You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing under Item 1 of Part 1. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report, including information with respect to our plans and strategy for our business and expected financial results, includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" under Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

CRITICAL ACCOUNTING POLICIES
Our most critical accounting policies, which are those that require significant judgment, include: revenue recognition, trade and other accounts receivable, goodwill and stock-based compensation. A more in-depth description of these can be found in Note 3 to the interim consolidated financial statements included in this Quarterly Report and Note 1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
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 204 corporate fitness center sites, 171 corporate health management sites and 87 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 ended June 30, 2009 and 2008:

                                                    Three Months Ended                Six Months Ended
                                                         June 30,                         June 30,
                                                   2009             2008            2009            2008
REVENUE                                              100.0 %         100.0 %          100.0 %        100.0 %
COSTS OF REVENUE                                      70.1 %          70.6 %           68.7 %         71.0 %

GROSS PROFIT                                          29.9 %          29.4 %           31.3 %         29.0 %
OPERATING EXPENSES
Salaries                                              16.9 %          16.1 %           16.1 %         16.0 %
Other selling, general and administrative              9.5 %           9.8 %            9.0 %          9.6 %
Amortization of acquired intangible assets             0.1 %           0.2 %            0.1 %          0.2 %

Total operating expenses                              26.5 %          26.1 %           25.2 %         25.8 %

OPERATING INCOME                                       3.4 %           3.3 %            6.1 %          3.2 %
OTHER INCOME (EXPENSE)                                 0.0 %           0.0 %            0.0 %          0.0 %

EARNINGS BEFORE INCOME TAXES                           3.4 %           3.3 %            6.1 %          3.2 %
INCOME TAX EXPENSE                                     1.5 %           1.4 %            2.6 %          1.4 %

NET EARNINGS                                           1.9 %           1.9 %            3.5 %          1.8 %

Results of Operations for the quarter ended June 30, 2009 compared to the quarter ended June 30, 2008.
Revenue. Revenue decreased $34,000 or 0.2%, to $18,781,000 for the three months ended June 30, 2009, from $18,815,000 for the three months ended June 30, 2008. Fitness Management
Our Fitness Management segment declined 5.1%, or $542,000, which included a decline in staffing services of $565,000 or 5.7%, and a slight increase in program services of $23,000, or 3.5%. This overall revenue decline is primarily due to contract terminations we experienced in 2008 and 2009 related to customer reaction to the

recessionary business climate. The increase in program services, as compared to last year, was primarily due to increased participation in walking programs and eHealth platform participation.
Health Management
Our Health Management segment contributed total revenue growth of 6.1%, or $507,000, which included overall growth from staffing services of $81,000, or 1.8%, and growth from program services of $426,000, or 11.3%. Overall, the growth in staffing revenue is attributable to new customers and the expansion of sales to existing customers. The increase in program services, compared to last year, was primarily driven by an increase in health coaching and advising services.
2009 Customer Commitments and Cancellations For the three months ended June 30, 2009, the Company received a total of three health management commitments, three expansions of health management services to existing clients, and four fitness management commitments. This commitment activity for 2009 may realize annualized revenue of $4.4 million, to be partially offset by a potential annualized revenue loss of $1.3 million from fitness and health management contract cancellations. These cancellations reflect the continuing weakness in the economy and the challenges companies expect to face during 2009.
Gross Profit. Gross profit increased $76,000 or 1.4%, to $5,612,000 for the three months ended June 30, 2009, from $5,536,000 for the three months ended June 30, 2008. Total gross margin increased to 29.9%, from 29.4% for the same period last year, which is primarily due to Health Management revenue representing a larger percentage of our total revenue and improved margins for Health Management program services.
Fitness Management
Fitness Management gross profit decreased $183,000, which includes a decrease of $235,000 from staffing services, partially offset by an increase of $52,000 from program services. Gross margin for our Fitness Management segment decreased in the three months ended June 30, 2009 to 24.2%, from 24.7% for the same period of 2008. This result is primarily due to a gross margin decrease in staffing services, which decreased from 23.9% for the same period last year, to 22.8%, partially offset by a gross margin increase in program services, which increased from 36.3% for the same period last year, to 42.8%. The margin decrease for staffing services is primarily due to higher costs for employee medical benefits and workers compensation costs. The margin increase for program services is primarily due to the mix of programs delivered during the quarter as compared to the same period last year and labor efficiencies for personal training and massage services.
Health Management
Health Management gross profit increased $259,000, which includes an increase of $474,000 from program services, reduced by a decrease of $215,000 from staffing services. Gross margin for our Health Management segment increased in the three months ended June 30, 2009 to 36.3%, from 35.4% for the same period of 2008. This result is primarily due to a gross margin increase in program services, which increased from 45.6% for the same period last year, to 52.2%, reduced by a gross margin decrease in staffing services, which decreased from 27.1% for the same period last year, to 22.0%. The margin decrease for staffing services is primarily due to higher costs for employee paid time off, medical benefits, workers compensation costs and increased wage costs. The margin increase in program services is primarily due to increased margins on health coaching and advising services and biometric screening services.
Operating Expenses and Operating Income. Operating expenses increased $78,000, or 1.6%, to $4,979,000 for the three months ended June 30, 2009, from $4,901,000 for the three months ended June 30, 2008.

