efforts include direct email campaigns

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with special offers as well as new product announcements or special events. The
Company believes this method maintains customer loyalty and generates repeat
sales at a low cost.

FULFILLMENT

Nutri/System currently operates a 27,000 square foot order fulfillment
center in Horsham, Pennsylvania and a 37,000 square foot order fulfillment
center in Reno, Nevada, both featuring computer-assisted picking and automated
conveyor systems. The Company maintains direct ownership and control over
operations in its distribution centers in order to fill customer orders promptly
and accurately.

All Internet customer orders received by 5:00 p.m. weekdays are available
for same-day shipment. Internet customers are not charged for their orders
until the ordered product is shipped. The Company maintains available inventory
in all stock keeping units, eliminating delays in orders caused by "stock outs."
By locating distribution centers near the East and West Coasts, the Company
estimates that 90% of the domestic population can be reached by its shippers
within three business days using standard ground transportation. The Company
ships to its members using either Federal Express or United Parcel Service. It
does not currently charge customers for shipping and handling on food orders of
four weeks or more.

In 2000, Nutri/System improved fulfillment operations at its Pennsylvania
facility by enhancing the systems, equipment and layout and installed these
features in a new fulfillment facility in Reno, Nevada. At both locations, the
Company installed an integrated order receipt, billing, picking, shipping and
delivery tracking system comprised of proprietary and third party components.
This system integrates the front end, or web site customer interface, with order
processing and shipping, and allows Internet customers to access shippers' order
tracking numbers online. The Company's computer-assisted picking system allows
for virtually paperless order picking, improved productivity and increased
picking accuracy.

TECHNOLOGY

The Company's technology infrastructure is designed to provide:

. continuous web site availability;
. a high degree of security and privacy for the Company and its members;
. ease of web site use and responsiveness;
. back end support for order processing, fulfillment and administrative
requirements; and
. scalability and flexibility to support rapid growth.

Physical web site hosting is maintained in two locations by hosting service
providers. These third parties provide technologically advanced physical and
fire security and electric power back-up for the equipment on which the
Company's web site operates. They also monitor the Company's servers and their
network connections 24 hours a day, seven days a week.

Servers at both sites are connected on a real-time basis using advanced
clustering technology. This arrangement provides us with continuous back-up and
fail-over protection in the unlikely event that either system should fail. It
also provides the server load balancing, scalability and flexibility required to
accommodate rapid growth.

COMPETITION

The weight loss market is served by a diverse array of competitors.
Potential customers seeking to manage their weight can turn to traditional
center-based competitors, medically supervised programs, online diet-oriented
sites or other self-administered products and programs.

The principal competitive factors in the online market are:

. the ability to attract and retain customers through promotion and personal
referral;
. the availability, convenience and effectiveness of the weight reduction
program;
. brand recognition and trustworthiness; and
. program pricing.

5

The Company believes it can compete effectively on these factors. However,
it has no control over how successful competitors will be in addressing these
factors. By migrating a well-recognized center-based program to the Internet,
the Company believes it has gained a competitive advantage in that market.

Many current and potential competitors have larger customer bases, similar
or greater brand recognition and significantly greater financial, marketing and
other resources than the Company's. Competitors have and are expected to
continue to adopt aggressive pricing schemes and innovative product and service
offerings. Increased competition may result in reduced operating margins, an
inability to increase market share and a diminished brand franchise for
Nutri/System and its competitors.

SEASONALITY

Typically, revenues of weight loss business, including the Company and
the Predecessor Businesses, are lowest in the fourth calendar quarter and during
the summer months.

EMPLOYEES

As of March 23, 2001, the Company had 113 full-time employees. None of the
Company's employees are represented by a labor union and the Company considers
its relations with its employees to be good.

6

RISK FACTORS

You should consider carefully the following risks and uncertainties when
reading this Annual Report on Form 10-K. If any of the events described below
actually occur, the Company's business, financial condition and operating
results could be materially adversely affected.

The limited history of the Company's Internet operations makes revenue and
expense forecasting difficult and could result in results of operations being
worse than expected.

As a result of the Company's limited history of providing products and
services on the Internet, it is difficult to forecast revenues accurately and
there is limited meaningful historical financial data upon which to base planned
operating expenses. If revenues from the online diet program are not as high as
expected, the Company would have difficulty reducing some of its expenses in the
short term. A failure to forecast revenues accurately could cause results of
operations in a given quarter to be worse than expected.

If consumers do not widely accept an online source for weight loss products and
services, the Company will be unable to increase its customer base.

The Company's success depends on attracting and retaining a high volume of
online customers. Factors that could prevent or delay the widespread consumer
acceptance of purchasing weight loss products and services online include
problems with or customer concerns about:

. the security of online transactions;
. the loss of privacy with respect to personal weight and health information;
. delays in responses to inquiries;
. delivery time associated with online orders, compared to the immediate
receipt of products at a store or weight loss center;
. shipping charges, which do not apply to shopping at stores or traditional
weight loss centers;
. the ability to return or exchange orders;
. the absence of personal contact with counselors and other dieters; and
. the loss of the discipline, accountability and support associated with
group sessions.

If the Company does not receive adequate supply from its food and other
manufacturers, revenues and earnings could suffer.

The Company relies solely on contract manufacturers to supply all of the
food and other products it sells. The Company does not have written contracts
with any suppliers and it is subject to numerous risks associated with these
suppliers' businesses, including labor disruptions, delivery problems, shortages
of ingredients and equipment failure. If the Company cannot supply a sufficient
quantity, quality and variety of products to its customers on acceptable
commercial terms, it would lose revenues and market share or incur higher costs.

The Company is dependent on its chief executive officer and other key managers
for future success and these persons are not obligated to stay with the Company.

The Company's future success depends to a significant degree on the skills,
experience and efforts of Brian D. Haveson, our Chief Executive Officer, and
other key managerial personnel. The loss of the services of any of these
individuals could harm the business. The Company does not have an employment
agreement with Mr. Haveson or any other key personnel. In addition, the Company
has not obtained key person life insurance on any key employees. If any key
employees left Nutri/System or were seriously injured and became unable to work,
the business could be harmed.

The Company may be subject to health-related claims from members or customers.

The Company's weight loss program does not include medical treatment or
advice, and the Company does not engage physicians or nurses to monitor the
progress of its members. Many persons who are overweight suffer from other
physical conditions, and Nutri/System's target consumers could be considered a
high-risk population in some respects. A member who experiences health problems
could bring a lawsuit against the Company alleging that such problems were
caused by participation in the weight loss program because certain side effects
can be associated with weight loss. For example, the Company's Predecessor
Businesses suffered substantial losses due to allegations that their weight loss

7

programs led to gall bladder disease, even though no medical link was proven.
Persons who suffer side effects while participating in the program may assert
claims against the Company whether or not the program was responsible for
causing the effects. Although the Company carries general liability insurance,
its insurance does not cover claims of these types.

The weight loss industry is subject to adverse publicity, which could harm the
business.

The weight loss industry receives adverse publicity from time to time, and
the occurrence of such publicity could harm the Company, even if the adverse
publicity is not directly related to Nutri/System. In the early 1990s, the
Predecessor Businesses were subject to extremely damaging adverse publicity
relating to a large number of lawsuits alleging that the Nutri/System weight
loss program led to gall bladder disease. This publicity was a factor that
contributed to the bankruptcy of our Predecessor Businesses in 1993. More
recently, the Predecessor Businesses were severely impacted by significant
litigation and damaging publicity related to the use by members of the weight
loss program of fen-phen as an appetite suppressant, which the Food and Drug
Administration (the "FDA") ordered withdrawn from the market in September 1997.
The significant decline in business resulting from the fen-phen problems caused
the Predecessor Businesses to close all of their company-owned weight loss
centers. Congressional hearings about certain practices in the weight loss
industry have also resulted in adverse publicity and a consequent decline in the
revenues of weight loss businesses. Future research reports or publicity that
are perceived as unfavorable or that question certain weight loss programs,
products or methods could result in a decline in the Company's revenues.
Because of the Company's dependence on consumer perceptions, adverse publicity
associated with illness or other undesirable effects resulting from the
consumption of the Company's products or competitors' similar products, whether
or not accurate, could also damage customer confidence in the Nutri/System
weight loss program and result in a decline in revenues. Adverse publicity
could arise even if the unfavorable effects associated with weight loss products
or services resulted from the user's failure to use such products or services
appropriately.

