BUSINESS DESCRIPTION
As a leading provider of population health improvement services and programs to corporations, hospitals, communities and universities located in the United States and Canada, we currently manage 218 corporate fitness center sites, 169 corporate health management sites and 105 unstaffed health management programs. We provide staffing services as well as a comprehensive menu of programs, products and consulting services within our Health Management and Fitness Management business segments. Our broad suite of services enables our clients' employees to live healthier lives, and our clients to control rising healthcare costs, through participation in our assessment, education, coaching, physical activity, weight management and wellness program services, which can be offered as follows: (i) through on-site fitness centers we manage; (ii) remotely via the web; and (iii) through telephonic health coaching.

RESULTS OF OPERATIONS
The following table sets forth our statement of operations data as a percentage
of total revenues for the quarter and the nine month period ended September 30,
2008 and 2007:

                                                    Three Months Ended                 Nine Months Ended
                                                      September 30,                      September 30,
                                                  2008              2007             2008             2007
REVENUE                                             100.0 %          100.0 %           100.0 %         100.0 %

COSTS OF REVENUE                                     67.6 %           71.5 %            69.9 %          71.5 %


GROSS PROFIT                                         32.4 %           28.5 %            30.1 %          28.5 %

OPERATING EXPENSES
Salaries                                             16.0 %           16.2 %            16.0 %          15.4 %
Other selling, general and administrative             8.0 %           10.7 %             9.1 %           9.9 %
Amortization of acquired intangible assets            0.2 %            0.3 %             0.2 %           0.2 %

Total operating expenses                             24.2 %           27.2 %            25.3 %          25.5 %


OPERATING INCOME                                      8.2 %            1.3 %             4.8 %           3.0 %

OTHER INCOME (EXPENSE)                               (0.1 %)          (0.1 %)           (0.0 %)         (0.1 %)


EARNINGS BEFORE INCOME TAXES                          8.1 %            1.2 %             4.8 %           2.9 %

INCOME TAX EXPENSE                                    3.5 %            1.1 %             2.1 %           1.5 %


NET EARNINGS                                          4.6 %            0.1 %             2.7 %           1.4 %

Results of Operations for the quarter ended September 30, 2008 compared to the quarter ended September 30, 2007.
Revenue. Revenue increased $1,344,000, or 7.8%, to $18,497,000 for the three months ended September 30, 2008, from $17,153,000 for the three months ended September 30, 2007.
Our Fitness Management segment declined $301,000, reflecting a decline in staffing services of $340,000 and growth in program services of $39,000. The decline in staffing services for the third quarter is primarily due to contract terminations in 2007.
Our Health Management segment contributed total growth of $1,646,000, which includes growth of $536,000 from staffing services and growth of $1,110,000 from program services. Overall, the growth in staffing revenue is attributable to new customers and the expansion of services to existing customers. The increase in program services revenue is primarily due to new and existing customers in the areas of biometric screening services, health coaching and advising services and eHealth platform participation.

