UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

HEALTH FITNESS CORPORATION

Minnesota		No. 41-1580506
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting Company þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

The number of shares outstanding of the registrant’s common stock as of August 11, 2008 was: Common Stock, $0.01 par value, 19,276,810 shares.

 

 

Health Fitness Corporation
Consolidated Financial Statements
Table of Contents

		PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007			3
Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007			4
Consolidated Statements of Cash Flows for the three and six months ended June 30, 2008 and 2007			5
Notes to Consolidated Financial Statements			6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			20
ITEM 4. Controls and Procedures			20
PART II. OTHER INFORMATION			21
ITEM 1. Legal Proceedings			21
ITEM 1A. Risk Factors			21
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			21
ITEM 3. Defaults Upon Senior Securities			21
ITEM 4. Submission of Matters to a Vote of Security Holders			21
ITEM 5. Other Information			22
ITEM 6. Exhibits			22
Signatures			23
Exhibit Index			24
Statement Re: Computation of Earnings Per Share
302 Certification of President and CEO
302 Certification of CFO
906 Certification of President and CEO
906 Certification of CFO

PART I. — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

HEALTH FITNESS CORPORATION

CONSOLIDATED BALANCE SHEETS (Unaudited)
JUNE 30, 2008 AND DECEMBER 31, 2007

		June 30,				December 31,
		2008				2007
ASSETS
CURRENT ASSETS
Cash		$	201,722			$	1,946,028
Trade and other accounts receivable, less allowances of $242,800 and $243,300			13,570,650				14,686,879
Inventory			589,784				569,458
Prepaid expenses and other			473,885				226,891
Deferred tax assets			406,367				406,367
Total current assets			15,242,408				17,835,623
PROPERTY AND EQUIPMENT, net			1,313,692				1,400,570
OTHER ASSETS
Goodwill			14,546,250				14,546,250
Software, less accumulated amortization of $1,033,100 and $795,100			1,805,649				1,734,920
Trademark, less accumulated amortization of $395,100 and $345,500			97,936				147,561
Other intangible assets, less accumulated amortization of $277,700 and $241,700			251,417				287,334
Other			1,401				9,807
		$	33,258,753			$	35,962,065
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade accounts payable		$	1,012,088			$	2,121,154
Accrued salaries, wages, and payroll taxes			3,876,816				4,011,580
Other accrued liabilities			521,904				1,187,045
Accrued self funded insurance			289,357				333,724
Line of credit			640,068				—
Deferred revenue			1,299,483				1,722,254
Total current liabilities			7,639,716				9,375,757
DEFERRED TAX LIABILITY			108,623				108,623
LONG-TERM OBLIGATIONS			—				—
COMMITMENTS AND CONTINGENCIES			—				—
STOCKHOLDERS’ EQUITY
Common stock, $0.01 par value; 50,000,000 shares authorized; 19,221,576 and 19,928,590 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively			192,216				199,285
Additional paid-in capital			27,703,966				29,350,211
Accumulated comprehensive loss from foreign currency translation			(57,782	)			(56,413	)
Accumulated deficit			(2,327,986	)			(3,015,398	)
			25,510,414				26,477,685
		$	33,258,753			$	35,962,065

See notes to consolidated financial statements.

HEALTH FITNESS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
REVENUE		$	18,815,458			$	16,979,167			$	37,518,125			$	33,569,200
COSTS OF REVENUE			13,278,965				12,223,734				26,639,367				24,003,873
GROSS PROFIT			5,536,493				4,755,433				10,878,758				9,565,327
OPERATING EXPENSES
Salaries			3,026,310				2,645,073				5,998,687				5,043,875
Other selling, general and administrative			1,832,102				1,691,109				3,595,767				3,173,634
Amortization of acquired intangible assets			42,770				42,770				85,540				85,540
Total operating expenses			4,901,182				4,378,952				9,679,994				8,303,049
OPERATING INCOME			635,311				376,481				1,198,764				1,262,278
OTHER INCOME (EXPENSE)
Interest expense			(3,208	)			(4,591	)			(4,131	)			(6,690	)
Other, net			(1,211	)			4,090				1,074				2,576
EARNINGS BEFORE INCOME TAXES			630,892				375,980				1,195,707				1,258,164
INCOME TAX EXPENSE			268,192				202,976				508,295				573,493
NET EARNINGS		$	362,700			$	173,004			$	687,412			$	684,671
NET EARNINGS PER SHARE:
Basic		$	0.02			$	0.01			$	0.03			$	0.04
Diluted			0.02				0.01				0.03				0.03
WEIGHTED AVERAGE COMMON SHARES:
Basic			19,727,954				19,702,693				19,906,247				19,508,107
Diluted			19,984,737				20,558,007				20,281,772				20,415,501