The weight loss industry is subject to governmental regulation that could
increase in severity and hurt results of operations.

Certain advertising practices in the weight loss industry have led to
investigations from time to time by the Federal Trade Commission (the "FTC") and
other governmental agencies. Many companies in the weight loss industry,
including the Predecessor Businesses, have entered into consent decrees with the
FTC relating to weight loss claims and other advertising practices. The Company
continues to be subject to such consent decrees. These consent decrees restrict
the manner in which the Company's advertising describes the success members have
achieved in losing weight through the program and require the Company to include
the phrase "results not typical" in such advertisements. The Company cannot be
sure that this regulation will not increase in scope or severity in the future,
which could have a material adverse impact on its business. Remedies available
in administrative actions may include requiring the Company to refund amounts
paid by all affected customers or pay other damages, which could be substantial.

The Company may be subject to health-related claims or other liabilities by
customers of the Predecessor Businesses, and such claims or liabilities could
adversely affect results of operations.

The Predecessor Businesses were subject to numerous claims based on various
health-related concerns during their 29-year operating history, including most
recently, claims related to the use of fen-phen. Although American Home
Products has agreed to indemnify the Company against the fen-phen claims, it may
need to defend itself against such claims. Such litigation, regardless of its
merit and ultimate outcome, is often lengthy and costly. Therefore, if the
Company becomes involved in any such litigation, results of operations could be
negatively affected.

The sale of ingested products involves product liability and other risks.

Like any other distributor of products that are ingested, the Company faces
an inherent risk of exposure to product liability claims if the use of its
products results in illness or injury. The food that the Company resells is
subject to certain laws and regulations of the FDA, which establishes
manufacturing practices and quality standards for food products. If the Company
does not have adequate insurance or contractual indemnification from its
suppliers, product liability claims could have a material adverse effect on the
business. Distributors of weight loss food products, vitamins, nutritional
supplements and minerals, including the Predecessor Businesses, have been named
as defendants in product liability lawsuits from time to time. The successful
assertion or settlement of an uninsured claim, a significant number of insured
claims or a claim exceeding the limits of the Company's insurance coverage would
harm it by adding costs to the business and by diverting the attention of senior
management from the operation of the business. The Company may also be subject
to claims that its products contain contaminants, are improperly labeled,
include inadequate instructions

8

as to use or inadequate warnings covering interactions with other substances.
Product liability litigation, even if not meritorious, is very expensive and
could also entail adverse publicity for the Company and reduce its revenues.

The Company may be subject to claims that its personnel are unqualified to
provide proper weight loss advice.

Most of the Company's counselors for our online diet program do not have
extensive training or certification in nutrition, diet or health fields and have
only undergone the training they receive from the Company. Nutri/System may be
subject to claims from its members alleging that its personnel do not have the
qualifications necessary to provide proper advice regarding weight loss. The
Company may also be subject to claims that its personnel have provided
inappropriate advice or have inappropriately referred or failed to refer members
for matters other than weight loss. Any such claims could result in financial
liability and damage the Company's reputation.

Nutri/System has a history of operating losses and an accumulated deficit and it
may not become profitable.

The Company and its Predecessor Businesses have incurred losses in each of
the last five years. At December 31, 2000, the Company had an accumulated
deficit of $26.7 million. The Company expects to continue to incur significant
operating and capital expenditures to develop its business. The Company needs
to generate significant additional revenues to achieve and maintain
profitability, and it may not be able to do so.

The Company may not be successful in raising necessary additional funds in the
future.

The Company may require additional funds in order to maintain or grow
operations. It would seek such additional funding through public or private
financings. The Company cannot be sure that additional financing would be
available or, if available, that it would be available on acceptable terms. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate advertising programs or the further enhancement of its web
site or discontinue operations completely.

The Company's stock price has been volatile and its trading volume has been low.
these conditions may continue or worsen.

The Company's common stock has been publicly traded on the Nasdaq National
Market since June 16, 2000 at very low trading volumes. The Company cannot
predict when a more liquid trading market may develop and cannot be assured that
the stock will not be delisted from the Nasdaq market, which would further
reduce trading liquidity. In addition, the Company's share price may decline for
reasons related, or unrelated, to future operating results. For example, in
October 2000, the Company's share price declined substantially for reasons it
believes are unrelated to operating performance. There are many factors,
including the risk factors described in this Annual Report on Form 10-K, that
may cause operating results to fluctuate or have a significant adverse effect on
the market price of the Company's common stock.

Certain anti-takeover provisions in the Company's certificate of incorporation
and Delaware law may deter or prevent a change in control of the Company, even
if that change would be beneficial to its stockholders.

Provisions of the Company's certificate of incorporation, bylaws and
Delaware law may have the effect of deterring unsolicited takeovers or delaying
or preventing changes in control of the Company, including transactions in which
its stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests.

The Company's certificate of incorporation permits its Board of Directors
to issue preferred stock without stockholder approval upon such terms as its
Board of Directors may determine. The rights of the holders of its common stock
will be junior to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of the Company's outstanding common
stock. The issuance of a substantial number of preferred shares could adversely
affect the price of the Company's common stock.

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ITEM 2. PROPERTIES

The Company currently leases approximately 48,500 square feet of office and
warehouse space in Horsham, Pennsylvania pursuant to a lease expiring in 2004 at
an annual rent of $335,000 and approximately 37,000 square feet of warehouse
space in Reno, Nevada pursuant to a lease expiring in 2003 at an annual rent of
$124,000. The Company believes these facilities are adequate for its needs for
the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

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

The Company held its Annual Meeting of Stockholders on June 19, 2000. The
following table lists all the director nominees set forth in the Notice of
Annual Meeting and the details of the votes cast for each:

Nominee Votes For Votes Withheld
- -------------------- ---------- ---------------

Brian D. Haveson 17,535,663 10
Michael E. Heisley 17,535,663 10
Frederick C. Tecce 17,535,663 10
Donald R. Caldwell 17,535,673 0
Dean J. Bozzano 17,535,663 10

The Company's 2000 Equity Incentive Plan was approved with 17,470,540 votes
favoring approval, 40,013 opposing and 25,120 abstaining. The Equity Plan for
Outside Directors and Consultants was approved with 17,470,534 votes favoring
approval, 40,019 opposing and 25,120 abstaining. The proposal to amend the
Company's Certificate of Incorporation was approved with 17,470,533 votes
favoring approval, 10 opposing and 110 abstaining.

EXECUTIVE OFFICERS OF THE COMPANY

The Company's executive officers and their respective ages and positions
are as follows:

Name Age Position
- ----------------------------------------- ------------- -----------------------------------------------------------

Brian D. Haveson 37 President, Chief Executive Officer and Director

James D. Brown 43 Chief Financial Officer and Treasurer

Brendon Perero 24 Chief Information Officer

Deborah A. Gallen 42 Vice President, E-Commerce

Joseph J. DiBartolomeo, Ph.D. 49 Vice President, Scientific Affairs

Brian D. Haveson has served as the President, Chief Executive Officer of
Nutri/System and as a member of its Board of Directors since its formation in
August 1999. Mr. Haveson was President of the Company's predecessor from 1997
until 1999 and was Chief Financial Officer of the predecessor from 1993 until
1997. For five years prior thereto, Mr. Haveson was a Manager in the Corporate
Recovery Services Practice of Arthur Andersen LLP. His work encompassed
numerous industries, including retail, manufacturing, trucking, printing,
financial services and health care, assisting with turnarounds and
restructurings for more than 20 companies.

