FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements. Forward-looking statements include any statements related to our expectations regarding future performance or conditions, including any statements regarding anticipated sales growth across markets, distribution channels, and product categories, expenses and gross margins, expense as a percentage of revenue, anticipated earnings, new product introductions, future capital expenditures, anticipated tax benefits, financing and working capital requirements and resources. These forward-looking statements, and others we make from time to time, are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements, including the risks described in our most recent Annual Report on Form 10-K which are summarized below.

• Availability of media time and fluctuating advertising rates;

• Ability to successfully transfer products to alternative manufacturing facilities;

• Manufacturing quality issues resulting in increased warranty costs;

• Our ability to effectively restructure the business and reduce costs;

• A decline in consumer spending due to unfavorable economic conditions;

• A change in the availability of credit for our customers who finance their purchases;

• Our ability to effectively develop, market and sell future products;

• Our ability to get foreign-sourced product through customs in a timely manner;

• Our ability to effectively identify, negotiate and integrate any future strategic acquisitions;

• Our ability to protect our intellectual property;

• The introduction of lower-priced competing products, unpredictable events and circumstances relating to international operations including the use of foreign manufacturers; and

• Government regulatory action.

We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.

This Management's Discussion and Analysis of Financial Condition and Results of Operation (the "MD&A") should be read in conjunction with our consolidated financial statements and related notes located at Item 1 of this Form 10-Q. We believe that period-to-period comparisons of our operating results are not necessarily indicative of future performance. You should consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies that operate in evolving markets. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assure you of any future growth or profitability.

SUMMARY OF THE THIRD QUARTER 2008 RESULTS

We are aggressively seeking to improve the Company's operations and financial condition. Our balance sheet and liquidity have been strengthened by the sale of our apparel business, the termination of our proposed acquisition of Land America and the structural improvements we are making in our operations. We have realigned the Company by global commercial, retail and direct businesses and have established separate teams with accountability for each of our business units. Each of the business units is focused on improving shareholder returns with particular focus currently on working capital management to generate liquidity, operating effectiveness, cost reductions and product innovation. We believe that our brands are some of the strongest in the industry and we are focused on capitalizing on that brand recognition. Although our restructuring plan has not been entirely implemented, and in spite of the present difficult economic environment, we are seeing benefits from our efforts.

Net sales for the third quarter of 2008 were $93.7 million, compared to $115.3 million in the same quarter of 2007, a decrease of $21.5 million or 18.7%. Gross profit margins decreased to 31.7% in the third quarter of 2008, compared to 37.6% in the same quarter of 2007, as a result of changes in product and business unit mix as well as cost of goods charges primarily related to the closure of our Tulsa manufacturing facility. The decrease in sales is primarily weakness in our direct business due to the overall consumer environment and credit market disruptions, as well as an internal decision to reduce the level of discounting versus the prior year to improve product margins within the direct business.

Operating expenses for the third quarter of 2008 were $43.1 million compared to $66.6 million in the third quarter of 2007. The decrease in operating expenses is primarily the result of progress we are making on our restructuring plan and a $4.8 million charge to bad debt expense in the prior year as a result of a former customer filing for Chapter 11 bankruptcy. The decrease in operating expenses was partially offset by a $1.1 million non-cash write off of deferred financing fees in the third quarter 2008 related to the reduction of the borrowing limit in the Company's revolving credit agreement.

In April 2008, the Company completed the sale of Pearl Izumi, its former fitness apparel business. Assets, liabilities and results of operations associated with the fitness apparel business have been presented in the consolidated financial statements as discontinued operations.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

The following tables present certain consolidated financial data as a percentage
of net sales and statement of operations data comparing results for the three
months ended September 30, 2008 and 2007:



                                                            Three Months Ended September 30,
                                                     % of                         % of                         %
(in thousands)                         2008        net sales        2007        net sales      $ change      change
Net sales                            $  93,749         100.0 %    $ 115,257         100.0 %    $ (21,508 )    (18.7 %)
Cost of sales                           64,019          68.3 %       71,926          62.4 %       (7,907 )    (11.0 %)

