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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2008

or



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to

Commission File Number 1-13806





REWARDS NETWORK INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 84-6028875                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

Two North Riverside Plaza, Suite 950, Chicago, Illinois 60606

(Address of principal executive offices) (Zip code)

312-521-6767

(Registrants telephone number, including area code)

N/A

(Former name, former address
and former fiscal year, if changed since last report)





Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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.    x  Yes     ̈  No

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.



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).     ̈  Yes    x  No

As of November 4, 2008, there were 27,002,455 shares of the registrants common stock, par value $.02 per share, outstanding.









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INDEX

REWARDS NETWORK INC. AND SUBSIDIARIES



|                              |  |                                                                                                                     |  |         
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                     |  | Page No.
|PART I. FINANCIAL INFORMATION |  |                                                                                                                    
|                              |  |                                                                                                                    
|Item 1.                       |  | Financial Statements:                                                                                               |  |         
|                              |  |                                                                                                                    
|                              |  | Condensed Consolidated Balance SheetsSeptember 30, 2008 (unaudited) and December 31, 2007                          |  | 3       
|                              |  |                                                                                                                    
|                              |  | Condensed Consolidated Statements of OperationsThree and nine months ended September 30, 2008 and 2007 (unaudited) |  | 4       
|                              |  |                                                                                                                    
|                              |  | Condensed Consolidated Statements of Cash FlowsNine months ended September 30, 2008 and 2007 (unaudited)           |  | 5       
|                              |  |                                                                                                                    
|                              |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                      |  | 6-11    
|                              |  |                                                                                                                    
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                               |  | 12-27   
|                              |  |                                                                                                                    
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                          |  | 28      
|                              |  |                                                                                                                    
|Item 4.                       |  | Controls and Procedures                                                                                             |  | 28      
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                    
|                              |  |                                                                                                                    
|Item 6.                       |  | Exhibits                                                                                                            |  | 29      
|                              | 
|SIGNATURES                    |  | 30                                                                                                                 



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REWARDS NETWORK INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1  Financial Statements

Condensed Consolidated Balance Sheets

(in thousands, except per share data)



|                                                                                                                                            |  |                   |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                            |  | September 30,2008 |         |   | December 31,2007 |  
|                                                                                                                                            |  | (Unaudited)       |         |   |                  |  
|Assets                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Current assets:                                                                                                                             |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                   |  | $                 | 18,457  |   |                  | $ | 35,517  |  
|Accounts receivable, net of allowance for doubtful accounts of $2,706 and $3,420, respectively                                              |  |                   | 5,321   |   |                  |   | 10,101  |  
|Dining credits, net of allowance for doubtful accounts of $20,876 and $21,257, respectively                                                 |  |                   | 82,389  |   |                  |   | 94,880  |  
|Deferred income taxes                                                                                                                       |  |                   | 10,653  |   |                  |   | 10,014  |  
|Prepaid expenses                                                                                                                            |  |                   | 1,168   |   |                  |   | 1,675   |  
|Income taxes receivable                                                                                                                     |  |                   | 936     |   |                  |   | 3,036   |  
|                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total current assets                                                                                                                        |  |                   | 118,924 |   |                  |   | 155,223 |  
|Property and equipment, net of accumulated depreciation and amortization of $27,223 and $24,592, respectively                               |  |                   | 11,363  |   |                  |   | 11,818  |  
|Other assets                                                                                                                                |  |                   | 387     |   |                  |   | 233     |  
|Goodwill                                                                                                                                    |  |                   | 8,117   |   |                  |   | 8,117   |  
|Deferred income taxes                                                                                                                       |  |                   | 329     |   |                  |   | 1,153   |  
|                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                                                |  | $                 | 139,120 |   |                  | $ | 176,544 |  
|                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Liabilities and Stockholders Equity                                                                                                        |  |                   |         |   |                  |   |         |  
|Current liabilities:                                                                                                                        |  |                   |         |   |                  |   |         |  
|Accounts payabledining credits                                                                                                             |  | $                 | 4,619   |   |                  | $ | 7,080   |  
|Accounts payablemember benefits                                                                                                            |  |                   | 8,205   |   |                  |   | 7,672   |  
|Accounts payabletrade                                                                                                                      |  |                   | 2,132   |   |                  |   | 1,573   |  
|Accrued compensation                                                                                                                        |  |                   | 3,748   |   |                  |   | 1,280   |  
|Other current liabilities                                                                                                                   |  |                   | 2,956   |   |                  |   | 4,237   |  
|Deferred membership fee income                                                                                                              |  |                   | 644     |   |                  |   | 750     |  
|Litigation and related accruals, current                                                                                                    |  |                   | 3,232   |   |                  |   | 2,987   |  
|Convertible subordinated debentures                                                                                                         |  |                   | 14,788  |   |                  |   | 55,000  |  
|                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                                                   |  |                   | 40,324  |   |                  |   | 80,579  |  
|Litigation and related accruals, net of current portion                                                                                     |  |                   |        |   |                  |   | 3,123   |  
|                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                           |  |                   | 40,324  |   |                  |   | 83,702  |  
|                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Stockholders equity:                                                                                                                       |  |                   |         |   |                  |   |         |  
|Common stock, par value $0.02 per share; authorized 70,000 shares; issued 27,127 shares; outstanding 27,002 and 26,851 shares, respectively |  |                   | 542     |   |                  |   | 542     |  
|Additional paid-in capital                                                                                                                  |  |                   | 67,225  |   |                  |   | 66,787  |  
|Accumulated other comprehensive income:                                                                                                     |  |                   |         |   |                  |   |         |  
|Foreign currency translation, net of income taxes                                                                                           |  |                   | 603     |   |                  |   | 827     |  
|Retained earnings                                                                                                                           |  |                   | 31,404  |   |                  |   | 26,845  |  
|Treasury stock, at cost (125 and 276 shares, respectively)                                                                                  |  |                   | (978    | ) |                  |   | (2,159  | )
|                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                  |  |                   | 98,796  |   |                  |   | 92,842  |  
|                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                  |  | $                 | 139,120 |   |                  | $ | 176,544 |  
|                                                                                                                                            |  |                   |         |   |                  |   |         |  

See accompanying notes to consolidated financial statements.