The increase is primarily due to higher costs for management incentive programs and employee benefits, reduced by operating cost savings. For the three months ended June 30, 2009, operating expenses, as a percent of revenue, were 26.5%, compared to 26.0% for the same period last year.
Operating margin remained flat to last year for the second quarter 2009, at 3.4%. This result reflects the sales growth in our Health Management segment and cost efficiencies related to Health Management segment program services, offset by the decrease in Fitness Management segment sales, higher staffing costs, and a higher ratio of operating expenses to revenue as discussed above Other Income and Expense. Interest expense was inconsequential during the quarters ended June 30, 2009 and 2008.
Income Taxes. Income tax expense increased $10,000 to $278,000 for the three months ended June 30, 2009, from $268,000 for the three months ended June 30, 2008. The increase is primarily due to a true-up adjustment for the quarter ended June 30, 2009, compared to the same period of 2008.
Our effective tax rate was 43.8% of earnings before income taxes for the second quarter of 2009, compared to 42.5% for the same period last year. Compared to our normal effective tax rate of 38.5%, our current effective tax rate is higher due primarily to the non-deductibility of compensation expense for incentive stock options.
Net Earnings. Net earnings decreased $6,000 to $357,000 for the three months ended June 30, 2009, from $363,000 for the three months ended June 30, 2008. This decrease is primarily due to the decrease in Fitness Management segment sales, higher staffing costs, and a higher ratio of operating expenses to revenue as discussed above, mostly offset by sales growth in our Health Management segment and cost efficiencies related to Health Management segment program services.
Results of Operations for the six months ended June 30, 2009 compared to the six months ended June 30, 2008.
Revenue. Revenue increased $470,000, or 1.3%, to $37,988,000 for the six months ended June 30, 2009, from $37,518,000 for the six months ended June 30, 2008. Fitness Management
Our Fitness Management segment declined $1,102,000, which included a decline in staffing services of $1,069,000 and a decline in program services of $33,000. This revenue decline is primarily due to the termination of large automotive contracts in 2008 and 2009.
If the economic recession continues for the remainder of 2009, it is possible we could continue to experience a higher level of staffing services revenue loss in our Fitness Management segment. Our most at risk contracts include those in the automotive industry, although we believe the current recession may have an adverse impact on many industries, which could affect our other customers and lead to further revenue loss from contract termination or service reduction. With respect to the automotive industry, we have lost approximately $1.7 million in revenue over the past twelve to eighteen months. During 2009, we expect to realize approximately $2.5 million in revenue from our "at risk" automotive contracts, and if their financial difficulties continue, we may see similar revenue losses during 2009.
It is also possible we could experience further declines in Fitness Management program service revenue during 2009. Program service revenue is derived from fees we charge to members of our managed fitness centers for services such as personal training, massage therapy, weight loss programs and special fitness classes. The revenue decline we experienced in the first half of 2009 is attributed to the effects of the recessionary economy, employment reductions and our members decreasing their spending on discretionary services. We believe this trend will continue during 2009.