Gross profit                            29,730          31.7 %       43,331          37.6 %      (13,601 )    (31.4 %)
Operating expenses:
Selling and marketing                   29,852          31.8 %       49,872          43.3 %      (20,020 )    (40.1 %)
General and administrative              11,011          11.7 %       14,150          12.3 %       (3,139 )    (22.2 %)
Research and development                 2,243           2.4 %        2,555           2.2 %         (312 )    (12.2 %)

Total operating expenses                43,106          46.0 %       66,577          57.8 %      (23,471 )    (35.3 %)

Operating loss                         (13,376 )       (14.3 %)     (23,246 )       (20.2 %)       9,870       42.5 %
Other Income (Expense):
Interest income                             38           0.0 %           91           0.1 %          (53 )    (58.2 %)
Interest expense                          (169 )        (0.2 %)      (1,606 )        (1.4 %)       1,437       89.5 %
Other income (expense), net               (241 )        (0.3 %)         499           0.4 %         (740 )   (148.3 %)

Total other expense                       (372 )        (0.4 %)      (1,016 )        (0.9 %)         644       63.4 %

Loss from continuing operations
before income taxes                    (13,748 )       (14.7 %)     (24,262 )       (21.1 %)      10,514       43.3 %
Income tax expense (benefit)            21,512          22.9 %       (9,818 )        (8.5 %)      31,330     (319.1 %)

Loss from continuing operations        (35,260 )       (37.6 %)     (14,444 )       (12.5 %)     (20,816 )   (144.1 %)
Income from discontinued
operations, net of tax                   1,142                          997                          145

Net loss                             $ (34,118 )                  $ (13,447 )                  $ (20,671 )

Net Sales

The Company is operating in a weak consumer and tight credit environment that we believe is contributing to softer domestic sales of our products. In the third quarter of 2008, we continued our efforts to restructure our organization to create teams accountable for profitability of the direct, retail and commercial global business units. Net sales were $93.7 million compared to $115.3 million in the third quarter of 2007 or a decline of 18.7%. The decline in net sales is due to lower sales in the direct business of $20.1 million and the commercial business of $1.4 million.

In the direct business, net sales declined $20.1 million to $38.7 million compared to $58.8 million in the third quarter of 2007 or a decrease of 34.2%. Sales in the direct channel consist of our Bowflex branded products and primarily include our rod-based home gyms, certain TreadClimber products, SelectTech dumbbells, and the Bowflex Revolution home gym. The decrease in net sales was primarily the result of declines in all product lines as a result of lower advertising dollars in the current period, lower conversion rates for interested customers making a purchase and a reduction in discounting compared to the prior year. In the third quarter of 2007, the Company offered large discounts and free freight to encourage customers to purchase our home fitness equipment. In addition, in the 2008 quarter economic factors such as record high gas prices, rising food prices and the credit crisis had a direct impact on the credit approval rates for our customers who finance their purchases. We have experienced lower credit approval rates for our higher sales price products like the TreadClimber and Revolution and expect to focus on introducing lower priced products in the direct business in the future. In addition, the Revolution product lines received additional consumer financing support through the second quarter of 2008 which allowed more customers to qualify for financing of this product in the form of higher credit lines at higher costs to the Company. Discontinuation of the financing support led to lower sales of the Revolution product lines but should improve overall profitability in future periods.

In the retail business, net sales remained flat at $26.4 million, compared to the third quarter of 2007. Sales in this business are primarily to various sporting good stores, warehouse clubs, department stores, fitness retail stores and independent bicycle dealers that typically sell health club-quality equipment to the end consumer for home and small business use. Sales in this channel were led by increased distribution of Schwinn branded cardio products as we seek to increase our presence in the much larger cardio segment of the fitness business. About 70% of fitness industry sales globally are cardio products while we have historically had stronger sales in the strength product category. We seek to expand our cardio presence in the future to be more aligned with consumer demand. Although sales in the retail channel were consistent with the prior year quarter, economic conditions deteriorated in the last part of the third quarter are likely to impact our retail customers which may have an impact on our net sales in this channel during the fourth quarter of 2008 and beyond.