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REWARDS NETWORK INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)



|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                            |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                            |  | 2008                            |        |   | 2007                           |   |        | 2008 |  |   | 2007    |  
|Operating revenues:                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                                            |  |                                 |        |  
|Sales                                                                       |  | $                               | 62,442 |   |                                | $ | 57,180 |      |  | $ | 187,228 |   |  | $ | 166,918 |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Cost of sales                                                               |  |                                 | 33,246 |   |                                |   | 28,652 |      |  |   | 98,741  |   |  |   | 83,439  |  
|Provision for losses                                                        |  |                                 | 2,949  |   |                                |   | 3,171  |      |  |   | 8,433   |   |  |   | 8,020   |  
|Member benefits                                                             |  |                                 | 7,926  |   |                                |   | 8,724  |      |  |   | 22,994  |   |  |   | 27,889  |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total direct expenses                                                       |  |                                 | 44,121 |   |                                |   | 40,547 |      |  |   | 130,168 |   |  |   | 119,348 |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net revenue                                                                 |  |                                 | 18,321 |   |                                |   | 16,633 |      |  |   | 57,060  |   |  |   | 47,570  |  
|Membership fees and other income                                            |  |                                 | 308    |   |                                |   | 409    |      |  |   | 977     |   |  |   | 1,328   |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating revenues                                                    |  |                                 | 18,629 |   |                                |   | 17,042 |      |  |   | 58,037  |   |  |   | 48,898  |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating expenses:                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Salaries and benefits                                                       |  |                                 | 5,414  |   |                                |   | 5,063  |      |  |   | 16,278  |   |  |   | 15,339  |  
|Sales commissions and expenses                                              |  |                                 | 4,921  |   |                                |   | 5,072  |      |  |   | 14,784  |   |  |   | 15,541  |  
|Professional fees                                                           |  |                                 | 836    |   |                                |   | 369    |      |  |   | 2,349   |   |  |   | 1,717   |  
|Member and merchant marketing                                               |  |                                 | 978    |   |                                |   | 1,752  |      |  |   | 3,003   |   |  |   | 5,425   |  
|Depreciation and amortization                                               |  |                                 | 1,246  |   |                                |   | 1,117  |      |  |   | 4,036   |   |  |   | 3,445   |  
|General and administrative                                                  |  |                                 | 3,150  |   |                                |   | 2,937  |      |  |   | 9,684   |   |  |   | 10,019  |  
|Litigation and related expenses                                             |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   | (11,631 | )
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                    |  |                                 | 16,545 |   |                                |   | 16,310 |      |  |   | 50,134  |   |  |   | 39,855  |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating income                                                            |  |                                 | 2,084  |   |                                |   | 732    |      |  |   | 7,903   |   |  |   | 9,043   |  
|                                                                            |  |                                 |        |  
|Other income (expense):                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                                            |  |                                 |        |  
|Interest and other income                                                   |  |                                 | 229    |   |                                |   | 636    |      |  |   | 627     |   |  |   | 2,134   |  
|Interest expense and financing costs                                        |  |                                 | (446   | ) |                                |   | (783   | )    |  |   | (1,602  | ) |  |   | (2,376  | )
|Gain on extinguishment of convertible subordinated debentures               |  |                                 | 138    |   |                                |   | 739    |      |  |   | 266     |   |  |   | 739     |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income before income tax provision                                          |  |                                 | 2,005  |   |                                |   | 1,324  |      |  |   | 7,194   |   |  |   | 9,540   |  
|                                                                            |  |                                 |        |  
|Income tax provision                                                        |  |                                 | 513    |   |                                |   | 179    |      |  |   | 2,635   |   |  |   | 3,257   |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income                                                                  |  | $                               | 1,492  |   |                                | $ | 1,145  |      |  | $ | 4,559   |   |  | $ | 6,283   |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Earnings per share of common stock:                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                                       |  | $                               | 0.05   |   |                                | $ | 0.04   |      |  | $ | 0.17    |   |  | $ | 0.23    |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Diluted                                                                     |  | $                               | 0.05   |   |                                | $ | 0.04   |      |  | $ | 0.17    |   |  | $ | 0.23    |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Weighted average number of common and common equivalent shares outstanding: |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                                       |  |                                 | 27,201 |   |                                |   | 27,038 |      |  |   | 27,157  |   |  |   | 26,969  |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Diluted                                                                     |  |                                 | 27,455 |   |                                |   | 27,120 |      |  |   | 27,443  |   |  |   | 27,098  |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

See accompanying notes to unaudited condensed consolidated financial statements.



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REWARDS NETWORK INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)



|                                                                                            |  |                                |         |   |      |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                            |  | Nine Months EndedSeptember 30, |        
|                                                                                            |  | (Unaudited)                    |        
|                                                                                            |  | 2008                           |         |   | 2007 |  
|Cash flows from operating activities:                                                       |  |                                |         |   |      |   |         |  
|Net income                                                                                  |  | $                              | 4,559   |   |      | $ | 6,283   |  
|                                                                                            |  |                               
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                                               |  |                                | 4,036   |   |      |   | 3,445   |  
|Loss on disposal of fixed assets                                                            |  |                                | 53      |   |      |   | 68      |  
|Amortization of deferred financing costs                                                    |  |                                | 259     |   |      |   | 401     |  
|Provision for losses                                                                        |  |                                | 8,433   |   |      |   | 8,020   |  
|Stock-based compensation                                                                    |  |                                | 1,686   |   |      |   | 710     |  
|Deferred income taxes                                                                       |  |                                | 186     |   |      |   | 4,455   |  
|Gain on extinguishment of convertible subordinated debentures                               |  |                                | (266    | ) |      |   | (739    | )
|                                                                                            |  |                               
|Changes in assets and liabilities:                                                          |  |                                |         |   |      |   |         |  
|Accounts receivable                                                                         |  |                                | 4,165   |   |      |   | (5,289  | )
|Dining credits including accounts payabledining credits                                    |  |                                | 2,021   |   |      |   | (21,701 | )
|Prepaid expenses                                                                            |  |                                | 395     |   |      |   | 5       |  
|Income taxes receivable                                                                     |  |                                | 2,101   |   |      |   | (1,366  | )
|Other assets                                                                                |  |                                | (404    | ) |      |   | 463     |  
|Accounts payablemember benefits                                                            |  |                                | 540     |   |      |   | 1,716   |  
|Accounts payabletrade                                                                      |  |                                | 443     |   |      |   | (687    | )
|Accrued compensation                                                                        |  |                                | 2,470   |   |      |   | (1,946  | )
|Other liabilities                                                                           |  |                                | (1,335  | ) |      |   | (539    | )
|Deferred membership fee income                                                              |  |                                | (106    | ) |      |   | (203    | )
|Litigation and related accruals                                                             |  |                                | (2,877  | ) |      |   | (12,397 | )
|                                                                                            |  |                                |         |   |      |   |         |  
|Net cash provided by (used in) operating activities                                         |  |                                | 26,359  |   |      |   | (19,301 | )
|                                                                                            |  |                                |         |   |      |   |         |  
|Cash flows from investing activities:                                                       |  |                                |         |   |      |   |         |  
|                                                                                            |  |                               
|Purchases of available for sale securities                                                  |  |                                |        |   |      |   | (1,125  | )
|Sales of available for sale securities                                                      |  |                                |        |   |      |   | 2,760   |  
|Additions to property and equipment, net                                                    |  |                                | (3,607  | ) |      |   | (5,930  | )
|                                                                                            |  |                                |         |   |      |   |         |  
|Net cash used in investing activities                                                       |  |                                | (3,607  | ) |      |   | (4,295  | )
|                                                                                            |  |                                |         |   |      |   |         |  
|Cash flows from financing activities:                                                       |  |                                |         |   |      |   |         |  
|Tax benefit from the exercise of stock options                                              |  |                                | 5       |   |      |   | 27      |  
|Proceeds from the exercise of stock options                                                 |  |                                | 107     |   |      |   | 249     |  
|Purchase of convertible subordinated debentures                                             |  |                                | (39,870 | ) |      |   | (14,150 | )
|                                                                                            |  |                                |         |   |      |   |         |  
|Net cash used in financing activities                                                       |  |                                | (39,758 | ) |      |   | (13,874 | )
|                                                                                            |  |                                |         |   |      |   |         |  
|Effect of exchange rate on cash and cash equivalents                                        |  |                                | (54     | ) |      |   | (424    | )
|                                                                                            |  |                                |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                                   |  |                                | (17,060 | ) |      |   | (37,894 | )
|                                                                                            |  |                               
|Cash and cash equivalents:                                                                  |  |                                |         |   |      |   |         |  
|Beginning of the period                                                                     |  |                                | 35,517  |   |      |   | 52,496  |  
|                                                                                            |  |                                |         |   |      |   |         |  
|End of the period                                                                           |  | $                              | 18,457  |   |      | $ | 14,602  |  
|                                                                                            |  |                                |         |   |      |   |         |  
|Supplemental disclosures of cash flow information:                                          |  |                                |         |   |      |   |         |  
|Cash paid during the period for:                                                            |  |                                |         |   |      |   |         |  
|Interest                                                                                    |  | $                              | 1,263   |   |      | $ | 1,138   |  
|                                                                                            |  |                                |         |   |      |   |         |  
|Income taxes                                                                                |  | $                              | 1,421   |   |      | $ | 140     |  
|                                                                                            |  |                                |         |   |      |   |         |  