Because we are the largest provider of fitness management services in the United States, we believe the number of opportunities to bid on new business during 2009 should be consistent with past years. In order to increase our chances of winning new business in 2009 and reverse the historical decline of our fitness management revenue, we also believe that we will need to lower our pricing to be competitive in this market, which may result in lower profitability. Health Management
Our Health Management segment contributed total growth of $1,572,000, which includes growth of $327,000 from staffing services and growth of $1,245,000 from program services. Overall, the growth in staffing revenue is attributable to new customers and the expansion of sales to existing customers. The increase in program services revenue is primarily due to an increase in our core health programs, including biometric screening services, health coaching and advising services and eHealth platform revenue.
For 2009, we anticipate that the economic recession may have a negative impact on revenue from existing customers. It is possible that many of our health management customers may reduce the scope of their programs during 2009 as a measure to conserve cash and improve profitability. Our health management revenue may also be negatively affected by lower participation rates at some customers due to employee layoffs. At the same time, the recessionary economy has also lengthened the sales cycle for new opportunities. The combination of these events, if they materialize, may challenge our ability to increase 2009 revenue on a basis consistent with past growth. 2009 Customer Commitments and Cancellations For the six months ended June 30, 2009, the Company received a total of seven health management commitments, three expansions of health management services to existing clients, and five fitness management commitments. This commitment activity for 2009 may realize annualized revenue of $6.0 million, to be partially offset by a potential annualized revenue loss of $1.8 million from fitness and health management contract cancellations. These cancellations reflect the continuing weakness in the economy and the challenges companies expect to face during 2009.
Gross Profit. Gross profit increased $1,025,000, or 9.4%, to $11,904,000 for the six months ended June 30, 2009, from $10,879,000 for the six months ended June 30, 2008. Total gross margin in the six months ended June 30, 2009 increased to 31.3% from 29.0% for the same period last year, which is primarily due to Health Management revenue representing a larger percentage of our total revenue and improved margins for Health Management program services. Fitness Management
Fitness Management gross profit decreased $173,000, which includes a decrease of $211,000 from staffing services, partially offset by an increase of $38,000 from program services. Gross margin for our Fitness Management segment increased in the six months ended June 30, 2009 to 24.2%, from 23.7% for the same period of 2008. This result is primarily due to a gross margin increase in program services, which increased from 37.2% for the same period last year, to 41.3%, and a slight gross margin increase in staffing services, which increased from 22.9% for the same period last year, to 23.0%. The margin increase for program services is primarily due to the mix of programs delivered during the quarter as compared to the same period last year and labor efficiencies for personal training and massage services.

Health Management
Our Health Management segment contributed gross profit growth of $1,197,000, which includes growth of $1,211,000 from program services and a decline of $14,000 from staffing services. Gross margin for our Health Management segment increased in the six months ended June 30, 2009 to 39.1%, from 35.6% for the same period of 2008. This result is primarily due to a gross margin increase in program services, which increased from 48.0% for the same period last year, to 54.7%, reduced by a gross margin decrease in staffing services, which decreased from 24.6% for the same period last year, to 23.5%. The margin decrease for staffing services is primarily due to higher costs for employee paid time off, medical benefits and workers compensation costs. The gross increase in program services is primarily due to increased margins on health coaching and advising services and biometric screening services.
The anticipated negative impact of the economic recession discussed above may challenge our ability to improve gross profit and margins in 2009 on a basis consistent with past growth.
Operating Expenses and Operating Income. Operating expenses decreased $109,000, or 1.1%, to $9,571,000 for the six months ended June 30, 2009, from $9,680,000 for the six months ended June 30, 2008.
The decrease is primarily due to general operating cost savings. For the three months ended June 30, 2009, operating expenses, as a percent of revenue, were 25.2%, compared to 25.8% for the same period last year.
Operating margin increased to 3.6% for the six months ended June 30, 2009, from 1.8% for the same period 2008. This result reflects the sales growth in our Health Management segment, cost efficiencies related to Health Management segment program services and operating expense savings, reduced by the decrease in Fitness Management segment sales. Since 2009 revenue growth may be challenged by recessionary pressures, our strategies to maximize our operating profitability will focus on closely managing operating expenses and improving business processes.
Other Income and Expense. Interest expense was inconsequential for the six months ended June 30, 2009 and 2008.
Income Taxes. Income tax expense increased $467,000 to $975,000 for the six months ended June 30, 2009, from $508,000 for the six months ended June 30, 2008. The increase is due to a higher operating income for the first six months of 2009 as compared to the same period last year.
Our effective tax rate was 41.8% of earnings before income taxes for the second quarter of 2009, compared to 42.5% for the same period last year. Compared to our normal effective tax rate of 38.5%, our current effective tax rate is higher due primarily to the non-deductibility of compensation expense for incentive stock options.
Net Earnings. Net earnings applicable to common shareholders increased $673,000 to $1,360,000 for the six months ended June 30, 2009, from $687,000 for the six months ended June 30, 2008. This increase is primarily due to sales growth in our Health Management segment, cost efficiencies related to Health Management segment program services and operating expense savings, reduced by the decrease in Fitness Management segment sales.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital increased $1,800,000 to $12,500,000 for the six months ended June 30, 2009, from $10,700,000 at December 31, 2008. This increase is largely attributable to our improved operating results and cash accumulation strategy given current economic conditions.
In addition to cash flows generated from operating activities, our other primary source of liquidity and working capital is provided by a $3,500,000 Credit Agreement with Wells Fargo Bank, N.A. (the "Wells Loan"). Effective