James D. Brown has been the Company's Chief Financial Officer since
December 1999 and its Treasurer since February 2000. Prior to joining
Nutri/System, Mr. Brown was Chief Financial Officer of ImageMax, Inc., a
document management company, from 1997 to 1999, and Chief Financial Officer of
LMR Holdings, a holding company for textile component manufacturers, from 1996
to 1997. During 1995, Mr. Brown was President of Main Line Management, a

10

management consulting firm, and from 1990 to 1994 he was Chief Financial Officer
of Liberty Broadcasting Group, a consolidator of radio broadcasting properties,
and Controller of Lancer Industries, Inc., a diversified manufacturer.

Brendon Perero has been Nutri/System's Chief Information Officer since
August 1999. From 1997 to 1999, Mr. Perero was a Vice President and Senior
Programmer/Developer of INetU, Inc., a firm engaged in Internet hosting and
consulting. From 1997 to 1998, Mr. Perero was also a member of the Design
Council for IBM Net.Commerce and collaborated with IBM for third party
development of e-commerce software. Prior to 1997, Mr. Perero was a college
student.

Deborah A. Gallen has served as the Company's Vice President, E-Commerce
since August 1999. She was Vice President, Operations for Nutri/System's
predecessor from 1995 until 1999 and was Director of Health Care Services for
the predecessor from 1994 to 1995. Previously, Ms. Gallen was Director of
Outpatient Care for the Mercy Health System in Philadelphia, Pennsylvania. Ms.
Gallen is also a registered nurse.

Joseph J. DiBartolomeo, Ph.D. has been employed by Nutri/System since
January 2000 and has been Vice President, Scientific Affairs since May 2000.
Dr. DiBartolomeo was Vice President of Product Development for Nutrx Natural
Therapies Inc., a developer and marketer of nutraceuticals, from 1998 to 1999.
From 1997 to 1998, Dr. DiBartolomeo was Special Assistant to the President of
the Temple University Health System in Philadelphia, Pennsylvania. From 1981
to 1996, Dr. DiBartolomeo was with the Company's predecessor, where he initially
served as Director of Nutrition and later as Vice President of Scientific
Affairs.

11

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

The Company's common stock has traded on the Nasdaq National Market since
June 16, 2000 under the symbol "THIN." From October 1999 until June 16, 2000,
the Company's common stock traded infrequently and in limited volumes in the
over-the-counter market. The following table sets forth, for the periods
indicated, the high and low closing prices for the Company's common stock as
reported on the Nasdaq National Market since June 16, 2000. Because of the
extremely limited trading in the stock in the over-the-counter market prior to
that date, the Company does not consider trading price information prior to June
16, 2000 meaningful.

High Low
------- -------

2000 Second Quarter (from June 16) $14.00 $13.25
2000 Third Quarter 14.00 9.25
2000 Fourth Quarter 8.00 0.81

On March 20, 2001, the closing bid price of the Company's common stock on
the Nasdaq National Market was $0.56. As of March 20, 2001, the Company had
approximately 471 record holders of its common stock.

On February 26, 2001, the Company announced that its Board of Directors had
authorized a stock repurchase program under which the Company may repurchase up
to 250,000 shares of its outstanding common stock. The shares may be purchased
at the Company's discretion from time to time in open market transactions at
prevailing prices or in private transactions at negotiated prices. Through
March 23, 2001, the Company had repurchased a total of 100,000 shares of its
common stock.

The Company has not paid any dividends since its inception and currently
has no plans to begin paying dividends. The declaration and payment of
dividends in the future will be determined by the Company's Board of Directors
in light of conditions then existing, including the Company's earnings,
financial condition, capital requirements and other factors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below have been derived
from the Company's consolidated financial statements for each of the periods
indicated. The data set forth below is qualified by reference to and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements included as Items 7 and 8 in this Annual Report on Form 10K.

12

SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)

Year Ended December 31,
-------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- --------

Statement
Of Operations Data:

Revenues: (a)
Food sales.......................... $39,000 $23,698 $ 8,415 $ 7,910 $ 20,011
Other revenues...................... 8,030 22,105 870 674 191
Total revenues.................... 47,030 45,803 9,285 8,584 20,202

Costs and expenses:
Cost of revenues.................. 42,409 41,920 7,101 6,196 11,055
Advertising and
marketing....................... 3,414 5,766 113 520 8,432
General and
administrative.................. 1,392 1,056 2,140 3,333 6,068
Other items....................... 367(b) (1,828)(c) - 8,202(d) 20
Other operating
expenses........................ 926 1,817 79 230 307

Operating loss........................ (1,478) (2,928) (148) (9,897) (5,680)

Discontinued operation - - - - (8,586)(e)

Net loss.............................. (163) (1,598) (42) (9,633) (13,984)

Basic and diluted net loss per share:
Continuing operations................ $ (0.00) $ (0.08) $ (0.00) $ (0.45) $ (0.19)
Discontinued operation............... - - - - $ (0.03)
Disposal of discontinued operation... - - - - $ (0.28)
--------
Basic and diluted................... $ (0.00) $ (0.08) $ (0.00) $ (0.45) $ (0.50)

Basic and diluted weighted
average shares outstanding.......... 16,283 19,539 19,539 21,449 28,006

December 31,
-------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- --------

Balance Sheet Data:

Cash, cash equivalents and
short-term investments.............. $ 1,346 $ 843 $ 361 $2,902 $1,638
Working capital....................... 2,601 1,235 1,047 3,509 1,434
Total assets.......................... 11,056 4,826 2,930 5,856 5,908
Stockholders' equity.................. 2,163 565 523 4,391 2,901

___________________

(a) In 1997, the Company sold its company-owned weight loss centers. As a
result, beginning in 1998, the Company experienced a significant decrease
in revenues associated with food sales and weight loss programs. Revenues
generated from the weight loss centers owned by the Company in 1997 were
$33,484.

(b) In 1996, the Company sold company-owned weight loss centers at a loss of
$367.

13

(c) In 1997, the Company sold its company-owned weight loss centers (see note
(a)) at a loss of $5,347. In addition, in 1997, the Company received
proceeds from its insurance carrier associated with products liability
litigation which generated a net gain of $7,175.

(d) Compensation charges of $8,202 were recorded in 1999. See discussion
relating thereto in Note 1 of the Notes to the Consolidated Financial
Statements.

(e) In 2000, the Company recorded a loss from discontinued operation of $713
and a loss on disposal of $7,873. The loss on disposal consisted of a write
off of intangibles of $7,650 and $223 of other shutdown related costs. See
discussion relating thereto in Note 3 of the Notes to the Consolidated
Financial Statements.

14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Except for the historical information contained herein, this Report on Form
10-K 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." 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 Form 10-K Annual Report. 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, 11 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 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.

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 December 31, 2000, had an accumulated
deficit of $26,724. In 2000, the Company's net loss was $13,984. 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 December
31, 2000 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 profitability depends primarily upon the
Company's ability to: (1) continue to 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.

15

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. 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 and piggy-back
registration rights prior to that date.

In December 2000, the Company determined it would sell the Sweet Success
product line or discontinue sales of the products by June 30, 2001. In March
2001, the Company ended negotiations to sell the product line and opted to
discontinue the product line. Under current 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.

The results of the Sweet Success product line have been reported separately
as a discontinued operation in the 2000 Statement of Operations, the Balance
Sheet and the Statement of Cash Flows. Under the Company's ownership in 2000,
Sweet Success generated sales of $4,215 and incurred operating losses of $713.
In conjunction with the discontinuance of operation, the Company recorded a loss
on disposition of $7,873, of which $7,650 related to the write down of
intangible assets and the remaining $223 related to various shut down costs.