See accompanying notes to unaudited condensed consolidated financial statements.



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REWARDS NETWORK INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(amounts in thousands, except per share data)

Note 1 - Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Management
of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these interim financial statements in conformity with accounting
principles generally accepted in the United States of America. In the opinion of management, all adjustments that are of a normal recurring nature necessary to fairly present the unaudited condensed consolidated financial position of Rewards Network
Inc. and its subsidiaries (collectively, the Company) at September 30, 2008, unaudited condensed consolidated results of operations of the Company for the three and nine months ended September 30, 2008 and 2007 and unaudited
condensed consolidated statements of cash flows of the Company for the nine months ended September 30, 2008 and 2007 have been made. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of
the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007 filed
with the Securities and Exchange Commission on March 17, 2008. The condensed consolidated balance sheet as of December 31, 2007 is derived from the Companys audited consolidated financial statements.

Nature of operations: Rewards Network Inc. (the Company) operates the leading frequent dining programs in North America by marketing
its participating restaurants to members of these programs and by providing incentives to members to dine at these restaurants. Participating restaurants benefit from these marketing efforts, reporting of program results, customer feedback through
member comments as well as access to capital offered by the Company. In addition to operating the frequent dining programs of leading airline frequent flyer programs, clubs and other affinity organizations, the Company offers its own frequent dining
program through its website, www.rewardsnetwork.com.

The Company markets
participating restaurants to members principally through the Internet and email. The Companys programs are designed to increase the frequency of dining and amount spent on dining by members at participating restaurants by providing incentives
to members to dine at these restaurants, including airline miles, college savings rewards, reward program points, and Cashback RewardsSMsavings.
The Company also offers reporting and customer feedback to participating restaurants and provides aggregate data regarding members activity and member feedback through comments and ratings gathered from surveys. In addition, the Company
provides access to capital by purchasing a portion of future member transactions from participating restaurants in bulk and in advance. Bars and clubs also participate in the Companys programs, and for purposes of describing its business, are
included when the terms restaurants or merchants are used.

The Company is paid for its services and, if
applicable, receives the portion of a members transaction that the Company purchased only if a member dines at a participating restaurant when rewards are available and pays using a payment card that the member registered with the Company. The
Companys revenue is equal to a percentage of the amount of the members total dining transaction. These revenues are applied to recover the Companys costs where the Company has purchased a portion of future member transactions;
provide rewards to members; cover its selling, marketing, general and administrative expenses; and generate operating income that provides a return for its stockholders.

The Company primarily offers two programs to restaurants  the Marketing Services Program and Marketing Credits Program. In both the Marketing Services and Marketing Credits Programs, the Company markets
participating restaurants to members, offers incentives to members to dine at these restaurants and provides reporting on member activity and member feedback. The Company also provides restaurants that participate in the Marketing Credits Program
with access to capital through the purchase of a portion of future member transactions.

The accompanying unaudited condensed consolidated
financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Shares of our common stock are traded on the NASDAQ under the symbol DINE.



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##### Table of Contents

Note 2 - Certain Relationships and Related Party Transactions (square footage not in thousands)

Active agreements

On May 5, 2003, the
Company entered into an office lease agreement, which was amended on May 8, 2006 and August 24, 2006, with Equity Office Properties Management Corp., the agent for Two North Riverside Plaza Joint Venture Limited Partnership, a limited
partnership comprised in part of certain trusts. Samstock, L.L.C., the Companys largest stockholder, is indirectly owned by these trusts. The trustee of these trusts is Chai Trust Company, L.L.C., and Donald J. Liebentritt, the Chairman of the
Companys Board of Directors, is President of Chai Trust Company, L.L.C. The lease, as amended, provides for 28,721 square feet of office space at Two North Riverside Plaza, Chicago, Illinois and has a term from September 1, 2003 through
August 31, 2011. The Company paid rent of $135 and $132 for the three months ended September 30, 2008 and 2007, respectively and $403 and $392 for the nine months ended September 30, 2008 and 2007, respectively.

The Company has entered into two storage space lease agreements with Equity Office Properties Management Corp., the agent for Two North Riverside Plaza
Joint Venture Limited Partnership, one dated November 2, 2005 and one dated October 22, 2003. The leases provide for an aggregate of 1,130 square feet of storage space at Two North Riverside Plaza, Chicago, Illinois. The term of both
leases is month-to-month. The Company paid rent of $3 for each of the three months ended September 30, 2008 and 2007 and $10 for each of the nine months ended September 30, 2008 and 2007.

