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

FORM 10-Q

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

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

JENNY CRAIG, INC.

(Exact name of registrant as specified in its charter)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [ X]  No [    ]

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

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TABLE OF CONTENTS

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

ITEM 1. FINANCIAL STATEMENTS

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

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

See accompanying notes to unaudited consolidated financial statements.

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

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

See accompanying notes to unaudited consolidated financial statements.

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

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

See accompanying notes to unaudited consolidated financial statements.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Forward-Looking Statements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

• Operating lease payments on premises from which the Company’s centre operations are conducted totaling approximately $29,934,000, of which approximately $16,078,000 is payable in calendar year 2002 and approximately $9,014,000 is payable in calendar 2003. Management expects that in the normal course of business, leases that expire will be renewed or replaced by other leases.

• The litigation judgment of approximately $700,000 plus simple interest at 10% and attorney’s fees to be determined by the trail court.

• Debt service with respect to the capital lease principal totaling $1,337,000, plus related interest.

• In the normal course of its business the Company acquires property and equipment, including replacing assets which are no longer useful. This may include moving the location of a centre or remodeling existing centres.

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

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

Effects of Recent Accounting Pronouncements

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

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

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

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

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

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

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

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

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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PART II — OTHER INFORMATION

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

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

The results of the vote to elect the eight directors were as follows:

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

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

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

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

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

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

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PART II — OTHER INFORMATION (continued)

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

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

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SIGNATURE

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

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

Date: February 13, 2002

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EXHIBIT 2

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

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

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