RESULTS OF OPERATIONS

In pursuing its business strategy, the Company's primary financial
objectives are to generate rapid growth while maintaining and improving 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 will be compared to the same period in prior years. However,
because the Internet business started in October 1999, sequential period
comparisons will be used initially.

Revenues and expenses consist of the following components:

Revenues. Revenues consist of food sales, franchise royalty fees and,
prior to October 1999, other revenues. Food sales include sales of food and
supplements and shipping and handling charges billed to members, net of sales
credits and adjustments, including product returns. Prior to October 1999, all
revenues were derived from company-owned or franchised weight loss centers and
independent distribution (direct sales) and included program fees and other non-
food revenues included in other revenues. 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 sales 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

16

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." During 1999, web site development
costs totaled $207, of which $3 was capitalized in other assets and amortized in
2000. No additional costs were capitalized in 2000.

Non-cash compensation expense. Non-cash compensation expense recorded in
2000 represents the amortization of deferred compensation related to stock
options granted to management, directors and consultants over a one to four-year
vesting period. In 1999, non-cash compensation expense is associated almost
entirely with equity interests granted to an executive pursuant to the Stock
Exchange and Purchase Agreement to acquire the beneficial interest in
NutriSystem Direct, L.L.C.

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

Income taxes. The Predecessor Businesses were flow-through entities, which
were not subject to federal or state income taxes and, consequently, none have
been reflected in the financial statements for the historical periods prior to
September 30, 1999. For purposes of pro forma presentation, given the
uncertainty of future operating results, no pro forma tax benefit was recorded
during the year ended December 31, 1999. Effective with the Merger on September
27, 1999, the Company became subject to corporate level income taxes. No income
tax benefit on the excess of the tax basis of assets over the financial
reporting carrying amount has been recorded since September 1999, again in light
of 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.

SELECTED FINANCIAL AND OPERATING STATISTICS

1999 2000 2000 2000 2000
Q4 Q1 Q2 Q3 Q4
---------------- ---------------- ---------------- ---------------- ----------------

Revenues (000's) $ 275 $ 3,183 $ 3,700 $ 3,788 $3,315
Cost of revenues (000's) 126 1,426 1,747 1,767 1,594
------ ------- ------- ------- ------
Gross margin (000's) $ 149 $ 1,757 $ 1,953 $ 2,021 $1,721
% of revenue 54.2% 55.2% 52.8% 53.4% 51.9%
Advertising and marketing (000's) $ 465 $ 2,605 $ 2,515 $ 1,662 $1,650
% of revenue 169.1% 81.8% 68.0% 43.9% 49.8%
New customers 1,416 13,384 12,448 12,472 9,818
Advertising and marketing/ $ 328 $ 195 $ 202 $ 133 $ 168
new customer
Revenues/new customer $ 194 $ 238 $ 297 $ 304 $ 338

Internet operations have generated increasing revenues in each quarter of
operation with the exception of the fourth quarter of 2000. The Company
attributes the revenues increase from the fourth quarter of 1999 to the first
quarter of 2000 to seasonality and greater advertising spending. The first
quarter of the year is traditionally the strongest for the weight loss industry
and the fourth quarter is traditionally the weakest. From the first quarter
2000 to the second, revenues increased 16% despite a 3% decline in advertising
spending, and from the second quarter to the third quarter, revenues increased
an additional 2% despite a 34% drop in advertising spending. In the fourth
quarter 2000 revenues

17

declined 12% relative to the third quarter while advertising spending remained
virtually constant. Spending for advertising and marketing was reduced in the
second, third and fourth quarters of 2000 compared to the first quarter to focus
spending on more cost effective media. In Internet advertising in particular,
the Company was successful in eliminating less effective programs and
negotiating better advertising rates in the third and fourth quarters. From the
first quarter to the third quarter, advertising and marketing expenses per new
customer declined 32%, from $195 to $133, an indication of more effective
marketing. Compared to the third quarter, results in the fourth quarter of 2000
declined in terms of revenues and advertising cost per customer due to
traditionally weak demand for diet products during the year end holiday season.
Relative to the same quarter in 1999, the Company's fourth quarter 2000 revenues
and advertising performance improved dramatically.

From the first quarter to the fourth quarter of 2000, revenues per customer
increased 42% from $238 to $338 primarily because customers participated in the
Company's diet program for longer periods on average, which is an indication
that members are having increasing weight loss success with the program. The
Company believes that successful customers generate referral business, which is
a potentially significant source of revenue growth. Gross margin (revenues less
cost of revenue) has fluctuated between 55.2% and 51.9% of revenues in the five
quarters of operation. Fluctuations in gross margin percent have been caused by
food promotions, the mix of products sold and fluctuations in shipping costs
incurred and recouped from customers.

Year Ended December 31, 1999 Compared to Year Ended December 31, 2000

Revenues. Revenues increased from $8,584 for the year ended December 31,
1999 to $20,202 for the year ended December 31, 2000. The revenue increase of
$11,618, or 135%, resulted primarily from food sales related to the commencement
of Internet sales ($13,711), partially offset by lower franchise food sales and
royalties. The Company anticipates that Internet sales will generate an
increasing proportion of total revenues, while the proportion of franchise
revenues will decline. In 2000, Internet sales accounted for 69% of total
revenues, while N/S Direct and franchise revenues accounted for 16% and 15% of
total revenues, respectively.

Costs and Expenses. Cost of revenues increased $4,859 from $6,196 to
$11,055 for the years ended December 31, 1999 and 2000, respectively. Gross
margin increased from 28% to 45% for the years ended December 31, 1999 and 2000,
respectively. This increase is due primarily to the shift in mix toward higher-
margin Internet food sales and away from franchise and independent distribution
food sales. Advertising and promotional expenses increased $7,912 from $520 to
$8,432 from 1999 to 2000. All advertising spending in 2000 promoted the
Internet program. General and administrative expenses increased from $3,333 to
$6,068 from 1999 compared to 2000. This increase of $2,735 is due primarily to
an increase in compensation expense ($1,969), professional services ($288), rent
($237), and other costs which were connected to establishing the Internet
business. In the fourth quarter of 2000 the Company made a determination to
expense $347 of professional fees incurred over the course of the year in
connection with unsuccessful fundraising efforts.

Interest Income. Interest income net of interest expense increased $142
from $56 in 1999 to $198 in 2000 primarily due to higher cash balances.

Net Loss. The Company incurred net losses of $9,633 and $13,984 for 1999
and 2000, respectively. The net loss in 1999 included an $8,200 non-cash
compensation charge arising from the merger in August 1999. Excluding this one-
time compensation charge, operating losses were $1,695 in 1999. The net loss in
2000 included losses from a discontinued operation of $8,586, including a $7,650
write off on intangibles. In 2000, the operating loss from continuing
operations of $5,680 arose as increases in advertising and marketing and, to a
lesser extent, general and administrative expenses more than offset higher sales
and gross margins.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Net Sales. The Company's net sales decreased $701, or approximately 7.5%,
from $9,285 for the year ended December 31, 1998 to $8,584 for the year ended
December 31, 1999. The decrease was attributable primarily to a decline in food
sales ($505) and franchise royalty fees ($230).

Costs and Expenses. Cost of sales decreased $905 from $7,101 in 1998 to
$6,196 in 1999. Gross margin increased from 24% to 28% from 1998 to 1999
primarily due to a shift in mix toward higher margin NutriSystem Direct sales
and away from franchise food sales. General and administrative expenses
increased $1,193, or approximately 56%, from $2,140 in 1998 to $3,333 in 1999
primarily due to increased compensation ($392), expenses related to the web site
($204) and professional services ($195). During the year ended
December 31, 1999, the Company recorded non-cash

18

compensation expense of $8,202 primarily associated with equity interests
granted to an executive pursuant to the purchase of NSDirect and stock options
granted to management. See discussion relating thereto in the Notes to
Consolidated Financial Statements.