The future minimum lease obligations for the above leases are as follows:



|                              |  |   |      
|----------------------------- |  | - | -----
|Remaining quarter of 2008     |  | $ | 137  
|Year ending December 31, 2009 |  |   | 554  
|Year ending December 31, 2010 |  |   | 570  
|Year ending December 31, 2011 |  |   | 361  
|                              |  |   |      
|Total minimum lease payments  |  | $ | 1,622
|                              |  |   |      

Previous related party agreements

On June 20, 2005, the Company entered into an office lease agreement with CA Shorebreeze Limited Partnership, an affiliate of Equity Office
Properties Trust. Affiliates of Samstock L.L.C., the Companys largest stockholder, had a substantial interest in Equity Office Properties Trust through February 2007. The lease is for office space at 255 Shoreline Drive, Suite 145, Redwood
City, California. The term of the lease is from August 10, 2005 through February 9, 2009. The Company paid rent of $7 for the three months ended March 31, 2007.

Terminated agreements

On August 4, 2005, the Company entered into an office license
agreement with WA-Columbia Center, L.L.C., an affiliate of Equity Office Properties Trust. The license was for office space at 701 Fifth Avenue, Suite 1410, Seattle, Washington. The term of the license was from August 1, 2005 through
July 31, 2008; however, the Company terminated the license effective July 31, 2007 for $15. The Company paid rent of $2 for the three months ended September 30, 2007 and $16 for the nine months ended September 30, 2007.



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Note 3 - Litigation

On May 25, 2004, a complaint was filed in the Los Angeles County Superior Court against the Company and certain of its subsidiaries by Bistro
Executive, Inc. and certain other restaurants and their owners and guarantors who participated in the Companys dining credits purchase plan. The Company described this litigation, including the removal of the case to the United States District
Court for the Central District of California and the certification of class action treatment of the case, in greater detail in the Companys previously filed Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and some of the Current
Reports on Form 8-K.

On March 6, 2007, the Company entered into a formal agreement with the representative plaintiffs acting on
behalf of a Settlement Class to settle this litigation. On August 23, 2007, the District Court issued an order granting formal approval of the settlement and it became final on September 24, 2007 after no appeal was taken. The amounts
that members of the Settlement Class are entitled to under the settlement were determined through a claims process that resulted in a payment of the first installment for virtually all of the claims in December 2007. The Company
also made payments to the representative plaintiffs and the first installment of payments to class counsel in December 2007. The Company paid the second installment for virtually all of the claims and to class counsel as scheduled in July 2008. The
last remaining installment will be paid in the first quarter of 2009.

The Company previously recorded $38,771 in expense relating to the
California class action suit, which included $29,424 of expense recorded during the fourth quarter of 2006. $13,217 of the expense recorded was subsequently reversed during 2007. The Company established the original reserve in the fourth
quarter of 2006 based on managements initial estimate of the cost of the settlement and related legal and administrative expenses. The related legal and administrative expenses include legal expenses incurred by the Company, legal expenses
from the plaintiffs attorneys, claims administration costs and class representation costs. The reversal was based on a review of the claims filed by class members and managements best estimate of claims that could have been filed before
the end of the claims filing period. The balance of the accrual relating to this litigation as of September 30, 2008 was $3,232 and is expected to be paid during the quarter ended March 31, 2009. The claims filing period closed on
October 8, 2007; however, the reserve may be further adjusted once final payments are made. The liability initially recorded included future legal and administrative costs as allowed under Emerging Issues Task Force (EITF) Topic No.
D-77, Accounting for Legal Costs Expected to Be Incurred in Connection with a Loss Contingency. The total litigation accrual was calculated using the discounted cash flow method. As such, the Company reduced the liability by $536 as a
result of this discounted cash flow and is amortizing this amount to expense. The amortization expense was $93 and $92 for the three months ended September 30, 2008 and 2007, respectively and $169 and $275 for the nine months ended
September 30, 2008 and 2007, respectively. The remaining balance of $75 as of September 30, 2008 will be amortized through the first quarter of 2009.

As previously disclosed, a complaint was filed on October 1, 2004, in the United States District Court for the Eastern District of Texas against Rewards Network Inc. by Source, Inc. The complaint claimed that the
Company infringed four patents owned by Source, Inc. The Company filed a counterclaim for trademark infringement against Source, Inc. On April 26, 2006, the Company entered into a Settlement Agreement with Source, Inc. settling the disputes
between the parties. As part of the Settlement Agreement, Source, Inc. discontinued using Rewards Network and the parties entered into a nonexclusive license agreement pursuant to which the Company obtained a license from Source, Inc. to
practice the inventions under the subject patents for a payment of $1,000, consisting of an initial payment of $800 (paid during the quarter ended June 30, 2006) and payments of $100 on each of the first two anniversaries of the date of the
Settlement Agreement. The Company recorded an expense of $1,300 relating to the settlement and associated legal and administrative costs during 2006. On April 18, 2007, the Company agreed with Source Inc. to make a final payment of $175 in
April 2007. This payment settled the balance in the accrual and as a result the Company reversed $25 of this charge during the three months ended June 30, 2007. The table below outlines the costs associated with both of these litigation
matters.



