RESULTS OF OPERATIONS
The following table sets forth our statement of operations data as a percentage
of total revenues for the quarter ended September 30, 2009 and 2008:

                                                Three Months Ended         Nine Months Ended
                                                  September 30,              September 30,
                                                 2009         2008         2009         2008
REVENUE                                          100.0 %      100.0 %       100.0 %     100.0 %
COSTS OF REVENUE                                  67.4 %       67.6 %        68.2 %      69.9 %

GROSS PROFIT                                      32.6 %       32.4 %        31.8 %      30.1 %
OPERATING EXPENSES
Salaries                                          15.9 %       16.0 %        16.0 %      16.0 %
Other selling, general and administrative          9.0 %        8.0 %         9.0 %       9.1 %
Amortization of acquired intangible assets         0.1 %        0.2 %         0.1 %       0.2 %

Total operating expenses                          25.0 %       24.2 %        25.1 %      25.3 %

OPERATING INCOME                                   7.6 %        8.2 %         6.7 %       4.8 %
OTHER INCOME (EXPENSE)                             0.0 %       -0.1 %         0.0 %       0.0 %

EARNINGS BEFORE INCOME TAXES                       7.6 %        8.1 %         6.7 %       4.8 %
INCOME TAX EXPENSE                                 2.9 %        3.5 %         2.7 %       2.1 %

NET EARNINGS                                       4.7 %        4.6 %         4.0 %       2.7 %

Results of Operations for the quarter ended September 30, 2009 compared to the quarter ended September 30, 2008.
Revenue. Revenue increased $1,279,000 or 6.9%, to $19,776,000 for the three months ended September 30, 2009, from $18,497,000 for the three months ended September 30, 2008.
Fitness Management
Our Fitness Management segment declined 5.8%, or $595,000, which included a decline in staffing services of $527,000 or 5.4%, and a decline in program services of $68,000, or 11%. 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 decline in program services, as compared to last year, was primarily due to contract terminations and lower participation in personal training and specialty classes. Health Management
Our Health Management segment contributed total revenue growth of 22.9%, or $1,874,000, which included growth from staffing services of $178,000, or 3.9%, and growth from program services of $1,696,000, or 46.8%. 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 and biometric screening services.
2009 Customer Commitments and Cancellations For the three months ended September 30, 2009, the Company received a total of four health management commitments and two fitness management commitments. This commitment activity for 2009 may realize annualized revenue of $5.2 million, to be partially offset by a potential annualized revenue loss of $0.4 million from fitness and health management contract cancellations. These cancellations reflect the continuing weakness in the economy and the financial challenges companies expect to face in the foreseeable future.
Gross Profit. Gross profit increased $453,000 or 7.6%, to $6,441,000 for the three months ended September 30, 2009, from $5,987,000 for the three months ended September 30, 2008. Total gross margin increased to 32.6%, from 32.4% for the same period last year, which is primarily due to Health Management revenue representing a larger percentage of our total revenue. Fitness Management
Fitness Management gross profit decreased $172,000, which includes a decrease of $182,000 from staffing services, partially offset by an increase of $10,000 from program services. Gross margin for our Fitness Management segment decreased in the three months ended September 30, 2009 to 24.6%, from 24.9% for the same period of 2008. This result is primarily due to a gross margin decrease in staffing services, which decreased from 24.3% for the same period last year, to 23.7%, partially offset by a gross margin increase in program services, which increased from 33.8% for the same period last year, to 39.8%. The margin decrease for staffing services is primarily due to increased wage costs. The margin increase for program services is primarily due to labor efficiencies for personal training and massage services.
Health Management
Health Management gross profit increased $625,000, which includes an increase of $672,000 from program services, reduced by a decrease of $47,000 from staffing services. Gross margin for our Health Management segment decreased in the three months ended September 30, 2009 to 40.3%, from 41.8% for the same period of 2008. This result is

primarily due to a gross margin decrease in program services, which decreased from 59.1% for the same period last year, to 52.9%, further reduced by a gross margin decrease in staffing services, which decreased from 28.1% for the same period last year, to 26.1%. The margin decrease for staffing services is primarily due to higher costs for employee paid time off and increased wage costs. The margin decrease in program services is primarily due to the mix of programs delivered, the addition of telephonic health coaches during the quarter and higher costs for our eHealth platform.
Operating Expenses and Operating Income. Operating expenses increased $473,000, or 10.6%, to $4,952,000 for the three months ended September 30, 2009, from $4,479,000 for the three months ended September 30, 2008.
The increase is primarily due to higher costs for management incentive programs and higher customer service costs that reflect the growth in health improvement programs. For the three months ended September 30, 2009, operating expenses, as a percent of revenue, were 25.0%, compared to 24.2% for the same period last year.
Operating margin decreased to 7.5% for the three months ended September 30, 2009, from 8.2% for the same period last year. This result reflects the higher operating expenses, as discussed above, reduced by sales growth in our Health Management segment.
Other Income and Expense. Interest expense was inconsequential during the quarters ended September 30, 2009 and 2008.
Income Taxes. Income tax expense decreased $74,000 to $577,000 for the three months ended September 30, 2009, from $651,000 for the three months ended September 30, 2008. The decrease is due primarily to a lower effective tax rate for the quarter ended September 30, 2009, compared to the same period of 2008. Our effective tax rate was 38.7% of earnings before income taxes for the third quarter of 2009, compared to 43.6% for the same period last year. The lower effective tax rate as compared to the corresponding period of 2008 is primarily due to the lower non-deductible stock based compensation expense in proportion to earnings before income taxes.
Net Earnings. Net earnings increased $71,000 to $912,000 for the three months ended September 30, 2009, from $841,000 for the three months ended September 30, 2008. This increase is primarily due to the sales growth in our Health Management segment and lower income taxes, reduced by higher operating expenses, as discussed above.
Results of Operations for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.
Revenue. Revenue increased $1,749,000, or 3.1%, to $57,764,000 for the nine months ended September 30, 2009, from $56,015,000 for the nine months ended September 30, 2008.
Fitness Management
Our Fitness Management segment declined $1,697,000, which included a decline in staffing services of $1,596,000 and a decline in program services of $101,000. This revenue decline is primarily due to contract terminations in 2008 and 2009, and lower participation in personal training and specialty classes.
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 $1.4 million in revenue when comparing the nine month period ended September 30, 2009 to the corresponding period of 2008. During 2009, we expect to realize