Interest Income. Interest income net of interest expense increased $25
from $31 in the year ended December 31, 1998 to $56 in the year ended December
31, 1999 primarily due to higher average cash balances.

Net Loss. The Company's net loss increased to $9,633 for the year ended
December 31, 1999 versus $42 for the year ended December 31, 1998, primarily due
to the compensation expense charges and to higher general and administrative
expenses discussed above.

Liquidity, Capital Resources and Other Financial Data

At December 31, 2000, the Company had net working capital of $1,434. Cash
and cash equivalents were $1,638. The Company's principal source of liquidity
is the cash obtained from the private placement transactions in October 1999 and
March 2000. The Company currently has no bank debt or term or revolving credit
facilities to fund operating cash flow or investment opportunities.

In the year ended December 31, 2000, the Company generated a $2,766 cash
flow deficit from operations, primarily attributable to net losses partially
offset by cash generated from a discontinued operation, non-cash charges and
reductions in net working capital.

In the year ended December 31, 2000, net cash used by investing activities
was $982 which primarily consisted of capital expenditures incurred to increase
web site and fulfillment capacity.

In the year ended December 31, 2000, net cash provided by financing
activities amounted to $2,484. Of this total, $2,462 was generated in the
Company's March 2000 private placement of common stock and the rest from the
exercise of warrants and options. The proceeds from these transactions were
used for working capital and to pursue the Company's business strategy.

Under marketing agreements as of December 31, 2000, the Company was
required to pay aggregate minimum fixed fees of $1,289 for the twelve months
ending December 31, 2001. As part of an ongoing effort to improve the cost
effectiveness of Internet advertising, the Company was able to renegotiate
certain Internet advertising contracts subsequent to December 31, 2000 and
thereby reduce the amount of these contractual commitments by $1,114. As of
December 31, 2000, the Company's principal commitments consisted of obligations
under marketing agreements and 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
December 31, 2000 and management's belief that additional equity financing can
be raised, the Company anticipates that it has the ability to continue
operations into 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

19

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 7A. 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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item is set forth on pages 23 through 39
hereto and is incorporated by reference herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

20

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information contained under the caption "Election of Directors" in
the definitive proxy statement for the Company's 2001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission (the
"Commission") is incorporated herein by reference. Information regarding the
Company's executive officers is included in Part I of this Form 10-K Annual
Report.

ITEM 11. EXECUTIVE COMPENSATION

The information contained under the caption "Executive Compensation" in
the definitive proxy statement for the Company's 2001 Annual Meeting of
Stockholders to be filed with the Commission is incorporated herein by
reference.

ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information contained under the caption "Beneficial Ownership of
Common Stock" in the Company's definitive proxy statement for the Company's 2001
Annual Meeting of Stockholders to be filed with the Commission is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information contained under the caption "Certain Related Party
Transactions" in the Company's definitive proxy statement for the Company's 2001
Annual Meeting of Stockholders to be filed with the Commission is incorporated
herein by reference.

21

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

See Index to the Consolidated Financial Statements which begins on page 23 of
this Annual Report

2. Financial Statement Schedules

None.

3. Exhibits

The exhibits listed in the accompanying index to exhibits are incorporated by
reference as part of this Annual Report on Form 10-K.

(b) Reports on Form 8-K.

On October 24, 2000 the registrant filed a Form 8-K reporting under Item 2 the
August 25, 2000 acquisition of certain assets from Nestle USA, Inc.

22

NUTRI/SYSTEM, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Public Accountants.................... 24

Consolidated Balance Sheets................................. 25

Consolidated Statements of Operations....................... 26

Consolidated Statements of Changes in Stockholders' Equity.. 27

Consolidated Statements of Cash Flows....................... 28

Notes to Consolidated Financial Statements.................. 29

23

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Nutri/System, Inc.:

We have audited the accompanying consolidated balance sheets of Nutri/System,
Inc. (formerly nutrisystem.com inc.)(a Delaware corporation) and subsidiaries as
of December 31, 1999 and 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nutri/System, Inc. and
subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

ARTHUR ANDERSEN LLP

Philadelphia, Pennsylvania,
February 9, 2001

24

NUTRI/SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

December 31
-------------------------------------
1999 2000
---------------- -----------------

ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 2,902 $ 1,638
Restricted cash 360 525
Trade receivables, less allowance of $80 and $36 in 1999 and 2000, 140 284
respectively
Inventories 769 1,435
Prepaid expenses and other current assets 670 414
-------- --------
Total current assets 4,841 4,296

FIXED ASSETS, net 295 1,054
INTANGIBLES, net 500 395
OTHER ASSETS 220 163
-------- --------
$ 5,856 $ 5,908
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 870 $ 1,892
Accrued payroll and related benefits 65 131
Net liabilities of discontinued operation -- 433
Other current liabilities 397 406
-------- --------
Total current liabilities 1,332 2,862
NON-CURRENT LIABILITIES 133 145
-------- --------
Total liabilities 1,465 3,007
-------- --------

COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock $.001 par value (5,000,000 shares authorized, no shares -- --
outstanding)
Common stock, $.001 par value (100,000,000 shares 27 29
authorized; shares issued - 27,176,737 at December 31, 1999 and 28,735,794 at
December 31, 2000)
Additional paid-in capital 16,760 29,272
Warrants exercisable at $1 per share 344 324
Accumulated deficit (12,740) (26,724)
-------- --------
Total stockholders' equity 4,391 2,901
-------- --------
$ 5,856 $ 5,908
======== ========

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

25

NUTRI/SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

Year Ended December 31
----------------------------------------------------
1998 1999 2000
------- ------- --------

REVENUES:
Food sales $ 8,415 $ 7,910 $ 20,011
Franchise royalty fees 633 403 145
Other 237 271 46
------- ------- --------
9,285 8,584 20,202
------- ------- --------
COSTS AND EXPENSES:
Cost of revenues 7,101 6,196 11,055
Advertising and marketing 113 520 8,432
General and administrative 2,140 3,333 6,068
Depreciation and amortization 79 99 307
Other -- 131 --
Non-cash compensation expense (Notes 1 and 11) -- 8,202 20
------- ------- --------
9,433 18,481 25,882
------- ------- --------
Operating loss from continuing operations (148) (9,897) (5,680)
OTHER INCOME -- -- 84
INTEREST INCOME, net 31 56 198
------- ------- --------
Loss before minority interest and discontinued (117) (9,841) (5,398)
operation
MINORITY INTEREST 75 208 --
------- ------- --------
Loss before discontinued operation (42) (9,633) (5,398)
DISCONTINUED OPERATION (Note 3):
Loss from operation -- -- (713)
Loss on disposal -- -- (7,873)
------- ------- --------
Net loss $ (42) $(9,633) $(13,984)
======= ======= ========

BASIC AND DILUTED LOSS PER SHARE
Continuing operations (0.00) (0.45) (0.19)
Discontinued operation -- -- (0.03)
Disposal of discontinued operation -- -- (0.28)
------- ------- --------
$(0.00) $(0.45) $ (0.50)
======= ======= ========
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 19,539 21,449 28,006
======= ======= ========

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

26

NUTRI/SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

Common
Shares Common Stock Additional Stock Accumulated Total
Paid-in Capital Warrants Deficit