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##### Table of Contents

|                                          |  |                            |        |             |   |        |             |  |   |                   |   |  |                 |      |                            |  |             |     |  |                   |       |                 |   |                             |   |  |   |     |  |   |     |  |   |      
|----------------------------------------- |  | -------------------------- | ------ | ----------- | - | ------ | ----------- |  | - | ----------------- | - |  | --------------- | ---- | -------------------------- |  | ----------- | --- |  | ----------------- | ----- | --------------- | - | --------------------------- | - |  | - | --- |  | - | --- |  | - | -----
|                                          |  | Balance atDecember 31,2006 |        | AmountsPaid |   |        | Adjustments |  |   | Reclassifications |   |  | InterestExpense |      | Balance atDecember 31,2007 |  | AmountsPaid |     |  | Reclassifications |       | InterestExpense |   | Balance atSeptember 30,2008
|California Class Action Suit:             |  |                            |        |             |   |        |             |  |   |                   |   |  |                 |      |                            |  |             |     |  |                   |       |                 |   |                             |   |  |   |     |  |   |     |  |   |      
|Expense for Class                         |  | $                          | 16,740 |             | $ | (1,427 | )           |  | $ | (12,597           | ) |  | $               |     |                            |  | $           | 133 |  | $                 | 2,849 |                 | $ | (1,573                      | ) |  | $ |    |  | $ | 85  |  | $ | 1,361
|Related legal and administrative expenses |  |                            | 11,710 |             |   | (7,862 | )           |  |   | (746              | ) |  |                 |     |                            |  |             | 159 |  |                   | 3,261 |                 |   | (1,624                      | ) |  |   | 150 |  |   | 84  |  |   | 1,871
|Dining credits reserve                    |  |                            |       |             |   |       |             |  |   | 126               |   |  |                 | (126 | )                          |  |             |    |  |                   |      |                 |   |                            |   |  |   |    |  |   |    |  |   |     
|                                          |  |                            |        |             |   |        |             |  |   |                   |   |  |                 |      |                            |  |             |     |  |                   |       |                 |   |                             |   |  |   |     |  |   |     |  |   |      
|Total California litigation               |  |                            | 28,450 |             |   | (9,289 | )           |  |   | (13,217           | ) |  |                 | (126 | )                          |  |             | 292 |  |                   | 6,110 |                 |   | (3,197                      | ) |  |   | 150 |  |   | 169 |  |   | 3,232
|                                          |  |                            |        |             |   |        |             |  |   |                   |   |  |                 |      |                            |  |             |     |  |                   |       |                 |   |                             |   |  |   |     |  |   |     |  |   |      
|Source Inc. litigation:                   |  |                            |        |             |   |        |             |  |   |                   |   |  |                 |      |                            |  |             |     |  |                   |       |                 |   |                             |   |  |   |     |  |   |     |  |   |      
|Settlement                                |  |                            | 200    |             |   | (175   | )           |  |   | (25               | ) |  |                 |     |                            |  |             |    |  |                   |      |                 |   |                            |   |  |   |    |  |   |    |  |   |     
|                                          |  |                            |        |             |   |        |             |  |   |                   |   |  |                 |      |                            |  |             |     |  |                   |       |                 |   |                             |   |  |   |     |  |   |     |  |   |      
|Total Source Inc. litigation              |  |                            | 200    |             |   | (175   | )           |  |   | (25               | ) |  |                 |     |                            |  |             |    |  |                   |      |                 |   |                            |   |  |   |    |  |   |    |  |   |     
|                                          |  |                            |        |             |   |        |             |  |   |                   |   |  |                 |      |                            |  |             |     |  |                   |       |                 |   |                             |   |  |   |     |  |   |     |  |   |      
|Total litigation and related expenses     |  | $                          | 28,650 |             | $ | (9,464 | )           |  | $ | (13,242           | ) |  | $               | (126 | )                          |  | $           | 292 |  | $                 | 6,110 |                 | $ | (3,197                      | ) |  | $ | 150 |  | $ | 169 |  | $ | 3,232
|                                          |  |                            |        |             |   |        |             |  |   |                   |   |  |                 |      |                            |  |             |     |  |                   |       |                 |   |                             |   |  |   |     |  |   |     |  |   |      

Note 4 - Basic and Diluted Net Income per Share

Basic and diluted net income per share was computed by dividing net income available to common stockholders by the weighted-average number of shares of
the Companys common stock outstanding for each period presented. Weighted average shares of common stock equivalents of 1,808 and 3,679 for the three months ended September 30, 2008 and 2007, respectively, and 2,608 and 3,834 for the nine
months ended September 30, 2008 and 2007, respectively, were excluded as their effect would have been anti-dilutive.



|                                                                           |  |                                 |        |                                |   |        |  |      |        |  |   |       
|-------------------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                                                           |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                                           |  | 2008                            |        | 2007                           |   | 2008   |  | 2007
|Net income                                                                 |  | $                               | 1,492  |                                | $ | 1,145  |  | $    | 4,559  |  | $ | 6,283 
|                                                                           |  |                                 |        |                                |   |        |  |      |        |  |   |       
|                                                                           |  |                                 |        |                               
|Weighted average number of common and common equivalent shares outstanding |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Basic                                                                      |  |                                 | 27,201 |                                |   | 27,038 |  |      | 27,157 |  |   | 26,969
|Stock options and restricted stock                                         |  |                                 | 254    |                                |   | 82     |  |      | 286    |  |   | 129   
|                                                                           |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Diluted                                                                    |  |                                 | 27,455 |                                |   | 27,120 |  |      | 27,443 |  |   | 27,098
|                                                                           |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Earnings per share of common stock                                         |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Basic                                                                      |  | $                               | 0.05   |                                | $ | 0.04   |  | $    | 0.17   |  | $ | 0.23  
|                                                                           |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Diluted                                                                    |  | $                               | 0.05   |                                | $ | 0.04   |  | $    | 0.17   |  | $ | 0.23  
|                                                                           |  |                                 |        |                                |   |        |  |      |        |  |   |       



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Note 5 - Business and Credit Concentrations

As of September 30, 2008, the Company had contracts or relationships with eight major airlines that offer frequent flyer miles as rewards. Members of
each of the Upromise Inc., American Airlines Inc. and United Air Lines programs represented 10% or more of the Companys sales for the three and nine months ended September 30, 2008. Members of each of the United Air Lines and Upromise
Inc. programs represented 10% or more of the Companys sales for the three and nine months ended September 30, 2007. The following table illustrates the Companys partner sales concentration as a percentage of total sales:



|                                                      |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|----------------------------------------------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | ---- | - |  | ---- | -
|                                                      |  | Three Months Ended September 30, |   |  | Nine Months Ended September 30, |  
|                                                      |  | 2008                             |   |  | 2007                            |   |  | 2008 |   |  | 2007 |  
|Airlines                                              |  | 57                               | % |  | 57                              | % |  | 56   | % |  | 58   | %
|All partners that each represent 10% or more of sales |  | 57                               | % |  | 42                              | % |  | 55   | % |  | 42   | %

Note 6 - Minimum Partner and Vendor Obligations

The Company has agreements with various partners and vendors that obligate the Company, among other things, to certain minimum purchases as well as
minimum thresholds of marketing activities. These partner and vendor obligations are generally measured over a one to five year period. The Company periodically evaluates whether its minimum obligations with respect to each partner and vendor will
be satisfied and records a liability if appropriate. The Company has minimum purchase obligations with these vendors as follows:



|                                             |  |   |       
|-------------------------------------------- |  | - | ------
|Remaining quarter of 2008                    |  | $ | 11,073
|2009                                         |  |   | 10,260
|2010                                         |  |   | 6,960 
|2011                                         |  |   | 360   
|2012                                         |  |   | 360   
|2013                                         |  |   | 180   
|                                             |  |   |       
|Total minimum partner and vendor obligations |  | $ | 29,193
|                                             |  |   |       

As of September 30, 2008, the Company has recorded a liability totaling $2,098 related to its minimum
purchase obligations for 2008.