See notes to consolidated financial statements

HEALTH FITNESS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

		Six Months Ended
		June 30,
		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	687,412			$	684,671
Adjustments to reconcile net earnings to net cash used in operating activities:
Stock-based compensation			411,973				386,338
Depreciation and amortization			549,608				457,609
Change in assets and liabilities, net of assets acquired:
Trade and other accounts receivable			1,116,229				(22,847	)
Inventory			(20,326	)			(482,223	)
Prepaid expenses and other			(246,994	)			(226,603	)
Other assets			8,406				6,671
Trade accounts payable			(1,110,435	)			(603,508	)
Accrued liabilities and other			(844,272	)			381,047
Deferred revenue			(422,771	)			(453,101	)
Net cash provided by operating activities			128,830				128,054
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(139,234	)			(510,978	)
Capitalized software development costs			(308,683	)			(163,940	)
Business acquisition, net of cash acquired			—				(20,205	)
Net cash payment made for acquisition			—				(737,500	)
Net cash used in investing activities			(447,917	)			(1,432,623	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit			3,003,110				7,229,742
Repayments under line of credit			(2,363,042	)			(6,955,251	)
Costs from issuance of preferred stock			—				(17,415	)
Repurchase of common stock			(2,354,923	)			—
Proceeds from the issuance of common stock			92,206				21,249
Proceeds from the exercise of stock options			197,429				170,532
Net cash (used in) provided by financing activities			(1,425,220	)			448,857
NET DECREASE IN CASH			(1,744,306	)			(855,712	)
CASH AT BEGINNING OF PERIOD			1,946,028				987,465
CASH AT END OF PERIOD		$	201,722			$	131,753
SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow information:
Cash paid for interest		$	4,132			$	3,153
Cash paid for taxes			720,958				101,364
Noncash investing and financing activities affecting cash flows:
Common stock issued for acquisition earnout			—				737,500

See notes to consolidated financial statements.

HEALTH FITNESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1. ORGANIZATION

Health Fitness Corporation, a Minnesota corporation (also referred to as “we,” “us,” “our,” the “Company,” or “Health Fitness”), is 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 226 corporate fitness center sites, 173 corporate health management sites and 104 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.

You may contact us at our executive offices at 1650 West 82^nd Street, Suite 1100, Bloomington, Minnesota 55431, telephone number (952) 831-6830. We maintain an internet website at www.hfit.com.

NOTE 2. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2008 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Financial information as of December 31, 2007 has been derived from our audited consolidated financial statements. In accordance with the rules and regulations of the United States Securities and Exchange Commission, the Company has omitted footnote disclosures that would substantially duplicate the disclosures contained in the audited financial statements of the Company. The unaudited consolidated financial statements should be read together with the financial statements for the year ended December 31, 2007, and the footnotes thereto included in the Company’s Form 10-K as filed with the United States Securities and Exchange Commission on March 26, 2008.

In the opinion of management, the interim consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the results for interim periods presented. These financial statements include some amounts that are based on management’s best estimates and judgments. These estimates may be adjusted as more information becomes available, and any adjustment could be significant. The impact of any change in estimates is included in the determination of earnings in the period in which the change in estimate is identified. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the operating results that may be expected for the year ended December 31, 2008.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation — The consolidated financial statements include the accounts of our Company and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Cash — We maintain cash balances at several financial institutions, and at times, such balances exceed insured limits. We have not experienced any losses in such accounts and we believe we are not exposed to any significant credit risk on cash. At June 30, 2008 and December 31, 2007, we had cash of approximately $110,300 and $59,400 (U.S. Dollars), respectively, in a Canadian bank account.

Trade and Other Accounts Receivable — Trade and other accounts receivable represent amounts due from companies and individuals for services and products. We grant credit to customers in the ordinary course of business, but generally do not require collateral or any other security to support amounts due. Management performs ongoing credit evaluations of customers. Accounts receivable from sales of services are typically due from customers within 30 to 90 days. Accounts outstanding longer than contractual payment terms are considered past due. We determine our allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer’s current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivable are credited to the allowance. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers and their geographic dispersion.

Inventories — Inventories, which consist primarily of health management resource materials and supplies used in our biometric screenings services, are stated at the lower of cost or market. Cost is determined using average cost, which approximates the first-in, first-out method.

Property and Equipment — Property and equipment are stated at cost. Depreciation and amortization are computed using both straight-line and accelerated methods over the useful lives of the assets.

Software Development Costs — We expense all costs of software development that we incur to establish technological feasibility of an enhancement, including activities related to initial planning, functionality design, health content sourcing and organization, technical performance requirements and assessing integration issues with the overall software system. Accordingly, software development costs incurred subsequent to the determination of technological feasibility are capitalized. Capitalization of costs ceases and amortization of capitalized software development costs commences when the products are available for their intended purpose. We amortize our capitalized software development costs using the straight-line method over the estimated economic life of the product, which is generally three to five years.

Capitalized software development costs are stated at the lower of amortized cost or net realizable value. Recoverability of these capitalized costs is determined by comparing the forecasted future revenues from the related products and services, based on management’s best estimates using appropriate assumptions and projections at the time, to the carrying amount of the capitalized software development costs. If the carrying value is determined not to be recoverable from future revenues, an impairment loss is recognized equal to the amount by which the carrying amount exceeds the future revenues.

During the three and six months ended June 30, 2008, we capitalized $202,900 and $308,700, respectively, of software development costs related to enhancements we made to our eHealth platform. Such enhancements include the development of a program that will allow us to deliver our online health risk assessment services in multiple languages, a web-based point of sale system to electronically capture sales transactions and improvements to our platform data management infrastructure. These capitalized costs are captured within Software Technology, and will be amortized over the remaining economic life of the eHealth platform, or five years, once the programs are placed into service. We expect to recover our capitalized software development costs through the growth of our business, enhancements to our services, and cost efficiencies generated.