BALANCE, JANUARY 1, 1998 19,539,337 $20 $ 3,610 -- $ (3,065) $ 565
Net loss -- -- -- -- (42) (42)
---------- --- ------- ---- -------- --------
BALANCE, DECEMBER 31, 1998 19,539,337 20 3,610 -- (3,107) 523
Net loss -- -- -- -- (9,633) (9,633)
Payment to stockholder in excess of
book value (Note 1) -- -- (2,275) -- -- (2,275)
Capital contribution of shares
issued to executive (Note 1) -- -- 8,202 -- -- 8,202
Issuance of warrants -- -- (344) 344 -- --
Issuance of common stock
(Notes 1 and 10) 7,637,400 7 7,567 -- -- 7,574
---------- --- ------- ---- -------- --------
BALANCE, DECEMBER 31, 1999 27,176,737 27 16,760 344 (12,740) 4,391
Net loss -- -- -- -- (13,984) (13,984)
Amortization of deferred
compensation -- -- 20 -- -- 20
Exercise of stock options 1,666 -- 2 -- -- 2
Exercise of warrants 42,391 -- 40 (20) -- 20
Issuance of common stock
(Note 10) 1,515,000 2 12,450 -- -- 12,452
---------- --- ------- ---- -------- --------
BALANCE, DECEMBER 31, 2000 28,735,794 $29 $29,272 $324 $(26,724) $ 2,901
========== === ======= ==== ======== ========

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

27

NUTRI/SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended
December 31
----------------------------------------------

1998 1999 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (42) $(9,633) $(13,984)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Discontinued operation net loss -- -- 8,586
Net cash from discontinued operation -- -- 1,212
Loss on disposals -- 167 9
Minority interest (75) (208) --
Non-cash compensation expense -- 8,202 20
Depreciation and amortization 79 99 307
Other non-cash expense -- -- 625

Changes in operating assets and liabilities-
Restricted cash (121) 41 (165)
Trade receivables 1,214 387 (144)
Inventories 212 50 (666)
Prepaid expenses and other assets 217 (373) 313
Accounts payable (130) 108 1,022
Accrued payroll and related benefits (286) 19 66
Other liabilities (1,470) (244) 33
------- ------- --------
Net cash used in operating activities (402) (1,385) (2,766)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions (180) (248) (982)
------- ------- --------
Net cash used in investing activities (180) (248) (982)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance from stockholder 100 -- --
Distribution to partners -- (3,400) --
Issuance of common shares, net of costs -- 7,574 2,484
------- ------- --------
Net cash provided by financing activities 100 4,174 2,484
------- ------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (482) 2,541 (1,264)
CASH AND CASH EQUIVALENTS,
beginning of year 843 361 2,902
------- ------- --------
CASH AND CASH EQUIVALENTS,
end of year $ 361 $ 2,902 $ 1,638
======= ======= ========

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

28

NUTRI/SYSTEM, INC. AND SUBSIDIARIES
-----------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share amounts)

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. The Company's pre-packaged foods are
sold to weight loss program participants through the Internet, independent
distribution and through franchised weight loss centers.

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

Since 1993, the Company, including its Predecessor Businesses, has incurred
significant losses and, as of December 31, 2000, has an accumulated deficit of
$26,724. 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 December 31, 2000 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
profitability depends primarily upon the Company's ability to: (1) continue to
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.

Merger Transaction

In August 1999, Ansama Corp. ("Ansama"), a non-operating public company with
minimal assets and liabilities and the sole stockholder of the Company, entered
into: (1) an Asset Purchase Agreement to acquire the operating assets and assume
certain liabilities of Nutri/System L.P. for $3,000 and (2) a Stock Exchange and
Purchase Agreement to acquire the beneficial interest of NutriSystem Direct,
L.L.C. for $400 and 17,500,000 shares of Ansama common stock. The Asset
Purchase Agreement and Stock Exchange and Purchase Agreement are collectively
referred to as the Merger Agreements and the transactions contemplated by the
Merger Agreements are referred to as the Merger. The amount paid to the
principal stockholder in excess of the book value was treated as a dividend. The

29

consideration paid for the acquisition of the minority interest was allocated to
the Company's assets and liabilities in accordance with Accounting Principles
Board Opinion No. 16, "Business Combinations." On September 27, 1999, Ansama was
merged into the Company and the Company completed the Merger with proceeds
generated from the private placement. As a result of the Merger, the owners of
the Predecessor Businesses obtained a controlling interest in the common stock
of the Company. In addition, the management team of the Predecessor Businesses
became the officers and management of the Company. The Merger was treated as a
recapitalization with the assets and liabilities of the Predecessor Businesses
recorded at historical cost in the accompanying consolidated financial
statements.

In connection with the Merger, the Company issued 8,200,000 shares of common
stock to the president of the Company. This issuance was treated as
compensation expense for accounting purposes. The compensation expense was
recorded in 1999 and was based on a fair market value of $1 per share.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of Financial Statements

As of December 31, 1999 and 2000, the Company's consolidated financial
statements include the accounts of Nutri/System, Inc. and its wholly owned
subsidiaries. The accompanying historical financial statements prior to
September 27, 1999 include the combined accounts of the Predecessor Businesses.
The historical stockholders' equity presented in the accompanying financial
statements has been retroactively restated to give effect to the shares and
consideration issued in the Merger. See Note 1.

All significant intercompany accounts and transactions have been eliminated.

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 years ended December 31, 1998, 1999 or 2000. Payments for interest
were $0, $2, and $3 for the years ended December 31, 1998, 1999 and 2000,
respectively.

Restricted Cash

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

Inventories

Inventories consist principally of packaged food at warehouses owned by the
Company and another entity under contract with the Company. 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, 1999 and 2000 and accumulated amortization was $26 and $131,
respectively. Intellectual property was generated from the acquisition of
certain assets associated with a now discontinued operation. In December 2000,
the Company wrote off the intellectual property associated with the discontinued
operation.

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-

30

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, 1998, 1999 and 2000, $41, $587 and $254,
respectively, of prepaid advertising was included in prepaid expenses.
Advertising expense was $65, $520 and $8,432 during 1998, 1999 and 2000,
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." During 1999, web site development costs total $207 of which $3
was capitalized in other assets and amortized in 2000. No additional costs
were capitalized during 2000.

Fixed Assets

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

Valuation of Long-Lived Assets

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, 1999 and 2000, 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 from food sales and other are recognized when the related products are
shipped. Food sales include amounts billed for shipping and handling and are
presented net of free food products provided to consumers. Other revenues
represent primarily the sale of print materials to franchisees and independent
distributors. Franchise royalty fees are contractually set at 4% of
franchisees' total net sales.

Minority Interest

Minority interest represents the minority stockholders' share of the equity and
results of operations of the Company based on their proportionate share of
capital contributions.

Income Taxes

The Predecessor Businesses were flow-through entities which were not subject to
federal or state income taxes and, consequently, none have been reflected in the
accompanying consolidated financial statements. The owners of the Predecessor
Businesses were required to include their respective share of the profits or
losses in their respective tax returns. See Note 4.

Nutri/System, Inc. is a "C" corporation which is subject to corporate level
income taxes. As a result of the Merger discussed in Note 1, the Company became
subject to corporate income taxes, and began providing for income taxes in the
accompanying financial statements beginning on September 27, 1999 in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes." SFAS No. 109 requires the

31

recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities.

As a result of the Merger discussed in Note 1, 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 11.

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 Loss Per Common Share

The Company has presented net loss per common share pursuant to SFAS No. 128,
"Earnings per Share," and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98. Basic loss per common share was computed by
dividing net loss applicable to common stockholders by the weighted average
number of shares of Common Stock outstanding. The impact of common stock
equivalents, consisting of 2,434,874 options and warrants outstanding as of
December 31, 2000, 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 Pronouncements

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

In June 1998, the FASB issued 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 Company is required to adopt this
statement beginning in 2001. Management currently believes that the adoption of
SFAS No. 133 will have no impact on the Company's consolidated financial
statements.

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.

32

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 and piggy-back
registration rights prior to that date.