Note 7 - Comprehensive Income

The Companys comprehensive income was as follows:



|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|--------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                    |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|                                                    |  | 2008                             |       |   | 2007                            |   |       | 2008 |  |   | 2007  |  
|Net income                                          |  | $                                | 1,492 |   |                                 | $ | 1,145 |      |  | $ | 4,559 |   |  | $ | 6,283 |  
|Other comprehensive loss:                           |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Foreign currency translation adjustment, net of tax |  |                                  | (166  | ) |                                 |   | (48   | )    |  |   | (224  | ) |  |   | (105  | )
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Total comprehensive income                          |  | $                                | 1,326 |   |                                 | $ | 1,097 |      |  | $ | 4,335 |   |  | $ | 6,178 |  
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  

Note 8 - Revolving Line of Credit

On November 6, 2007, the Company entered into a $25,000 senior secured revolving credit facility with RBS Business Capital (the Lender).
The Company amended this credit facility on August 11, 2008 to, among other matters, increase the amount the Company may borrow under the credit facility to a maximum of $40,000. The Lender has committed to $25,000 under the credit facility and
intends to seek commitments for the additional $15,000 from other financial institutions. As of September 30, 2008, the Company had no borrowings against this credit facility. The maturity date of the credit facility is August 11, 2011.
The credit facility is secured by substantially all of the Companys assets. Up to $1,000 of the facility can be used for letters of credit. The interest rates under the credit facility vary and are based on the Lenders prime rate and/or
LIBOR. The amount the Company may borrow is based on the amount of the Companys accounts receivable and dining credits, as determined under the credit facility. Advances under the credit facility are subject to certain conditions precedent,
including the accuracy of certain representations and warranties and the absence of any default or unmatured default. The Company may use advances for working capital, capital expenditures, permitted acquisitions and for other purposes described in
the credit facility.



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The credit facility has financial covenants that the Company will maintain a minimum ratio of debt to
cash flow, fixed charges to borrowed amounts and certain ratios related to the Companys dining credits portfolio. The credit facility contains customary representations, warranties and covenants and includes customary events of default,
including a change of control provision. The Company can offer no assurances that it will be in compliance with all conditions precedent and all representations and warranties at a time when the Company would like to borrow under the credit
facility. Further, the Company may not be able to borrow the full amount under the credit facility if the Companys dining credits portfolio or adjusted earnings before interest expense, income taxes, depreciation and amortization, as defined
in the credit facility, decreases substantially. These limitations on borrowings may apply if the Company becomes more conservative in the Companys dining credits purchases in light of current economic conditions and the performance of the
Companys restaurants or if the Companys earnings decline as discussed in the overview section of Managements Discussion and Analysis of Financial Condition and Results of Operations. The Company was in compliance with all of the
covenants under this facility as of September 30, 2008.

Note 9 - Subsequent Event

On October 15, 2003, the Company completed a private placement of $70,000 principal amount of their 3.25% Convertible Subordinated Debentures with a
final maturity date of October 15, 2023. The net proceeds from the offering were $67,500 and the issuance costs of $2,500 were amortized over five years. During the nine months ended September 30, 2008, the Company purchased $40,212
of the convertible subordinated debentures for $39,870 utilizing a portion of their cash and cash equivalents balances and recognized a gain on extinguishment of $266. The outstanding balance of the convertible subordinated debentures as of
September 30, 2008 was $14,788.

On October 15, 2008, the Company purchased $14,588 of the convertible subordinated debentures
pursuant to a repurchase offer as required by the indenture governing the convertible subordinated debentures. The purchase price was $14,828, equal to 100% of the principal amount of the debentures, together with accrued and unpaid
interest. The Company purchased the remaining $200 of convertible subordinated debentures on October 20, 2008 for a purchase price of $200. There was no gain recorded for the October 2008 purchases, as the Company purchased the
convertible subordinated debentures at 100% of the principle amount. The purchases of the final $14,788 of the convertible subordinated debentures were funded from the Companys cash and cash equivalents balances.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (amounts in thousands, except per share data, headcount, restaurants in the program and
average transaction amount)
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

You should read the following discussion together with our unaudited condensed
consolidated financial statements and notes to those financial statements, which are included in this report. This report contains forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words anticipates, intends, expects, could, should, plans, believes,
estimates or words or phrases of similar import generally identify forward-looking statements. You are cautioned that forward-looking statements are subject to risks, trends and uncertainties that could cause actual results, performance
or achievements to differ materially from those expressed in any forward-looking statements. Important factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or
achievements expressed or implied by those statements include, but are not limited to, the following: (i) our inability to attract and retain merchants, (ii) our dependence upon our relationships with payment card issuers, transaction
processors, presenters and aggregators, (iii) changes to payment card association rules and practices, (iv) economic changes, (v) our susceptibility to restaurant credit risk and the risk that our allowance for losses related to
restaurant credit risk in connection with dining credits may prove inadequate, (vi) our dependence on our relationships with airlines and other reward program partners for a significant number of members, (vii) the concentration of a
significant amount of our rewards currency in one industry group, the airline industry, (viii) our inability to attract and retain active members, (ix) changes in our programs that affect the rate of rewards, (x) our inability to
maintain an adequately-staffed sales force, (xi) our inability to maintain an appropriate balance between the number of members and the number of participating merchants in each market, (xii) our minimum purchase obligations and
performance requirements, (xiii) network interruptions, processing interruptions or processing errors, (xiv) susceptibility to a changing regulatory environment, (xv) increased operating costs or loss of members due to privacy
concerns of our program partners, payment card processors and the public, (xvi) the failure of our security measures, (xvii) the loss of key personnel, (xiii) increasing competition, and (xix) a shift toward Marketing Services
Program that may cause revenues to decline. We undertake no obligation to, and expressly disclaim any such obligation to, update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated
events or changes to future results over time or otherwise, except as required by law. See the risk factors included as Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2007
for a more detailed discussion of the foregoing and other factors that could cause actual results to differ materially from those included in the forward-looking statements and that, among others, should be considered in evaluating our outlook.

OVERVIEW

We operate the
leading frequent dining programs in North America by marketing our participating restaurants to members of these programs and by providing incentives to members to dine at these restaurants. Participating restaurants benefit from these marketing
efforts, reporting of program results, customer feedback through member comments as well as access to capital offered by us. In addition to operating the frequent dining programs of leading airline frequent flyer programs, clubs and other affinity
organizations, we offer our own frequent dining program through our website, www.rewardsnetwork.com.

We market participating restaurants to members principally through the Internet and email. Our programs are designed to increase the frequency of dining and amount spent on dining by members at participating
restaurants by providing incentives to members to dine at these restaurants, including airline miles, college savings rewards, reward program points, and Cashback RewardsSMsavings. We also offer reporting and customer feedback to participating restaurants and provide aggregate data regarding members activity and member feedback through comments and ratings gathered from surveys.
In addition, we provide access to capital by purchasing a portion of future member transactions from participating restaurants in bulk and in advance. Bars and clubs also participate in our programs, and for purposes of describing our business, are
included when the terms restaurants or merchants are used.