During the third quarter of 2008, we secured four new health management commitments and two new fitness management commitments, which combined may realize annualized revenue of $1.7 million. This growth will be partially offset by a potential annualized revenue loss of $1.1 million from fitness and health management contract cancellations.
Gross Profit. Gross profit increased $1,102,000, or 22.6%, to $5,987,000 for the three months ended September 30, 2008, from $4,885,000 for the three months ended September 30, 2007. Total gross margin increased to 32.4% from 28.5% for the same period last year.
Of this increase in gross profit, our Fitness Management segment grew $95,000, which includes growth of $180,000 from staffing services and a decline of $85,000 from program services. Gross margin for our Fitness Management segment increased to 24.9%, from 23.3% for the same period of 2007. This result is primarily due to a gross margin increase for staffing services, which increased to 24.3%, from 21.7%, reduced by a decrease in gross margin for program services, which decreased to 33.8% from 50.7%. The margin increase for staffing services is primarily due to lower costs for employee paid time off and medical benefits, in addition to expense savings for equipment maintenance, group classes, operating supplies and liability insurance. The margin decrease for program services is primarily due to higher costs to deliver site-based personal training and massage therapy services.
Our Health Management segment contributed gross profit growth of $1,008,000, which includes growth of $244,000 from staffing services and growth of $764,000 from program services. Gross margin for our Health Management segment increased to 41.8% from 37.0%. This increase is due to a gross margin increase for program services, which increased to 59.1% from 54.8%, and a gross margin increase for staffing services, which increased to 28.1%, from 25.8%. The increase in gross margin for program services is primarily due to revenue growth and productivity enhancements related to biometric screenings and health coaching and advising services. The increased margin for staffing services is primarily due to revenue growth, lower costs for employee paid time off and expense savings for marketing initiatives, operating supplies and staff training.
Operating Expenses and Operating Income. Operating expenses decreased $175,000, or 3.8%, to $4,478,000 for the three months ended September 30, 2008, from $4,653,000 for the three months ended September 30, 2007.
This decrease is due primarily to a $350,000, or 19.1%, decrease in other selling, general, and administrative expenses reduced by a $175,000, or 6.3%, increase in salaries. The decrease in selling, general, and administrative expenses reflects prior year cost increases to evaluate and improve corporate governance and compliance procedures and non-recurring legal and business consulting costs. The increase in salaries expense primarily reflects annual wage increases and the expense increases related to our equity incentive performance program, reduced by lower stock based compensation costs. Operating margin increased to 8.2% for the third quarter 2008, from 1.3% for the same period 2007. This increase is primarily due to improved gross margins for Fitness Management staffing services, improved gross margins for our Health Management segment, and the elimination of one-time, non-recurring expenses we incurred during the third quarter of 2007.
Other Income and Expense. Interest expense was inconsequential during the quarters ended September 30, 2008 and 2007, respectively.
Income Taxes. Income tax expense increased $458,000 to $651,000 for the three months ended September 30, 2008, from $193,000 for the same period last year. The increase is primarily due to higher operating income for the quarter ended September 30, 2008 as compared to same period of 2007, reduced by a prior year tax expense adjustment of $94,000 resulting from a change in estimated 2006 income taxes payable.
Our effective tax rate was 43.6% of earnings before income taxes for the third quarter of 2008, compared to 45% for the same period last year (excluding the prior year tax expense adjustment for the change in estimate for 2006

income taxes payable). Compared to a normal effective tax rate of 41%, our current effective tax rate is slightly higher due primarily to the non-deductibility of compensation expense for incentive stock options. Net Earnings. As a result of the above, net earnings for the quarter ended September 30, 2008 increased approximately $824,000 to $841,000, compared to net earnings of $17,000 for the quarter ended September 30, 2007.
Results of Operations for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.
Revenue. Revenue increased $5,293,000, or 10.4%, to $56,015,000 for the nine months ended September 30, 2008, from $50,722,000 for the nine months ended September 30, 2007.
Our Fitness Management segment declined $612,000, which included a decline in staffing services of $599,000 and a decline in program services of $13,000. This revenue decline is primarily due to contract terminations in 2007. Our Health Management segment contributed total growth of $5,905,000, which includes growth of $1,800,000 from staffing services and growth of $4,105,000 from program services. Overall, the growth in staffing services revenue is attributable to new customers and the expansion of services to existing customers. The increase in program services revenue is primarily due to new and existing customers in the areas of biometric screening services, health coaching and advising services and eHealth platform participation.
During the first nine months of 2008, we received a total of 15 health management commitments and expanded services with two existing health management customers. In addition, we received two fitness management commitments and expanded services with four fitness management customers. Combined commitment and service-expansion activity for the first nine months of 2008 may realize annualized revenue of $6.1 million, to be partially offset by a potential annualized revenue loss of $1.7 million from contract cancellations. Gross Profit. Gross profit increased $2,416,000, or 16.7%, to $16,866,000 for the nine months ended September 30, 2008, from $14,450,000 for the nine months ended September 30, 2007. Total gross margin increased to 30.1%, from 28.5% for the same period last year, which is primarily due to Health Management revenue representing a larger percentage of our total revenue.
Of this increase in gross profit, our Fitness Management segment increased $348,000, which includes an increase of $544,000 from staffing services and a decline of $196,000 from program services. Gross margin for our Fitness Management segment increased in the nine months ended September 30, 2008 to 24.1%, from 22.5% for the same period of 2007. This result is primarily due to a gross margin increase in staffing services, which increased to 23.3%, from 21.0% for the same period last year. Gross profit for program services decreased from 46.2% to 36.1%. The margin increase for staffing services is primarily due to lower costs for employee paid time off and medical benefits, in addition to expense savings for group classes and liability insurance. The margin decrease for program services is primarily due to higher costs to deliver site-based personal training and massage therapy services.
Our Health Management segment contributed gross profit growth of $2,068,000, which includes growth of $498,000 from staffing services and growth of $1,570,000 from program services. Gross margin for our Health Management segment declined in the first nine months from 38.4% to 37.6%. This result is due to a gross margin decrease for program services, which declined to 51.5%, from 58.9% in the same period last year, reduced by a gross margin increase for staffing services, which increased to 25.8%, from 25.5% in the same period last year. The gross margin increase for staffing services is primarily due to revenue growth and lower costs for employee paid time off and operating expense savings. The decrease in gross margin for program services is primarily due to the cost of additional screening and health coaching staff we hired in late 2007 to meet forecasted demand for these services. As we experience additional growth in program services revenue, we believe that margins will improve commensurately.