In the commercial business, net sales declined $1.4 million to $28.4 million compared to $29.7 million in the third quarter of 2007, or a decrease of 4.6%. Sales in this channel are primarily to commercial dealers, health clubs and hotels. Sales declined in the third quarter of 2008 primarily due to the decision to suspend sales of the commercial TreadClimber product due to durability issues. The decline in TreadClimber sales was offset by increased sales of the Nautilus One and F3 strength products, as well as increased sales in our Stairmaster products which received product upgrades in early 2008. International sales represent approximately 42% of the total sales in this channel.

In the corporate function, royalty income was $0.3 million in the third quarter of 2008 compared to $0.3 million in the same period of 2007. Royalty income represents the revenue the Company receives for licensing certain owned patents and trademarks to other companies.

Gross Profit

As a result of lower net sales and lower gross margins, total gross profit decreased $13.6 million to $29.7 million compared to $43.3 million in the third quarter of 2007, or a decrease of 31.4%. As a percentage of net sales, gross profit margins decreased to 31.7% in the third quarter of 2008 compared to 37.6% in the comparable period of 2007. Direct business sales, which have a substantially higher gross profit margin, declined 34.2% from the prior year quarter leading the decline in gross profit. Additional reasons for the decline in gross profit include $4.1 million of charges related to closing the Tulsa manufacturing facility and transferring operations, a $1.8 million charge to inventory reserves related to excess parts and accessories as the Company is working to consolidate warehouse and distribution space. Excluding these charges, our adjusted gross profit margin was 38%. We will continue to face gross margin pressure until the sales mix shifts back towards the direct business.

Operating Expenses

Selling and Marketing

Selling and marketing expenses were $29.9 million in the third quarter of 2008 compared to $49.9 million in the same period of 2007, a decrease of $20.0 million or 40.1%. The reduction in marketing expense is primarily a result of a $5.1 million decline in advertising and media as we seek to obtain a better return on our advertising investment; a $4.8 million bad debt expense related to the third quarter 2007 bankruptcy filing by a former customer; a $1.7 million reduction in personnel costs due to reductions in headcount; a $1.0 million reduction in financing fees due to lower sales in the direct business; a $0.5 million decrease in catalog costs due to reduced focus on use of catalogs as a selling tool; a $0.8 million reduction in fees for use of a third party to sell discontinued and refurbished products over the internet; and over $2.0 million in reductions for various promotions, tradeshows and other discretionary services received in 2007 that have been scaled back or eliminated in 2008. In addition, the Company closed its operations in Australia which reduced selling and marketing expenses by $0.6 million compared to the prior year.

General and Administrative

General and administrative expenses were $11.0 million in the third quarter of 2008 compared to $14.1 million in the same period of 2007, a decrease of $3.1 million or 22.2%. The 2008 total includes a $1.1 million charge in banking fees as the Company reduced the borrowing capacity under its revolving line of credit agreement offset by a $1.9 million reduction in personnel costs. The 2007 total includes $2.3 million of severance costs related to our former chief executive officer.

Research and Development

Research and development expenses were $2.2 million in the third quarter of 2008 compared to $2.6 million in the same period of 2007, a decrease of $0.3 million or 12.2%. The decrease in research and development expenses was the result of a $0.5 million decrease in personnel expenses compared with the third quarter of 2007; a $0.2 million decrease in prototype expenses related to the Nautilus One product launch in 2007; and general decreases in discretionary expenses such as travel and use of consultants due to the restructuring efforts; offset by a $0.4 million charge in preproduction royalties related to a new product being developed.

Other Income (Expense)

Interest expense

Interest expense decreased to $169,000 in the third quarter of 2008 compared to $1.6 million in the same period of 2007, as proceeds from the sale of the Company's fitness apparel business were used to reduce borrowings.

Other Income, net

Other Income, net decreased to an expense of $0.2 million in the third quarter of 2008 compared to income of $0.5 million in the comparable period of 2007. The decrease is due to foreign currency losses realized by the Company in 2008 based on currency fluctuations.

Income Tax Expense (Benefit)

The provision for income tax from continuing operations was an expense of $21.5 million in the third quarter of 2008 compared to a benefit of $9.8 million in the same period of 2007. During the third quarter of 2008, the Company concluded that an overall valuation allowance in the amount of $26.8 million is required for substantially all deferred tax assets due to the accounting requirements of SFAS 109.The recording of a tax asset valuation allowance will substantially eliminate tax benefit in a period of losses but similarly will substantially eliminate tax expense upon a return to profitability. Accordingly, the Company will record minimal income tax expense or benefit in future periods until the valuation allowance is fully utilized or reversed. We have a twenty year carry forward period for our net operating losses.