Goodwill — Goodwill represents the excess of the purchase price and related costs over the fair value of net assets of businesses acquired. The carrying value of goodwill is not amortized, but is tested for impairment on an annual basis or when factors indicating impairment are present. We elected to complete the annual impairment test of goodwill on December 31 of each year and determined that our goodwill relates to two reporting units for purposes of impairment testing.

Intangible Assets — Our intangible assets include trademarks and tradenames, software and other intangible assets, all of which are amortized on a straight-line basis. Trademarks and tradenames represent the value assigned to acquired trademarks and tradenames, and are amortized over a period of five years. Software represents the value assigned to an acquired web-based software program and is amortized over a period of five years. Other intangible assets include the value assigned to acquired customer lists, which is amortized over a period of six years, as well as deferred financing costs, which are amortized over the term of the related credit agreement.

Revenue Recognition — Revenue is recognized at the time the service is provided to the customer. We determine our allowance for discounts by considering historical discount history and current payment practices of our customers. For annual contracts, monthly amounts are recognized ratably over the term of the contract. Certain services provided to the customer may vary on a periodic basis and are invoiced to the customer in arrears. The revenues relating to theses services are estimated and recorded in the month that the service is performed.

We also provide services to companies located in Canada. Although we invoice these customers in their local currency, we do not believe there is a risk of material loss due to foreign currency translation.

Amounts received from customers in advance of providing contracted services are treated as deferred revenue and recognized when the services are provided.

We have contracts with third-parties to provide ancillary services in connection with their fitness and wellness management services and programs. Under such arrangements, the third-parties invoice and receive payments from us based on transactions with our customer. We do not recognize revenues related to such transactions as our customer assumes the risk and rewards of the contract and the amounts billed to the customer are either at cost or with a fixed markup.

Net Earnings Per Common Share — Basic net earnings per common share is computed by dividing net earnings by the number of basic weighted average common shares outstanding. Diluted net earnings per share is computed by dividing net earnings by the number of diluted weighted average common shares outstanding, and common share equivalents relating to stock options, unearned restricted stock and stock warrants, if dilutive. Refer to Exhibit 11.0 attached hereto for a detailed computation of earnings per share.

Stock-Based Compensation — We maintain a stock option plan for the benefit of certain eligible employees and directors of the Company. Commencing January 1, 2006, we adopted Statement of Financial Accounting Standard No. 123R, “Share Based Payment” (“SFAS 123R”), using the modified prospective method of adoption, which requires all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values over the requisite service period. The compensation cost we record for these awards is based on their fair value on the date of grant. The Company continues to use the Black Scholes option-pricing model as its method for valuing stock options. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate and dividend yield. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense. Further information on our share-based payments can be found in Note 6 in the Notes to the Consolidated Financial Statements under Part I, Item 1.

Fair Values of Financial Instruments — Due to their short-term nature, the carrying value of our current financial assets and liabilities approximates their fair values. The fair value of long-term obligations, if recalculated based on current interest rates, would not significantly differ from the recorded amounts.

Income Taxes — The Company records income taxes in accordance with the liability method of accounting. Deferred income taxes are provided for temporary differences between the financial reporting and tax basis of assets and liabilities and federal operating loss carryforwards. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment. Tax benefits are recognized when management believes the benefit is more likely than not to be sustained upon review from the relevant authorities. If the Company were to record a liability for unrecognized tax benefits, interest and penalties would be recorded as

a component of income tax expense. Income taxes are calculated based on management’s estimate of the Company’s effective tax rate, which takes into consideration a federal tax rate of 34% and a net effective state tax rate of approximately 7%. This normal effective tax rate of 41% is less than the tax rate resulting from income tax expense we recognized during the three and six months ended June 30, 2007, due to the tax rate effects of compensation expense for incentive stock options.

Use of Estimates — Preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 4. SEGMENT REPORTING

The Company discloses segment information in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” which defines an operating segment as a component of a company for which operating results are reviewed regularly by the chief operating decision-makers to determine resource allocation and assess performance. The Company has two reportable segments, Fitness Management and Health Management. Total assets are not allocated to the segments for internal reporting purposes. Financial information by segment is as follows:

Segment Data:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
REVENUE:
Fitness Management Revenue
Staffing Services		$	9,836,999			$	9,820,989			$	19,543,346			$	19,801,505
Program and Consulting Services			649,720				627,712				1,269,479				1,321,946
			10,486,719				10,448,701				20,812,825				21,123,451
Health Management Revenue
Staffing Services			4,569,055				3,920,775				8,864,799				7,600,279
Program and Consulting Services			3,759,684				2,609,691				7,840,501				4,845,470
			8,328,739				6,530,466				16,705,300				12,445,749
Total Revenue
Staffing Services			14,406,054				13,741,764				28,408,145				27,401,784
Program and Consulting Services			4,409,404				3,237,403				9,109,980				6,167,416
		$	18,815,458			$	16,979,167			$	37,518,125			$	33,569,200
GROSS PROFIT:
Fitness Management Gross Profit
Staffing Services		$	2,350,240			$	2,002,073			$	4,466,110			$	4,101,931
Program and Consulting Services			235,661				220,999				472,706				583,850
			2,585,901				2,223,072				4,938,816				4,685,781
Health Management Gross Profit
Staffing Services			1,237,896				1,010,607				2,176,803				1,922,572
Program and Consulting Services			1,712,696				1,521,754				3,763,139				2,956,974
			2,950,592				2,532,361				5,939,942				4,879,546
Total Gross Profit
Staffing Services			3,588,136				3,012,680				6,642,913				6,024,503
Program and Consulting Services			1,948,357				1,742,753				4,235,845				3,540,824
		$	5,536,493			$	4,755,433			$	10,878,758			$	9,565,327

NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. However, on December 14, 2007, the FASB issued proposed FSP FAS 157-b, which would delay the effective date of SFAS 157 for all non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This proposed FSP partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. Effective for 2008, we adopted SFAS 157 except as it applies to those non-financial assets and non-financial liabilities as noted in proposal FSP FAS 157-b. We do not believe the partial adoption of SFAS 157 will have a material impact on our consolidated financial position, results of operation or cash flows.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, IPR&D and restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS 141R is effective for fiscal years beginning after December 15, 2008 (our 2009 fiscal year). This statement will impact us if we complete an acquisition after the effective date.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests (NCI) and classified as a component of equity. This new consolidation method will significantly change the accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008 (our 2009 fiscal year). We do not believe the adoption of SFAS 160 will have a material effect on our consolidated financial statements.

In March 2008, the FASB issued statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (SFAS 133). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities to improve the transparency of financial reporting. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (our 2009 fiscal year). We do not believe the adoption of SFAS 161 will have a material effect on our consolidated financial statements.

In May 2008, the FASB issued statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not believe the adoption of SFAS 162 will have a material effect on our consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of Intangible Assets, to provide guidance for determining the useful life of recognized intangible assets and to improve consistency between the period of expected cash flows used to measure the fair value of a recognized intangible asset and the useful life of the intangible asset as determined under SFAS 142. The FSP requires that an entity consider its own historical experience in renewing or extending similar arrangements. However, the entity must adjust that experience based on entity-specific factors under SFAS 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for fiscal years and interim periods that begin after November 15, 2008. The Company intends to adopt FSP FAS 142-3 effective January 1, 2009 and to apply its provisions prospectively to recognized intangible assets acquired after that date. The Company has periodically purchased recognized intangible assets and is in the process of evaluating the impact that the adoption of FSP FAS 142-3 will have on its financial statements.

NOTE 6. EQUITY

Stock Options — We maintain a stock option plan for the benefit of certain eligible employees and our directors. We have authorized 4,000,000 shares for grant under our 2005 Stock Option Plan, and a total of 718,849 shares of common stock were reserved for additional grants of options at June 30, 2008. Generally, the options outstanding are granted at prices equal to the market value of our stock on the date of grant, generally vest over four years and expire over a period of six or ten years from the date of grant.

For the three and six months ended June 30, 2008, we recorded stock option compensation expense of $159,800 and $237,600, respectively, compared to $196,600 and $292,900, respectively, for the three and six months ended June 30, 2007. The compensation expense, net of tax effects, reduced diluted earnings per share by approximately $0.01 for the three and six months ended June 30, 2008 and 2007.

As of June 30, 2008, approximately $895,600 of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.93 years.

The following table summarizes information about stock options at June 30, 2008:

		Options Outstanding												Options Exercisable
						Weighted Average				Weighted								Weighted
						Remaining				Average								Average
Range of		Number				Contractual Life				Exercise				Number				Exercise
Exercise Prices		Outstanding				In Years				Price				Exercisable				Price
$0.30 –   $0.39			60,500				0.87			$	0.39				60,500			$	0.39
0.47 –     0.69			95,000				2.27				0.54				95,000				0.54
0.95 –     1.25			174,000				1.94				1.19				166,500				1.20
1.26 –     2.27			469,401				4.42				1.92				436,901				1.91
2.28 –     3.05			1,345,500				4.70				2.69				521,875				2.72
			2,144,401				4.20			$	2.24				1,280,776			$	1.97

We use the Black-Scholes option pricing model using weighted average assumptions for options granted to determine the fair value of options. The fair value of options at date of grant and the assumptions utilized to determine such values are indicated in the following table:

		Three Months Ended
		June 30,
		2008				2007
Risk-free interest rate			2.92	%			4.72	%
Expected volatility			37.4	%			40.0	%
Expected life (in years)			3.0				3.0
Dividend yield			—				—

Option transactions under the 2005 Stock Option Plan during the first six months ended June 30, 2008 are summarized as follows:

						Weighted								Weighted
						Average				Aggregate				Average
						Exercise				Intrinsic				Remaining
		Options				Price				Value				Term
Outstanding at December 31, 2007			2,338,300			$	1.96
Granted			498,301				2.46
Exercised			(372,200	)			0.57
Canceled/Forfeited			(320,000	)			2.45
Outstanding at June 30, 2008			2,144,401			$	2.24			$	345,755				3.94
Exercisable at June 30, 2008			1,280,776			$	1.97			$	338,443				3.33

Restricted Stock — In connection with our employment agreement dated as of December 1, 2006 with Gregg O. Lehman, Ph.D., our President and Chief Executive Officer, on January 1, 2007 we granted an award of 50,000 shares of restricted common stock to Mr. Lehman. This restricted common stock vests in three equal installments on the first of the year for each of 2007, 2008 and 2009. For the three and six months ended June 30, 2008, we recorded stock-based compensation related to this grant of $5,521 and $11,041, respectively, compared to $16,600 and $77,300, respectively, for the three and six months ended June 30, 2007. This grant was valued using a price of $2.65 per share, which was the market value of our common stock on the date of the grant. As of June 30, 2008, $11,041 of unrecognized compensation costs related to the non-vested portion of this award will be recognized through December 31, 2008.