We are paid for our services and, if applicable,
receive the portion of a members transaction that we purchased only if a member dines at a participating restaurant when rewards are available and pays using a payment card that the member registered with us. Our revenue is equal to a
percentage of the amount of the members total dining transaction. These revenues are applied to recover our costs where we have purchased a portion of future member transactions; provide rewards to members; cover our selling, marketing,
general and administrative expenses; and generate operating income that provides a return for our stockholders.

We primarily offer two
programs to restaurants  our Marketing Services Program and Marketing Credits Program. In both the Marketing Services and Marketing Credits Programs, we market participating restaurants to members, offer incentives to members to dine at these
restaurants and provide reporting on member activity and member feedback. We also provide restaurants that participate



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##### Table of Contents

in the Marketing Credits Program with access to capital through our purchase of a portion of future member transactions. In discussing our business, we use
the term dining credits to refer to the portion of future member transactions that we purchase. Our contracts include a separate fee for marketing, reporting on member activity, member feedback and frequency programs. We include all
components of the Marketing Credits Program, including the payment for marketing, reporting on member activity, member feedback and frequency programs, in Marketing Credits Program sales and net revenues because we analyze our business in this
manner.

In early 2007, we began to focus on increasing the number of restaurants that participate in our programs. We have supported our
efforts to increase the number of restaurants by developing and training our sales force to recruit new restaurants and retain existing restaurants in line with our growth strategy. Our sales force becomes more effective over time as each individual
sales person gains experience.

We ended the third quarter of 2008 with 522, or 5.7% more participating restaurants than the third quarter
of 2007. This achievement significantly contributed to a 9.2% and 12.2% increase in sales for the three and nine months ended September 30, 2008, respectively, as compared to the same period in the prior year, and improved net income and
operating cash flows for the three month and nine month periods ended September 30, 2008.

During most of 2007, we increased the size
of our dining credits portfolio by increasing the amount of dining credits purchased from select restaurants that met our due diligence and risk assessment requirements. The purchase of more dining credits resulted in an increase in the usage period
of those dining credits and allowed us to keep desirable restaurants in our program longer, without sacrificing the risk profile of the dining credits portfolio. This dining credits purchase policy contributed to an increase in our dining credits
portfolio and an increase in the number of participating restaurants each quarter during 2007. However, beginning in December 2007, we became more conservative in light of the economic and credit uncertainty facing both the restaurant industry and
consumers and to conserve liquidity due to the scheduled redemption of our convertible subordinated debentures in October 2008. As a result, we implemented more conservative dining credits purchasing policies aimed at generally reducing the amount
of dining credits we purchase from individual restaurants. We continue to be conservative in our purchase of dining credits, given the current economic environment.

We made the decision to modify the amount of dining credits we purchase based upon our review of internal and external conditions. We continually evaluate our dining credits purchase policies by monitoring the
performance of our dining credits portfolio and observing current economic trends facing the restaurant industry. In analyzing the appropriate amount of dining credits to purchase and, therefore, the length of the dining credits usage period for a
particular restaurant, we consider the overall economic condition of the restaurant industry, the performance of participating restaurants generally and that individual restaurants credit profile, sales, and history in our program. We
believe that purchasing fewer dining credits from individual restaurants is a conservative approach as we have less capital at risk with any individual restaurant. Although we may purchase fewer dining credits from individual restaurants, we
continue to seek to grow our dining credits portfolio by increasing the number of restaurants from which we purchase dining credits.

As a
result of our more conservative dining credits purchasing policies and increased sales, our net dining credits portfolio as of September 30, 2008 decreased to $82,389 from $94,880 at December 31, 2007. We generated higher sales as a
result of more merchants in our portfolio while lowering the average amount of capital at risk through reducing the net dining credits usage period. Net dining credits usage period decreased to 7.5 months during the three months ended September 30,
2008 from 9.7 months during the same period in the prior year. We intend to continue our conservative approach with respect to our dining credits purchasing policies during the current climate of economic and credit uncertainty.

Our more conservative dining credits purchasing policies impact not only the size of the dining credits portfolio, but also various items in our
Statement of Operations. Generally, a consequence of our purchase of fewer dining credits is a higher purchase price for the dining credits, which results in increased cost of sales. In order to maintain profitability of Marketing Credits
Program restaurants that have a higher cost of sales, we require a higher sales yield in our deals with those restaurants. Higher sales yield increases the amount of each member transaction we retain as Marketing Credits Program sales. Higher
sales yields also result in a decrease in member benefit expense as a percentage of each transaction which can partially or completely offset the increased cost of sales on that transaction.

Although deals with shorter usage periods should reduce our risk exposure while maintaining our profitability goals, shortening the dining credits usage
period may, in some cases, result in increased restaurant attrition. Shortening the timeframe by purchasing fewer dining credits may require additional sales resources for retention efforts, and reduce the total revenue that we realize. If we are
unable to renew the restaurant or replace it with a new restaurant, our revenues may decline.

During the second half of 2007, we were
engaged in a project to restructure the member benefits we offer. We implemented revised benefit offerings with most of our partners that became effective January 1, 2008. As a result of these efforts, with the exception of one partner, we
modified the member tier criteria to reward dining at participating restaurants and online engagement by



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providing the highest level of benefits to members that provide us with current email addresses, agree to receive our marketing promotions, dine frequently
and who have completed a specified number of dines at participating restaurants. We also revised bonus opportunities to encourage members to complete surveys regarding their dining experience. As a result of our revised benefit offerings to focus on
online engagement, member benefit expense decreased to 12.3% of sales for the nine months ended September 30, 2008 as compared to 16.7% of sales for the same period of the prior year. Year-to-date, we have driven increases in qualified
transactions, active members and overall revenues while lowering marketing and member benefit expense a total of $7,317. Our new website platform, email marketing and rewards structure have contributed to higher revenues and improved member
engagement at a lower cost.

As a result of our increase in sales, more conservative dining credits purchasing policies and our focus on
controlling expenses, we generated strong operating cash flows during the first three quarters of 2008 which enabled us to repurchase our convertible subordinated debentures from our cash and cash equivalents balances.