with the renewal of the Wells Loan on March 24, 2009, interest will be computed using the daily three month LIBOR rate plus a markup of 2.75% (effective rate of 3.345% and 5.0% at June 30, 2009 and 2008, respectively). The Wells Loan matures on June 30, 2011, 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 June 30, 2009 and December 31, 2008, respectively and no debt was outstanding on those dates. There were no borrowings under the line of credit during the six months ended June 30, 2009. Although we do not anticipate borrowing from the Wells Loan in 2009, we have extended the agreement, as previously discussed, to provide an additional source of funding. All borrowings are collateralized by substantially all of our assets. At June 30, 2009, we were in compliance with all of our financial covenants and expect to remain in compliance with the covenants over the life of the credit agreement. We believe our short and long-term capital needs will be met with cash flows generated by operations. We anticipate investment activities in 2009 will be near 2008 levels and will be funded through operating cash flows. Capitalized software development costs, as previously discussed, are primarily related to enhancements to our eHealth platform. These enhancements are made to improve efficiencies and/or generate additional revenues and are, thus, discretionary in nature.
We did not see a material change in the payment activities of our customers in 2008 and do not anticipate a material change in 2009. We do, however, expect to realize approximately $2.5 million in revenue from our existing automotive contracts in 2009 and will continue to monitor their financial health as it relates to outstanding accounts receivable. On April 30, 2009, an automotive customer in our fitness management segment filed for bankruptcy protection under Chapter 11. Our outstanding receivable from this customer was approximately $34,000. The customer has paid the outstanding balance and continues to make timely payments on the continued monthly service billings. In addition, we collected receivable payments of approximately $137,000 from the customer during the 90 days before the bankruptcy filing. Such payments may constitute preferential payments recoverable under the Bankruptcy Code. We believe we have valid defenses to any potential claim for these payments and will not be required to repay the full amount. This customer has assumed our contract as of May 22, 2009. On June 1, 2009, another automotive customer in our fitness management segment filed for bankruptcy protection under Chapter 11. Our outstanding receivable from this customer was approximately $283,000. The customer has paid the outstanding balance and continues to make timely payments on the continued monthly service billings. In addition, we collected receivable payments of approximately $110,000 from the customer during the 90 days before bankruptcy. Such payments may constitute preferential payments recoverable under the Bankruptcy Code. We believe we also have valid defenses to any potential claim for these payments. This customer has assumed our contracts as of July 10, 2009. Our revenue from these customers was approximately $2,909,000 and $746,000 for the year ended December 31, 2008 and the six months ended June 30, 2009, respectively.
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 June 30, 2009, 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-K, including this Item 7, as well as 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, statements relating to revenue loss in our Fitness Management segment; our belief the current recession may have an adverse impact on many industries, which could affect our customers and lead to further revenue loss from contract termination or service reduction; our belief that revenue decline will continue during 2009 due to the effects of the recessionary economy, employment reductions and our members decreasing their spending on discretionary services; our belief that the number of opportunities to bid on new fitness management business during 2009 should be consistent with past years; our belief that we will need to lower our pricing to be competitive in the fitness management market, which may result lower profitability; our ability to increase 2009 revenue on a basis consistent with past growth; our ability to improve gross profit and margins in 2009 on a basis consistent with past growth; our expectation that we will not borrow from the Wells Loan in 2009 and that we will remain in compliance with all of our financial covenants over the life of the credit agreement; our belief that our short and long-term capital needs will be met with cash flows generated by operations; our anticipation that investment activities in 2009 will be at or below 2008 levels and will be funded through operating cash flows; our anticipation that we will not see a material change in the payment activities of our customers in 2009; statements regarding the potential effects of automotive company bankruptcies on our accounts receivable, contract continuation and prior payments and related claims and defenses regarding repayment of preferential payments, and our belief that inflation has not significantly impacted our results of operations in any of the last three completed fiscal years, as well as statements regarding projections and outlook relating to the industries in which we compete and the economy in general, increasing revenue, improving margins, marketing efforts, competitive conditions, the effect of price competition and changes to the economy, and the sufficiency of our liquidity and capital resources. In addition, the estimated annualized revenue value of our new, lost and existing 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 . . .