On April 7, 2008, we granted an award of 20,000 shares of restricted stock to Wesley W. Winnekins, our Chief Financial Officer under the Equity Plan (as defined below). This restricted common stock vests in two equal installments on December 31, 2008 and 2009. For the three and six months ended June 30, 2008, we recorded stock-based compensation related to this grant of $10,952. This grant was valued using a price of $2.30 per share, which was the market value of our common stock on the date of the grant. As of June 30, 2008, $35,048 of unrecognized compensation costs related to the non-vested portion of this award will be recognized through December 31, 2009.

Employee Stock Purchase Plan — We maintain an Employee Stock Purchase Plan, which allows employees to purchase shares of our common stock at 95% of the fair market value. A total of 1,000,000 shares of common stock are reserved for issuance under this plan, of which 297,082 shares are unissued and remain available for issuance at June 30, 2008.

Equity Incentive Plan — At our Annual Meeting of Shareholders on May 21, 2007, our shareholders approved the implementation of our 2007 Equity Incentive Plan (the “Equity Plan”). The Equity Plan was developed to provide our executives with restricted stock incentives if certain financial targets are achieved for calendar years 2007 through 2009. In lieu of selecting restricted stock, and at the discretion of our Board of Directors, executives can choose to receive a cash bonus under our 2007 Cash Incentive Plan (the “Cash Plan”). The performance objectives, and monetary potential of grants under the Cash Plan would be the same as those under the Equity Plan and participants would receive their cash bonuses at the same time as the restricted stock vests under the Equity Plan. Restricted stock granted under the Equity Plan through June 30, 2008, other than the restricted stock granted to our Chief Financial Officer in April 2008 as described previously, is earned on an annual basis upon achievement of certain financial objectives for each of 2007, 2008 and 2009. All such shares earned during these years will vest upon completion of our 2009 annual audit. For the three and six months ended June 30, 2008, we recorded $66,904 and $167,223, respectively, of stock-based compensation related to elections under the Equity Plan, which was valued using a price of $2.78 per share, the market value of our common stock on the grant date. We also accrued $7,510 and $15,020 of bonus expense related to elections under the Cash Plan for the three and six months ended June 30, 2008. As of June 30, 2008, $1,441,600 of unrecognized compensation costs related to the non-vested portion of this program will be recognized through March 2010.

Accrued Acquisition Earnout — In accordance with the Stock Purchase Agreement executed in connection with our acquisition of HealthCalc.Net, Inc. on December 23, 2005, we agreed to pay the shareholders of HealthCalc a contingent earnout payment based upon the achievement of specific 2007 revenue objectives. In accordance with the Stock Purchase Agreement executed in this transaction, the contingent earnout payment could be made by us in cash, stock or a combination thereof. At December 31, 2006, we recorded a liability of $1,475,000 in favor of the former shareholders of HealthCalc representing the contingent earnout payment, with the offset reflected as an increase to goodwill. On March 27, 2007, our Board of Directors determined that this earnout payment would be made by a cash payment of $737,500 and the issuance of 262,590 shares of common stock, which was determined using an average closing share price of $2.81 for the twenty-one trading days preceding the date of payment. We made the cash payment on March 28, 2007 and issued the common stock effective on March 27, 2007.

Common Stock Repurchase Plan — During the three months ended June 30, 2008, we repurchased 1.14 million common shares at an aggregate cost of $2.3 million, including commissions of $34,000. All repurchased shares have been retired. This concludes the common stock repurchase plan, announced on March 24, 2008, authorizing the Company to repurchase up to $2.5 million of its outstanding common stock.

The following is a summary of the change in Stockholders’ Equity for the six month period ended June 30, 2008:

										Additional				Accumulated								Total
		Common Stock								Paid-in				Comprehensive				Accumulated				Stockholders’				Comprehensive
		Shares				Amount				Capital				Income				Deficit				Equity				Income
BALANCE AT DECEMBER 31, 2007			19,928,590			$	199,285			$	29,350,211			$	(56,413	)			(3,015,398	)		$	26,477,685
Issuance of common stock through stock purchase plan			36,626				367				91,839				—				—				92,206
Redemption of common stock for option exercises			(6,582	)			(66	)			(16,243	)			—				—				(16,309	)
Issuance of common stock for option exercises			372,200				3,722				209,836				—				—				213,558
Issuance of common stock for executive compensation			37,983				380				50,699				—				—				51,079
Redemption of common stock for executive compensation			(5,880	)			(59	)			(14,642	)			—				—				(14,701	)
Repurchase of common stock through common stock repurchase plan			(1,141,361	)			(11,413	)			(2,343,509	)			—				—				(2,354,922	)
Executive equity compensation program			—				—				138,137				—				—				138,137
Stock option compensation			—				—				237,638				—				—				237,638
Net earnings			—				—				—				—				687,412				687,412			$	687,412
Foreign currency translation			—				—				—				(1,369	)			—				(1,369	)			(1,369	)
Comprehensive Income																										$	686,043
BALANCE AT JUNE 30, 2008			19,221,576			$	192,216			$	27,703,966			$	(57,782	)		$	(2,327,986	)		$	25,510,414

NOTE 8. CONTINGENCIES

Legal Proceedings — We are involved in various claims and lawsuits incident to the operation of our business. We believe that the outcome of such claims will not have a material adverse effect on our financial condition, results of operation, or cash flows.