In December 2000, the Company determined it would sell the Sweet Success product
line or discontinue sales of the products by June 30, 2001. The results of the
Sweet Success product line have been reported separately as a discontinued
operation in the Company's Consolidated Financial Statements. Under the
Company's ownership in 2000, Sweet Success generated sales of $4,215 and
incurred an operating loss of $713. The Company recorded a loss on disposal of
$7,873, of which $7,650 related to the write down of intangible assets and the
remaining $223 related to various shut down costs. The net liabilities of the
discontinued operation have been recorded at their net realizable value under
the caption "Net liabilities of discontinued operation" in the accompanying
Consolidated Balance Sheet at December 31, 2000 and consist of the following:

Inventories $1,544

Other assets 24
------

Total assets 1,568

Accounts payable 41
Other current liabilities 1,960
------

Total liabilities 2,001
------

Net liabilities of discontinued operation $ 433
======

4. PRO FORMA INFORMATION (UNAUDITED)

As discussed in Note 2, on September 27, 1999, the Company became subject to
federal and state income taxes. Disclosure rules of the Securities and
Exchange Commission require companies, for informational purposes, to display a
pro forma adjustment for the income taxes that would have been recorded if the
Company had not been a flow-through entity during the periods presented in the
accompanying statements of operations. Due to the recurring losses incurred by
the Company, and management's assessment of realization of the related tax
deduction, no pro forma tax benefit was recorded during the periods presented.

Also on September 27, 1999, the Company's principal stockholder group purchased
the remaining interest of the minority stockholder, which resulted in goodwill
of $527. The effect of goodwill amortization on results of operations would
have been to increase expenses by $105 in 1998 and $79 in 1999.

33

5. FIXED ASSETS

Fixed assets consisted of the following:

December 31
----------------

1999 2000
----- ------
Furniture and fixtures $ 184 $ 149
Equipment 310 1,126
Leasehold improvements 20 122
----- ------
514 1.397
Accumulated depreciaion (219) (343)
----- ------
$ 295 $1,054
===== ======

Depreciation expense was $79, $91 and $214 in 1998, 1999 and 2000, respectively.

6. OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following:

December 31
---------------------------------

1999 2000
----- -----
Lease commitment liability $ 382 $ 375
Other 15 31
----- -----
$ 397 $ 406
===== =====

The lease commitment liability represents remaining rental payment obligation
related to the closing of company-owned weight loss centers during 1997.

7. RELATED-PARTY TRANSACTIONS

During 1998, 1999 and 2000, the Company purchased $172, $113, and $286,
respectively, of food from a vendor that is an affiliate of a member of the
Board of Directors.

For the years ended December 31, 1998, 1999 and 2000, the Company paid retainers
and professional fees of $0, $4, and $27, respectively, to a law firm whose
partner served as a member of the Board of Directors of the Predecessor
Businesses.

For the years ended December 31, 1998, 1999 and 2000, the Company purchased
vitamins and supplements of $51, $17, and $56, respectively, from a vendor that
is owned by a member of the Board of Directors.

At December 31, 2000, the Company had payables to related parties of which $51
are included in accounts payable.

Included in non-current liabilities as of December 31, 1999 and 2000 is a loan
from a member of the Board of Directors of $100, with interest accrued at the
rate of 7% per annum.

34

Management believes the terms of all related party transactions are reasonable
and reflect the fair market value of the goods and services provided.

8. COMMITMENTS AND CONTINGENCIES

The Company leases its warehouse, corporate headquarters and certain equipment.
These leases generally have initial terms of three to five years. Certain of
the leases also contain escalation clauses based upon increases in costs related
to the properties. Lease obligations, with initial or remaining terms of one
year or more, consisted of the following at December 31, 2000:

2001 $ 499
2002 513
2003 465
2004 376
2005 13
------
$1,866
======

Total rent expense for the years ended December 31, 1998, 1999 and 2000, was
$200, $227 and $464, respectively.

The Company has committed to marketing, advertising and Internet site linking
agreements with various Internet companies. These arrangements extend through
December 31, 2001 with a total commitment as of December 31, 2000 of $1,289
payable in installments over the related contract periods. As part of an
ongoing effort to improve the cost effectiveness of Internet advertising, the
Company was able to renegotiate certain Internet advertising contracts
subsequent to December 31, 2000 and thereby reduce the amount of these
contractual commitments by $1,114. In addition, the Company has various short-
term advertising arrangements relating to Internet and other media.

In September 1997, Nutri/System L.P., one of the Predecessor Businesses, removed
a drug combination from its weight loss program after it was shown to cause
health problems. Numerous suits were subsequently filed against Nutri/System
L.P. Also, in 1997, the Company obtained a settlement from its insurance
carrier for coverage associated with this matter. In September 1999, the
supplier of the drug combination agreed to indemnify Nutri/System L.P. with
respect to any further liability with respect to this matter. In the opinion of
management, the Company has no liability with respect to this matter.

The Company is also involved with certain other claims and routine litigation
matters. In the opinion of management, after consultation with legal counsel,
the outcome of such matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.

9. EMPLOYEE BENEFIT PLAN

During 1996, the Company adopted a qualified tax deferred defined contribution
retirement plan (the "Plan"). Under the provisions of the Plan, substantially
all employees meeting minimum age and service requirements are entitled to
contribute on a before and after-tax basis a certain percentage of their
compensation. The Company matches 100% of an employee's contribution, up to a
maximum Company match of 3% of the employee's annual salary. Employees vest
immediately in their contributions and vest in the Company contribution over a
three-year period of service. The Company's expense for the years ended
December 31, 1998, 1999 and 2000 was $13, $24 and $47, respectively.

35

10. 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 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.

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.

11. STOCK OPTIONS AND WARRANTS

Stock Option Plan

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. To date, all of the options granted expire ten years from the issue
date. The Board also determines the option exercise price per share and vesting
provisions. No options were issued prior to 1999, and no options were
exercisable at December 31, 1999. At December 31, 2000, 155,278 shares were
exercisable under granted options with a weight-average exercise price of $1.32.
The following table summarizes the options granted in 1999 and 2000:

36

Average Exercise
Number of Shares Price
------------------ -----
1999
- ----

Granted 494,500 $1.30
Exercised -- --
Cancelled 1,000 $1.00
---------
Outstanding, December 31 493,500 $1.30

2000
- ----

Granted 1,455,300 $4.26
Exercised 1,666 $1.00
Cancelled 231,000 $4.73
---------
Outstanding, December 31 1,716,134 $3.35
=========

The following table summarizes information about stock options outstanding as of
December 31, 2000:

Range of Exercise Number of Average Remaining Average Exercise
Prices Shares Life (Years) Price
- -------------------------------- --------------------------- -------------------

$1.00 - $1.99 1,055,834 9.4 $ 1.47
$2.00 - $2.99 174,000 9.3 $ 2.61
$3.00 - $6.99 365,300 9.2 $ 5.78
$7.00 - $13.99 121,000 9.5 $13.50
---------
1,716,134
=========

As permitted under SFAS No. 123, the Company has elected to continue to account
for stock-based compensation using the intrinsic value-based method of
accounting as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123 requires that the
Company disclose pro forma net loss and pro forma loss per share amounts as if
compensation expense were recognized for options granted based on the fair value
of the options issued. The Company estimates the fair value of its options
using the Black-Scholes option pricing model and the following weighted average
assumptions: no dividend yield; expected volatility of 66.5%; risk free
interest rate of 5.25%-6.32% and expected life of 7 years. The weighted average
fair value of the options issued in 1999 and 2000 was $0.56 and $2.06,
respectively. The Company's net loss in 1999 and 2000 would have been $9,649
and $14,504, respectively, and basic and diluted loss per share in 1999 and 2000
would have been $0.45 and $0.52, respectively.

The Company will record $60 in compensation expense related to the options
granted in November 1999 over the option vesting period of three years based on
a fair market value of $2.05 per share. Compensation expense of $2 and $20
associated with these options was recorded in 1999 and 2000, respectively.