Operating Expenses and Operating Income. Operating expenses increased $1,202,000, or 9.3%, to $14,158,000 for the nine months ended September 30, 2008, from $12,956,000 for the nine months ended September 30, 2007. This increase is due to a $1,130,000, or 14.4%, increase in salaries, and a $72,000, or 1.4%, increase in other selling, general and administrative expenses. These increases are primarily due to planned investments we made subsequent to the first quarter of 2007 to strengthen our management infrastructure in certain operating areas, including Research, Development and Outcomes, Information Technology and Account Services, in order to support our future revenue growth plans.
Operating margin increased to 4.8% for the nine months ended September 30, 2008, from 3.0% for the same period 2007. This increase is primarily due to health management revenue growth and improved margins on staffing services for both Health and Fitness management.
Other Income and Expense. Interest expense was inconsequential for the nine months ended September 30, 2008 and 2007, respectively.
Income Taxes. Income tax expense increased $392,000 to $1,159,000 for the nine months ended September 30, 2008, from $767,000 for the nine months ended September 30, 2007. The increase is primarily due to higher operating income for the first nine months of 2008 as compared to the same period last year, reduced by a prior year tax expense adjustment of $94,000 resulting from a change in estimated 2006 income taxes payable.
Our effective tax rate was 43% of earnings before income taxes for the first nine months of 2008, compared to 45% for the same period last year (excluding the prior year tax expense adjustment for the change in estimate for 2006 income taxes payable). Compared to a normal effective tax rate of 41%, our current effective tax rate is higher due primarily to the non-deductibility of compensation expense for incentive stock options.
Net Earnings. As a result of the above, net earnings for the nine months ended September 30, 2008 increased approximately $827,000 to $1,529,000, compared to net earnings of $702,000 for the nine months ended September 30, 2007.