Liquidated Damages — In accordance with the terms of a Private Investment in Public Equity transaction in November 2005 (the “PIPE Transaction”), we were required to file with the SEC, within sixty (60) days from the Effective Date, a registration statement covering the common shares issued and issuable in the PIPE Transaction. We were also required to cause the registration statement to be declared effective on or before the expiration of one hundred twenty (120) days from the Effective Date. We would have been subject to liquidated damages of one

percent (1%) per month of the aggregate gross proceeds ($10,200,000), if we failed to meet these date requirements. On March 10, 2006, the SEC declared effective our registration statement and, as a result, we did not pay any liquidated damages for failure to meet the filing and effectiveness date requirements. We could have nevertheless been subject to the foregoing liquidated damages if we failed (subject to certain permitted circumstances) to maintain the effectiveness of the registration statement. On June 15, 2006, we entered into an agreement with the accredited investors to amend the Registration Rights Agreement to cap the amount of liquidated damages we could pay at 9% of the aggregate purchase price paid by each accredited investor. On May 1, 2008, in accordance with the terms of the Registration Rights Agreement we deregistered all shares that remained unsold under the registration statement and terminated the offering of the common shares issued and issuable in the PIPE transaction. Holders of these shares may continue to sell the shares without volume limitations as may be permitted by Rule 144 under the Securities Act of 1933, as amended.

Patent Matter — In March 2007, we received a letter from a patent holder inquiring about our interest in negotiating a license for certain technology patents owned by the patent holder, which pertain to certain aspects of the electronic collection, use and management of health-related electronic data. We do not believe these patents are material based on our initial review, and it is unlikely we will be interested in a license on any material terms. However, we are currently conducting a more detailed review of this matter.

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

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, 2007 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, 2007.

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 226 corporate fitness center sites, 173 corporate health management sites and 104 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 six month period ended June 30, 2008 and 2007:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
REVENUE			100.0	%			100.0	%			100.0	%			100.0	%
COSTS OF REVENUE			70.6				72.0				71.0				71.5
GROSS PROFIT			29.4				28.0				29.0				28.5
OPERATING EXPENSES
Salaries			16.1				15.6				16.0				15.0
Other selling, general and administrative			9.8				10.0				9.6				9.5
Amortization of acquired intangible assets			0.2				0.2				0.2				0.2
Total operating expenses			26.1				25.8				25.8				24.7
OPERATING INCOME			3.3				2.2				3.2				3.8
OTHER INCOME (EXPENSE)			—				—				—				(0.1	)
EARNINGS BEFORE INCOME TAXES			3.3				2.2				3.2				3.7
INCOME TAX EXPENSE			1.4				1.2				1.4				1.7
NET EARNINGS			1.9	%			1.0	%			1.8	%			2.0	%

Results of Operations for the quarter ended June 30, 2008 compared to the quarter ended June 30, 2007.

Revenue. Revenue increased $1,836,000, or 10.8%, to $18,815,000 for the three months ended June 30, 2008, from $16,979,000 for the three months ended June 30, 2007.

Our Fitness Management segment grew $38,000, which includes growth of $16,000 from staffing services and $22,000 from program and consulting services. Growth for the second quarter is primarily due to new business and incremental revenue from existing accounts that outpaced revenue lost from contracts that terminated during the first six months 2007.

Our Health Management segment contributed total growth of $1,798,000, which includes growth of $648,000 from staffing services and growth of $1,150,000 from program and consulting services. Overall, the growth in staffing revenue is attributable to new customers and the expansion of sales to existing customers. The increase in program and consulting services revenue is primarily due to an increase in biometric screening services and health coaching and advising services.

During the second quarter of 2008, we obtained two new customer commitments in our Health Management segment, and up-sold health management services to two existing fitness management customers, the total of which may realize incremental annualized revenue of approximately $1.9 million. In our Fitness Management segment, we did not obtain any new customer commitments during the quarter, but we did expand four existing customers, which may realize incremental annualized revenue of approximately $0.5 million. The $2.4 million total for potential incremental annualized revenue is offset by a potential annualized revenue loss of $0.2 million from fitness management contract cancellations that occurred during the quarter.

Gross Profit. Gross profit increased $781,000, or 16.4%, to $5,536,000 for the three months ended June 30, 2008, from $4,755,000 for the three months ended June 30, 2007.

Of this increase in gross profit, our Fitness Management segment grew $363,000, which includes growth of $348,000 from staffing services and $15,000 from program and consulting services. The overall increase in gross profit for staffing services is primarily due to higher margins on new business we have won since the last half of 2007, and improved margins on existing accounts.

Our Health Management segment contributed gross profit growth of $418,000, which includes growth of $227,000 from staffing services and growth of $191,000 from program and consulting services. This growth in gross profit is primarily due to the 27.5% health management revenue growth we experienced during the second quarter of 2008.