37

COMMON STOCK WARRANTS

In return for services in connection with the October 1999 private placement,
the placement agent received warrants to purchase 763,740 common shares at $1.00
per share. The fair value of the warrants of $344 was recorded as a reduction
of the proceeds from the offering. Fair value was computed using the Black-
Scholes option pricing model.

12. INCOME TAXES

On September 30, 1999, the Company became subject to federal and state income
taxes. At that time, the Company recorded deferred income taxes which represent
the tax effect of the cumulative differences between the financial reporting and
income tax bases of assets and liabilities. See Note 2.

The significant items comprising the Company's deferred income tax assets and
liabilities are as follows:

December 31, 1999 December 31, 2000
---------------------------- ----------------------------
Deferred tax asset-

Reserves $ 132 $ 325
Goodwill 960 2,655
Net operating loss carryforward 640 2,101
Other 100 102
Valuation allowance (1,823) (5,181)
------- -------
9 2
------- -------
Deferred tax liability-
Property and equipment (9) (2)
------- -------
$ -- $ --
======= =======

The valuation allowance was established 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 deferred tax assets are
realized, $790 of the related tax benefit would be recorded as a credit to
equity. See Note 2.

13. ALLOWANCE FOR DOUBTFUL ACCOUNTS

Valuation and qualifying accounts consist of trade receivables allowance for
doubtful accounts. The balance in the allowance for doubtful accounts for the
years 1998, 1999 and 2000 consisted of the following:

Fiscal Year Balance at Write-offs Deductions Balance End
Beginning of of Year
Year
- --------------------- --------------- ------------- --------------- -------------

1998 $440 $ (99) $ -- $341
1999 $341 $(261) $ -- $ 80
2000 $ 80 $ (26) $ (18) $ 36

38

14. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA

Quarter
-----------------------------------------------
First Second Third Fourth Year

- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)

1999:
Net revenues $ 2,317 $ 2,574 $ 2,012 $ 1,681 $ 8,584

Net income (loss) $ (99) $ 72 $(8,297) $ (1,309) $ (9,633)

Income/loss per basic and
diluted share $ (.01) $ 0.00 $ (0.42) $ ( 0.02) $ (0.45)

- ----------------------------------------------------------------------------------------------------------------------------------

2000:
Net revenues $ 5,171 $ 5,521 $ 5,098 $ 4,412 $ 20,202

Loss from continuing (1,478) $(1,466) $ (817) $ (1,637) $ (5,398)
operations

Discontinued operation $ -- $ -- $ (126) $ (8,460) $ (8,586)

Net loss (1,478) $(1,466) $ (943) $(10,097) $(13,984)

Loss per basic and diluted share:
Continuing operations $ (0.05) $ (0.05) $ (0.03) $ (0.06) $ (0.19)
Discontinued operation $ -- $ -- $ (0.00) $ (0.02) $ (0.03)
Loss on disposal of
discontinued operation $ -- $ -- $ -- $ (0.28) $ (0.28)
------- ------- ------- -------- --------

$ (0.05) $ (0.05) $ (0.03) $ (0.36) $ (0.50)
======= ======= ======= ======== ========

----------------------------------------------------------------------------------------------------------------------------------

. Net loss for the year ended December 31, 2000 included losses of $8,586
relating to the discontinued operation of the Sweet Success product line.
The Company recorded a loss from discontinued operation of $126 and $587 in
the third and fourth quarters, respectively, and a loss on disposal of
$7,873 in the fourth quarter of 2000.

39

INDEX TO EXHIBITS

No. DESCRIPTION
--- -----------

*2.1 Agreement and Plan of Merger dated August 19, 1999 between
nutrisystem.com inc. and Ansama Corp.

*2.2 Asset Purchase Agreement dated August 16, 1999 between Ansama
Corp. and Nutri/System L.P.

*2.3 Stock Exchange and Purchase Agreement dated August 16, 1999
among Ansama Corp., HPF Holdings, Inc., Brian D. Haveson and
NutriSystem Direct, L.L.C. management (comprised of Joseph
Boileau, Kathleen Simone, Deborah Gallen and Frederick C. Tecce)

*2.4 Assignments of NutriSystem Direct, L.L.C. Membership Interests
dated September 30, 1999 to nutrisystem.com inc. by each of HPF
Holdings, Inc., Brian D. Haveson, Joseph Boileau, Kathleen
Simone, Deborah Gallen and Frederick C. Tecce

*2.5 Operating Agreement of NutriSystem Direct, L.L.C. dated
September 30, 1999

*2.6 Intellectual Property Assignment from Nutri/System L.P. to
nutrisystem.com inc. dated September 30, 1999

*2.7 Assignment of Franchise Agreements from Nutri/System L.P. to
nutrisystem.com inc. dated September 30, 1999

*3.1 Certificate of Incorporation of nutrisystem.com inc.

*3.2 By-laws of nutrisystem.com inc.

*4.1 Form of Common Stock certificate of nutrisystem.com inc.

*4.2 Form of warrant to purchase Common Stock of nutrisystem.com inc.

*10.1 Joint Defense and Indemnification Agreement dated September
27, 1999 between Wyeth Ayerst Laboratories Division of American
Home Products Corporation and Nutri/System L.P.

*10.2 Lease, dated December 11, 1997, between Teachers Insurance
and Annuity Association and nutrisystem.com inc. as amended by
First Amendment to Lease dated October 28, 1999

*10.3 Form of Nutri/System L.P. Franchise Agreement

*10.4 Form of NutriSystem Direct, L.L.C. Distributor Agreement

*10.5 1999 Equity Incentive Plan of nutrisystem.com inc.

**** 10.12 Stock Purchase Agreement dated March 1, 2000 between C&R
Investments I, L.P. (name subsequently retroactively changed to
"CRX Investments I, L.P.") and nutrisystem.com inc.

**** 10.13 Shareholders Agreement dated March 1, 2000 among C&R
Investments I, L.P. (name subsequently retroactively changed to
"CRX Investments I, L.P."), HPF Holdings, Inc. and Brian D.
Haveson

40

No. DESCRIPTION
--- -----------
** 10.14 Asset Purchase Agreement dated as of August 25, 2000 between
nutrisystem.com inc. and Nestle USA, Inc. and related
agreements.

*** 21.1 Subsidiaries of nutrisystem.com inc.

23.1 Consent of Arthur Andersen LLP

_______________

* Incorporated by reference to the designated exhibit of the Company's
Registration Statement on Form 10 filed on December 17, 1999 (file
number 000-28551).
** Incorporated by reference to the designated exhibit of the Company's
Report on Form 8-K filed on October 24, 2000 (file number 000-28551).
*** Incorporated by reference to the designated exhibit of Amendment No. 2
of the Company's Registration Statement on Form 10 filed on March 8,
2000 (file number 000-28551).
**** Incorporated by reference to the designated exhibit of Amendment No. 4
of the Company's Registration Statement on Form 10 filed on March 14,
2000 (file number 000-28551).

41

SIGNATURES
----------

Pursuant to the requirements of Section 13 or 15(d) 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
----------------------------
Brian D. Haveson, President
and Chief Executive Officer

Dated: March 29, 2001

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.

BY: /S/ BRIAN D. HAVESON March 29, 2001

Brian D. Haveson
President and Chief Executive Officer

BY: /S/ JAMES D. BROWN March 29, 2001
James D. Brown
Chief Financial Officer and Principal Accounting Officer

BY: /S/ DEAN J. BOZZANO March 29, 2001
Dean J. Bozzano
Director

BY: /S/ DONALD R. CALDWELL March 29, 2001
Donald R. Caldwell
Director

BY: /S/ MICHAEL E. HEISLEY March 29, 2001
Michael E. Heisley
Director

BY: /S/ FREDERICK C. TECCE March 29, 2001
Frederick C. Tecce
Director

42