LIQUIDITY AND CAPITAL RESOURCES
Our working capital increased $438,000 to $8,898,000 for the nine months ended September 30, 2008, from $8,460,000 at December 31, 2007. This increase is primarily due to the effect of seasonal business growth reduced by $2.3 million of cash outlays to repurchase common shares outstanding in the three months ended June 30, 2008, as discussed previously in Note 6.
In addition to cash flows generated from operating activities, our other primary source of liquidity and working capital is provided by a $7,500,000 Credit Agreement with Wells Fargo Bank, N.A. (the "Wells Loan"). At our option, the Wells Loan bears interest at prime, or the one-month LIBOR plus a margin of 2.25% to 2.75% based upon our Senior Leverage Ratio (effective rate of 5.00% and 7.25% at September 30, 2008 and December 31, 2007, respectively). The availability of the Wells Loan decreases $250,000 on the last day of each calendar quarter (to a floor of $3,250,000), beginning September 30, 2003, and matures on September 30, 2009, as amended. Working capital advances from the Wells Loan are based upon a percentage of our eligible accounts receivable, less any amounts drawn and outstanding. The facility provided maximum borrowing capacity of $3,250,000 at September 30, 2008 and December 31, 2007, respectively. No debt was outstanding at September 30, 2008 and December 31, 2007. All borrowings are collateralized by substantially all of our assets. At September 30, 2008, we were in compliance with all of our financial covenants. On a short and long-term basis, we believe that sources of capital to meet our obligations will be provided by cash generated through operations and the Wells Loan. We also believe that our current and available resources will enable us to finance our working capital needs without having to raise additional capital.
INFLATION
We do not believe that inflation has significantly impacted our results of operations in any of the last three completed fiscal years.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2008, the Company had no off-balance sheet arrangements or transactions with unconsolidated, limited purpose entities.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Such "forward-looking" information is included in this Form 10-Q, including Item 2 of Part I, as well as in our Annual Report on Form 10-K for the year ended December 31, 2007 that was filed with the Securities and Exchange Commission, and in other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company).
Forward-looking statements include all statements based on future expectations and specifically include, among other things, our belief that margins will improve commensurately as we experience additional growth in program services revenue, statements relating to forecasted future demand of our screening and health coaching services, statements relating to our planned investments made to strengthen our management infrastructure in order to support our future revenue growth plans, our belief that sources of capital to meet our obligations will be provided by cash generated through operations and the Wells Loan, and our belief that our current and available resources will enable us to finance our working capital needs without having to raise additional capital, as well as statements regarding increasing revenue, improving margins, marketing efforts, competitive conditions, the effect of price competition and changes to the economy, the sufficiency of our liquidity and capital resources, and our share repurchase plan. In addition, the estimated annualized revenue value of our new and lost contracts is a forward looking statement, which is based upon an estimate of the anticipated annualized revenue to be realized or lost.

Such information should be used only as an indication of the activity we have recently experienced in our two business segments. These estimates, when considered together, should not be considered an indication of the total net, incremental revenue growth we expect to generate in any year, as actual net growth may differ from these estimates due to actual staffing levels, participation rates and contract duration, in addition to other revenue we may lose in the future due to contract termination. Any statements that are not based upon historical facts, including the outcome of events that have not yet occurred and our expectations for future performance, are forward-looking statements. The words "potential," "believe," "estimate," "expect," "intend," "may," "could," "will," "plan," "anticipate," and similar words and expressions are intended to identify forward-looking statements. Such statements are based upon the current beliefs and expectations of our management. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, our inability to deliver the health management services demanded by major corporations and other clients, the level of demand for our services, customer acceptance of higher service pricing, our inability to successfully cross-sell health management services to our fitness management clients, our inability to successfully obtain new business opportunities, our failure to have sufficient resources to make investments, our ability to make investments and implement strategies successfully, our ability to limit and manage expenses, continued delays in obtaining new commitments and implementing services, and those matters identified and discussed in Item 1A of the Company's Form 10K for the year ended December 31, 2007 and Item 1A of Part II of this Form 10-Q under "Risk Factors."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to changes in U.S. and international interest rates. The company's borrowings under the Wells Fargo Line of Credit bear interest at a variable rate. There were no borrowings outstanding under the Wells Fargo Line of Credit at September 30, 2008.
We have no history of, nor do we anticipate in the future, investing in derivative financial instruments, derivative commodity instruments or other such financial instruments. We invoice our Canadian customers in their local currency, and such transactions are considered immaterial in relation to our total billings. As a result, the exposure to foreign currency fluctuations and other market risks is not material.