Total gross margin in the three months ended June 30, 2008 increased to 29.4% from 28.0% for the same period last year. Gross margin for our Health Management segment declined in the quarter from 38.8% to 35.4%. This decline is primarily due to a gross margin decrease for program and consulting services, which fell to 45.6% from 58.3% in the same period last year. This decline was partially offset by margin growth in staffing services, which increased to 27.1%, from 25.8% in the same period last year. The decrease in gross margin for program and consulting services is primarily due to lower pricing for new health management business we won in 2007, and the cost of additional screening and health coaching staff we hired in late 2007 to meet forecasted future demand for these services. We believe that we have the opportunity to improve our Health Management margins over the remainder of the year as we implement new customers, which will allow us to better leverage the investments we made in 2007 to improve our service delivery infrastructure.

Gross margin for our Fitness Management segment for the three months ended June 30, 2008 increased to 24.7%, from 21.3% for the same period of 2007. This result is primarily due to a gross margin increase for staffing services, which increased to 23.9%, from 20.4%, and program and consulting services, which increased to 36.3% from 35.2%. The margin increase for staffing services is primarily due to higher margins on new business and improved margins on existing accounts. The margin increase for program and consulting services is due primarily to an increase in personal training services.

Operating Expenses and Operating Income. Operating expenses increased $522,000, or 11.9%, to $4,901,000 for the three months ended June 30, 2008, from $4,379,000 for the three months ended June 30, 2007.

This increase is due to a $381,000, or 14.4% increase in salaries, and a $141,000, or 8.3% increase in other selling, general and administrative expenses. These increases are primarily due to planned investments we made subsequent to first quarter of 2007 to strengthen our management infrastructure in certain operating areas, including Research, Development and Outcomes, Marketing, Technology and Account Services, in order to support our future growth plans.

Operating margin increased to 3.4% for the second quarter 2008, from 2.2% for the same period 2007. This increase is primarily due to improvements in Fitness Management segment margins and Health Management segment revenue growth.

Other Income and Expense. Interest expense was inconsequential during the quarters ended June 30, 2008 and 2007, respectively.

Income Taxes. Income tax expense increased $65,000 to $268,000 for the three months ended June 30, 2008, from $203,000 for the same period last year. The increase is primarily due to higher operating income reduced by a lower effective tax rate for the quarter ended June 30, 2008 as compared to same period of 2007.

Our effective tax rate was 42.5% of earnings before income taxes for the second quarter of 2008, compared to 54.0% for the same period last year. 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 June 30, 2008 increased approximately $190,000 to $363,000, compared to net earnings of $173,000 for the quarter ended June 30, 2007.

Results of Operations for the six months ended June 30, 2008 compared to the six months ended June 30, 2007.

Revenue. Revenue increased $3,949,000, or 11.8%, to $37,518,000 for the six months ended June 30, 2008, from $33,569,000 for the six months ended June 30, 2007.

Our Fitness Management segment declined $311,000, which included a decline in staffing services of $258,000 and a decline in program and consulting services of $52,000. This revenue decline is primarily due to the termination of a large automotive contract in the first quarter of 2007.

Our Health Management segment contributed total growth of $4,260,000, which includes growth of $1,265,000 from staffing services and growth of $2,995,000 from program and consulting services. Overall, the growth in staffing revenue is attributable to new customers and the expansion of sales to existing customers. The increase in program and consulting 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.

During the first six months of 2008, we obtained eleven new customer commitments in our Health Management segment, and up-sold health management services to two existing fitness management customers, the total of which may realize incremental annualized revenue of approximately $3.9 million. In our Fitness Management segment, we did not obtain any new customer commitments during the first six months, but we did expand four existing customers, which may realize incremental annualized revenue of approximately $0.5 million. The $4.4 million total for potential incremental annualized revenue is offset by a potential annualized revenue loss of $0.6 million from fitness management contract cancellations that occurred during the first six months.

Gross Profit. Gross profit increased $1,313,000, or 13.7%, to $10,879,000 for the six months ended June 30, 2008, from $9,566,000 for the six months ended June 30, 2007.

Of this increase in gross profit, our Fitness Management segment increased $253,000, which includes an increase of $364,000 from staffing services and a decline of $111,000 from program and consulting services. The overall increase in gross profit for staffing services is primarily due to higher margins on new business and improved margins on existing accounts. The decline in gross profit for program and consulting services is primarily due the decline in sales and higher labor costs.

Our Health Management segment contributed gross profit growth of $1,060,000, which includes growth of $254,000 from staffing services and growth of $806,000 from program and consulting services. This growth in gross profit is primarily due to the 34.2% health management revenue growth we experienced during the first six months of 2008.

Total gross margin in the six months ended June 30, 2008 increased from 28.5% to 29.0% for the same period last year, which is primarily due to health management revenue representing a larger percentage of our total revenue. Gross margin for our Health Management segment declined in the first six months from 39.2% to 35.6%. This result is due to a gross margin decrease for program and consulting services, which declined to 48.0%, from 61.0% in the same period last year, and a gross margin decrease for staffing services, which decreased to 24.6%, from 25.3% in the same period last year. The gross margin decrease for staffing services is primarily attributed to lower pricing for new health management business we won during the last half of 2007. The decrease in gross margin for program and consulting services is primarily due to lower pricing for new health management business we won in 2007, and the cost of additional screening and health coaching staff we hired in late 2007 to meet forecasted future demand for these services. We believe that we have the opportunity to improve our Health Management margins over the remainder of the year as we implement new customers, which will allow us to better leverage the investments we made in 2007 to improve our service delivery infrastructure.