Discontinued Operations

The Company designated the financial results of its fitness apparel business, Pearl Izumi, as discontinued operations during 2007. This resulted in recording the financial results as income from discontinued operations. The income from discontinued operations (net of tax) during the third quarter of 2008 was $1.1 million compared to $1.0 million during the prior year quarter.

SUMMARY OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

Net sales for the first nine months of 2008 were $318.9 million, compared to $354.8 million for the same period of 2007, a decrease of 10.1%. Gross profit margins decreased to 37.5% in the first nine months of 2008, compared to 40.6% in the same period of 2007. This decline is a result of changes in product and channel mix primarily driven by lower sales within the direct channel due to a soft North American home market for home exercise strength products and reduced promotions offered in the current year; charges related to the closing the Tulsa, Oklahoma manufacturing facility; transferring certain manufacturing and distribution operations to Independence, Virginia; and right sizing our parts and finished goods inventory as we eliminate products to simplify our business, reduce the number of distribution centers being utilized and reduce overall product handling costs.

Operating expenses for the first nine months of 2008 were $155.7 million compared to $165.0 million (which included an $18.3 million reduction in operating expenses in 2007 for access to intellectual property as settlement of a lawsuit). The decrease in operating expenses is primarily the result of an ongoing review of global operations to restructure the Company to improve profitability. Restructuring activities have resulted in $4.8 million of severance charges in the first nine months of 2008 as the Company reduced headcount and reorganized along channels of business. In addition, the Company incurred a number of additional charges including an $8.0 million payment in settlement of all claims arising out of or related to the termination of the agreement with Land America to purchase their China based manufacturing assets; $1.5 million charge for contracts related to licensing matters in the second quarter 2008 and a $1.1 million charge for reducing the revolving line of credit during the third quarter 2008.

In April 2008, the Company completed the sale of Pearl Izumi, its former fitness apparel business. Assets, liabilities and results of operations associated with that business have been presented in the consolidated financial statements as discontinued operations.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

The following tables present certain consolidated financial data as a percentage
of net sales and statement of income data comparing results for the nine months
ended September 30, 2008 and 2007:



                                                            Nine Months Ended September 30,
                                                     % of                         % of                         %
(In Thousands)                         2008        net sales        2007        net sales      $ change      change
Net sales                            $ 318,914         100.0 %    $ 354,764         100.0 %    $ (35,850 )    (10.1 %)
Cost of sales                          199,325          62.5 %      210,689          59.4 %      (11,364 )     (5.4 %)

Gross profit                           119,589          37.5 %      144,075          40.6 %      (24,486 )    (17.0 %)

Operating expenses:
Selling and marketing                  103,566          32.5 %      138,288          39.0 %      (34,722 )    (25.1 %)
General and administrative              45,717          14.3 %       37,036          10.4 %        8,681       23.4 %
Research and development                 6,409           2.0 %        7,981           2.2 %       (1,572 )    (19.7 %)
Litigation settlement                       -            0.0 %      (18,300 )        (5.2 %)      18,300      100.0 %

Total operating expenses               155,692          48.8 %      165,005          46.5 %       (9,313 )     (5.6 %)

Operating loss                         (36,103 )       (11.3 %)     (20,930 )        (5.9 %)     (15,173 )    (72.5 %)
Other income (expense):
Interest income                            128           0.0 %          244           0.1 %         (116 )    (47.5 %)
Interest expense                        (1,499 )        (0.5 %)      (3,357 )        (0.9 %)       1,858       55.3 %
Other income (expense), net                (65 )         0.0 %        1,023           0.3 %       (1,088 )   (106.4 %)

Total other expense                     (1,436 )        (0.5 %)      (2,090 )        (0.6 %)         654       31.3 %

Loss from continuing operations
before income taxes                    (37,539 )       (11.8 %)     (23,020 )        (6.5 %)     (14,519 )    (63.1 %)
Income tax expense (benefit)            14,236           4.5 %       (9,221 )        (2.6 %)      23,457     (254.4 %)