approximately $1.4 million in revenue from our "at risk" automotive contracts, and if their financial difficulties continue, we may see additional revenue losses.
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 $3,446,000, which includes growth of $505,000 from staffing services and growth of $2,941,000 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, or eliminate 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 nine months ended September 30, 2009, the Company received a total of eleven health management commitments, three expansions of health management services to existing clients, and seven fitness management commitments. This commitment activity for 2009 may realize annualized revenue of $11.2 million, to be partially offset by a projected annualized revenue loss of $2.2 million from fitness and health management contract cancellations. These cancellations reflect the continuing weakness in the economy and the financial challenges companies expect to face in the foreseeable future.
Gross Profit. Gross profit increased $1,478,000, or 8.8%, to $18,344,000 for the nine months ended September 30, 2009, from $16,866,000 for the nine months ended September 30, 2008. Total gross margin in the nine months ended September 30, 2009 increased to 31.8% from 30.1% 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 $344,000, which includes a decrease of $393,000 from staffing services, partially offset by an increase of $49,000 from program services. Gross margin for our Fitness Management segment increased in the nine months ended September 30, 2009 to 24.3%, from 24.1% for the same period of 2008. This result is primarily due to a gross margin increase in program services, which increased from 36.1% for the same period last year, to 40.9%. Gross margin in staffing services remained flat at 23.3%. The margin increase for program services is primarily due to the mix of programs delivered and labor efficiencies for personal training and massage services. Health Management
Our Health Management segment contributed gross profit growth of $1,823,000, which includes growth of $1,883,000 from program services and a decline of $60,000 from staffing services. Gross margin for our Health Management segment increased in the nine months ended September 30, 2009 to 39.5%, from 37.6% for the same period of 2008. This result is primarily due to a gross margin increase in program services, which increased from 51.5% for the same period last year, to 54.1%, reduced by a gross margin decrease in staffing services, which decreased from 25.8% for the same period last year, to 24.4%. The margin decrease for staffing services is primarily due to higher costs for employee paid time off, medical benefits, workers compensation 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 $364,000, or 2.6%, to $14,523,000 for the nine months ended September 30, 2009, from $14,159,000 for the nine months ended September 30, 2008.
The increase is primarily due to higher costs for management incentive programs and higher customer service costs that reflect the growth in health improvement programs. For the nine months ended September 30, 2009, operating expenses, as a percent of revenue, were 25.1%, compared to 25.3% for the same period last year. Operating margin increased to 6.6% for the nine months ended September 30, 2009, from 4.8% for the same period in 2008. This result reflects the sales growth in our Health Management segment and cost efficiencies related to Health Management segment program services, 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 nine months ended September 30, 2009 and 2008.
Income Taxes. Income tax expense increased $393,000 to $1,552,000 for the nine months ended September 30, 2009, from $1,159,000 for the nine months ended September 30, 2008. The increase is due to a higher operating income for the first nine months of 2009 as compared to the same period last year. Our effective tax rate was 40.6% of earnings before income taxes for the nine months ended September 30, 2009, compared to 43.1% for the same period last year. The lower effective tax rate as compared to the corresponding period of 2008 is primarily due to the lower non-deductible stock based compensation expense in proportion to earnings before income taxes.
Net Earnings. Net earnings applicable to common shareholders increased $743,000 to $2,272,000 for the nine months ended September 30, 2009, from $1,529,000 for the nine months ended September 30, 2008. This increase is primarily due to sales growth in our Health Management segment and cost efficiencies related to Health Management segment program services, reduced by the decrease in Fitness Management segment sales.
LIQUIDITY AND CAPITAL RESOURCES

Our working capital increased $2,921,000 to $13,619,000 for the nine months ended September 30, 2009, from $10,698,000 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 3.048% and 3.25% at September 30, 2009 and December 31, 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 September 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 nine months ended September 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 September 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 $2.2 million in revenue from our existing automotive contracts in 2009, including $1.4 million from "at risk" automotive clients, 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 $1,087,000 for the year ended December 31, 2008 and the nine months ended September 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 September 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 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 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, 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 . . .