Gross margin for our Fitness Management segment increased in the six months ended June 30, 2008 to 23.7%, from 22.2% for the same period of 2007. This result is primarily due to a gross margin increase in staffing services, which increased to 22.9% from 20.7%. Gross profit for program and consulting services decreased from 44.2% to 37.2%. The gross margin increase for staffing services is primarily due to higher margins on new business and improved margins on existing accounts. The decline in gross margin for program and consulting services is primarily due to the decline in revenue and higher labor costs.

Operating Expenses and Operating Income. Operating expenses increased $1,377,000, or 16.6%, to $9,680,000 for the six months ended June 30, 2008, from $8,303,000 for the six months ended June 30, 2007.

This increase is due to a $955,000, or 18.9% increase in salaries, and a $422,000, or 13.3% 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, Marketing, Technology and Account Services, in order to support our future revenue growth plans.

Operating margin declined to 3.2% for the six months ended June 30, 2008, from 3.8% for the same period 2007. This decrease is primarily due to the investments we made in our business operations to support our future growth plans.

Other Income and Expense. Interest expense was inconsequential for the six months ended June 30, 2008 and 2007, respectively.

Income Taxes. Income tax expense decreased $65,000 to $508,000 for the six months ended June 30, 2008, from $573,000 for the six months ended June 30, 2007. The decrease is due to a lower effective tax rate and lower operating income for the first six months of 2008 as compared to the same period last year.

Our effective tax rate was 42.5% of earnings before income taxes for the first six months of 2008, compared to 45.6% for the same period last year. 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 six months ended June 30, 2008 increased approximately $2,000 to $687,000, compared to net earnings of $685,000 for the six months ended June 30, 2007.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital decreased $857,000 to $7,603,000 for the six months ended June 30, 2008, from $8,460,000 at December 31, 2007. This decrease is primarily due to $2.3 million of cash outlays to repurchase common shares outstanding, as discussed previously in Note 6, partially offset by borrowings under the Wells Fargo Line of Credit and other changes in current assets and liabilities.

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 June 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 June 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 June 30, 2008 and December 31, 2007, respectively. Borrowings of $640,000 were outstanding at June 30, 2008, and no debt was outstanding at December 31, 2007. All borrowings are collateralized by substantially all of our assets. At June 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 June 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, statements relating to our belief that we have the opportunity to improve our Health Management margins over the remainder of the year as we implement new customers, which will allow us to better leverage the investments we made in 2007 to improve our service delivery infrastructure, forecasted future demand of our screening and health coaching services, 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.

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.

ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer, referred to collectively herein as the Certifying Officers, are responsible for establishing and maintaining our disclosure controls and procedures. The Certifying Officers have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of June 30, 2008. Based on that review and evaluation, which included inquiries made to certain other employees of the Company, the Certifying Officers have concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures, as designed and implemented, are effective in ensuring that information relating to the Company required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2008 that may have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Refer to Item 3 (Legal Proceedings) in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, including the important information in “Private Securities Litigation Reform Act,” you should carefully consider the “Risk Factors” discussed in our Annual Report on Form 10-K for the year ended December 31, 2007. Those factors, if they were to occur, could cause our actual results to differ materially from those expressed in our forward-looking statements in this report, and materially adversely affect our financial condition or future results. Although we are not aware of any other factors that we currently anticipate will cause our forward-looking statements to differ materially from our future actual results, or materially affect the Company’s financial condition or future results, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial might materially adversely affect our actual business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities in Second Quarter 2008

Approximate

Total Number of

Dollar Value of

Average

Shares Purchased

Shares that May

Total Number of

Price Paid

as Part of Publicly

Yet Be Purchased

Shares Purchased

per Share

Announced Plan

Under the Plan

May 1 – 31, 2008 (1)

1,141,361

$

2.06

1,141,361

Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

(a) The Annual Meeting of the Company’s shareholders was held on Thursday, May 29, 2008.

(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no solicitation in opposition to management’s nominees, and the shareholders elected the following persons as directors of the Company to serve until the next annual meeting of shareholders:

Nominee		Number of Votes For				Number of Votes Withheld
Gregg O. Lehman			16,969,042				118,921
David F. Durenberger			16,969,042				118,921
K. James Ehlen, M.D			16,966,174				121,789
Robert J. Marzec			16,957,999				129,964
Jerry V. Noyce			16,970,164				117,799
John C. Penn			16,869,174				218,789
Curtis M. Selquist			16,970,174				117,789
Mark W. Sheffert			16,957,999				129,964
Linda Hall Whitman			16,860,999				226,964
Rodney A. Young			16,865,174				222,789

(c) By a vote of 16,368,048 shares in favor, 718,615 shares opposed, 1,299 shares abstaining, and 0 shares represented by broker nonvotes, the shareholders ratified the selection of Grant Thornton LLP as the Company’s independent auditors for the current fiscal year.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

(a) Exhibits — See Exhibit Index on page following signatures

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

EXHIBIT INDEX
HEALTH FITNESS CORPORATION
FORM 10-Q

Exhibit No.		Description
**11.0		Statement re: Computation of Earnings per Share
**31.1		Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
**31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
**32.1		Certification of President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002