Loss from continuing operations        (51,775 )       (16.2 %)     (13,799 )        (3.9 %)     (37,976 )   (275.2 %)
Income from discontinued
operations, net of tax                   2,421                        3,924                       (1,503 )

Net income (loss)                    $ (49,354 )                  $  (9,875 )                  $ (39,479 )

Net Sales

The Company is operating in an uncertain consumer environment that we believe is contributing to softer domestic sales. In 2008, we began an aggressive restructuring effort focused on profitability and cash flows of the direct, retail and commercial global business units. Net sales were $318.9 million compared to $354.8 million for the first nine months of 2007 or a decline of 10.1%. The decline in net sales is due to lower sales in the direct business of $37.5 million and the commercial business of $3.9 million, offset by an increase in net sales of $4.9 million in the retail business. The remainder of net sales consists of revenue from royalty agreements.

In the direct business, net sales declined $37.5 million to $149.6 million compared to $187.1 million in the first nine months of 2007 or a decrease of 20.1%. The decrease in net sales was primarily the result of declines in the sales of rod-based home gyms and the home version of certain TreadClimber products partially offset by an increase in sales of the Revolution product lines. The decline in rod-based home gym sales are partially explained by a decrease in advertising dollars in 2008 along with a reduction in discounting compared to the prior year. We believe TreadClimber revenue was adversely impacted by less efficient marketing activity due to the need to update our advertisements, a decrease in advertising dollars and a difficult financial market as most customers finance their purchase of this product. In addition, sales of TreadClimber products in the first quarter of 2007 were affected by a lack of product availability in the fourth quarter of 2006 which led to higher shipments in the first quarter of 2007. The introduction of the Revo XP model helped drive growth in Revolution product family revenue in 2008.

In the retail business, net sales increased $4.9 million to $78.2 million compared to $73.3 million in the first nine months of 2007, an increase of 6.7%. Increased sales in this business were led by SelectTech dumbbells and Schwinn ellipticals as we increased our presence in large sporting goods stores during 2008. These increases were offset by a decline in sales of rod-based home gyms as the Company has reduced the number of rod-based products offered in this channel.

In the commercial business, net sales declined $3.9 million to $88.8 million compared to $92.7 million in the first nine months of 2007, a decrease of 4.2%. Sales declined in the first nine months of 2008 primarily due to the decision to suspend sales of the commercial TreadClimber products due to durability issues. In addition, the Company's restructuring efforts and focus on channel profitability are expected to improve profitability in future periods as we focus on selling higher margin products. We launched the Nautilus One product line in the third quarter of 2007 which added revenue during 2008 and refreshed the Stairmaster products which have increased demand. International sales represent approximately 45% of the total sales in this channel and the international business benefited in 2007 as a result of currency fluctuations.

In the corporate function, royalty income increased to $2.3 million compared to $1.7 million in the first nine months of 2007. The increase is a result of having more companies utilizing our patents and trademarks. Royalty income represents the revenue the Company receives for licensing certain owned patents, trademarks and brands to other companies.

Gross Profit

As a percentage of net sales, gross profit margin decreased to 37.5% in the first nine months of 2008 compared to 40.6% in the comparable period of 2007. The decline in gross profit was primarily the result of a change in sales mix and an overall 10.0% decline in sales. Direct business sales, which have a substantially higher gross profit margin, declined 20.0% from the prior period leading the decline in overall gross profit margin. In addition, overall sales declined faster than the Company could reduce fixed costs of manufacturing and distribution. In July 2008 the Company made the decision to close its manufacturing facility in Tulsa, Oklahoma and transfer certain functions to another owned facility in Virginia. This decision has resulted in charges of $4.1 million. Additional reasons for the decline in gross profit include a decrease in vendor rebates of $2.4 million due to termination of the Land America acquisition agreement; and increased freight expenses related to higher fuel costs and backorders on a new commercial strength product line which required additional shipping and handling costs to deliver to our customers. In addition, we have identified products that will no longer be sold, resulting in increased inventory reserves for parts and finished goods inventories of approximately $3.2 million.

Operating Expenses

Selling and Marketing

Selling and marketing expenses were $103.6 million in the first nine months of . . .