In the third quarter of 2008, we experienced a decline in average transaction amount as a result of members spending less at our restaurants, either by
spending less on a particular meal or by altering their dining behavior by dining at restaurants with lower prices. If member spend continues to decline, it would negatively impact several aspects of our business and financial results. If average
transaction amount declines or members cut back on the frequency of their dines, our revenues may decline even if we are successful in increasing our merchant count and overall member engagement. A difficult economic environment may also cause an
increase in merchants defaulting in their obligations to us, including restaurant closings, which may result in an increase in our loss reserve and write-offs and would make it more difficult to increase our merchant count. The amount of rewards
currency that we provide to members is based on the amount the member spends at our restaurants. A decline in member spend, due to a declining average transaction amount, members dining at our restaurants less frequently or fewer merchants in our
programs, may make it difficult for us to meet our minimum purchase obligations for some of our partners rewards currency, which would cause us to incur costs for rewards currencies that we may not be able to use. Finally, a deterioration of
our financial performance could lead to a default under our credit facility with respect to certain financial covenants, which may limit our liquidity.

We monitor economic developments, member dining behavior and our restaurants business on an on-going basis and make business decisions based on the developments that we observe. As we discussed above, we have
taken a more conservative approach with our dining credits purchases, which has resulted in a smaller dining credits portfolio and shorter usage periods. In response to the economic environment, we may take an even more conservative approach with
our dining credits purchases in order to manage risk in our dining credits portfolio which would likely result in a further decrease in the size of our dining credits portfolio. We may also increase our loss reserves in response to our assessment of
the economy and the performance of our restaurants. Throughout 2008, we have focused on managing our operating expenses, and we may become more aggressive in the management of these operating expenses to preserve liquidity at the expense of
long-term growth initiatives. We believe that the steps we have taken to become more conservative in our purchases of dining credits and to manage member benefits expense, marketing expenses and other operating expenses, allowed us to achieve
profitable sales growth in the three and nine month periods ending September 30, 2008, and we intend to continue to make adjustments to our business, as appropriate, as economic conditions change.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of the financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates, including those related to the allowance for losses, the valuation allowance, if any, for net deferred tax assets, intangible assets and legal contingencies. Our estimates are based on historical
experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions. The following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial
statements.

Allowance for Losses

We provide allowances for dining credits losses and accounts receivables based on our estimate of losses that would result from the inability of participating merchants to remain in business or our merchants
unwillingness to honor their obligations relating to dining credits and accounts receivables. If the financial condition of our merchant base were to deteriorate beyond our expectations, resulting in participating merchants inability to
provide food, beverage, goods and services to members thereby reducing the redemption of dining credits, or if merchants are unwilling or otherwise unable to honor their obligations relating to dining credits or accounts receivable in greater
numbers than we expect, additional allowances may be required.



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During the second quarter of 2008, we refined our methodology used to estimate losses in dining
credits and accounts receivable. Prior to the second quarter of 2008, our methodology was primarily based upon the age of the portfolio as calculated from sales from the preceding quarter. We applied estimated loss percentages to the aged portfolio
based on the estimated time remaining on each deal. We also provided for specifically identified accounts and for dining credits balances that were large or slow moving. Since the beginning of 2007, however, we have been collecting additional
historical information on merchant account balances. With this additional data, during the second quarter of 2008, we refined our estimation method and now use this information to monitor accounts, track historical write-offs, and fund new accounts.
We now apply a reserve rate to accounts based upon additional characteristics, such as whether the account has been referred for legal collection, the date of the last payment received from the merchant, whether our attempt to debit the
merchants bank account for payments due to us has been rejected, the merchants commercial credit score, and the aging of the account. The reserve rate for each account is based upon historical charge-off rates of accounts with similar
characteristics. We also provide for specifically identified accounts and for dining credit balances that are large or slow moving as we did previously. We will continue to review our reserve rates on a regular basis based upon historical charge-off
rates and may adjust reserve rates based on changes in the nature of our business, risk considerations, economic conditions or other factors. Losses are reduced by recoveries of dining credits previously charged off. Account balances are charged off
against the allowance once we conclude that a merchant is unwilling or unable to honor their obligation relating to dining credits. Subsequent to the account being charged off, we may continue to pursue recovery efforts. As of the beginning of 2008,
we updated our write-off policy to further define when an account should be written-off. This updated policy contributed to higher write-offs in 2008 as compared with the prior year.

In March 2007, we began to provide access to capital through a loan product, called RCR Loans. We discontinued offering the product line
effective January 2008, although we continue to service RCR Loan notes that we previously purchased. We provide an allowance for our RCR Loan product using a specific reserve method based on the merchants payment history and previous
experience with the merchant, if applicable. We purchased RCR Loan notes from WebBank after WebBank originated and funded the RCR Loan. If an RCR Loan merchant fails, we may not realize any value for the RCR Loan note that we purchased. Even if an
RCR Loan merchant stays in business, it may fail to repay the note that we purchased and we may incur costs to collect on the note and may not recover amounts sufficient to compensate us for damages that we suffer.

Deferred Tax Assets Valuation Allowance

We
record a valuation allowance to reduce our deferred tax assets when it is not likely to be recognized due to cumulative losses and the uncertainty as to future recoverability. We consider future taxable income and available tax planning strategies
in assessing the need for the valuation allowance. In the event we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the
period in which such determination is made.

Impairment Loss on Goodwill

On at least an annual basis, we evaluate whether events and changes in circumstances warrant the recognition of an impairment loss on goodwill. The
conditions that would trigger an impairment assessment of unamortized goodwill include a significant, sustained negative trend in our operating results or cash flows, a decrease in demand for our programs, a change in the competitive environment and
other industry and economic factors. Recoverability of an asset is measured by comparison of its carrying amount to the expected future cash flows. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset
exceeds its fair market value. Significant management judgment is required in the forecasting of future operating results that are used in the preparation of projected cash flows, and, if different conditions prevail or judgments are made, a
material write-down of goodwill could occur.

We comply with Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets, the current standard for periodic assessment of the carrying value of intangible assets, including goodwill. We assess the impact of SFAS No. 142 using a two-step approach to
assess goodwill based on applicable reporting units and any intangible assets, including goodwill, recorded in connection with our previous acquisitions.

Revenue Recognition

We recognize revenue from the Marketing Credits Program and Marketing Services Program
when members patronize participating merchants and pay using a payment card they have registered with us. Revenue is recognized only if the members transaction qualifies for a benefit in accordance with the rules of the members
particular program. The amount of revenue recognized is that portion of the members total transaction amount that we are entitled to receive in cash, in accordance with the



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terms of our agreement with the participating merchant. For example, if a members total qualified transaction amount is $100 at a participating
merchant, as evidenced by the full amount of the payment card transaction, and our contract provides for us to receive 80%, the amount of revenue we recognize is $80, representing what we actually realize in cash. Similarly, under the typical
Marketing Services Program contract, we recognize revenue only to the extent that we are contractually entitled to receive cash for a portion of the members total qualified transaction amount. The same $100 transaction referred to above at a
Marketing Services Program merchant may yield $17 in revenue to be recognized. Under the RCR Loan product, we recognize interest income on an effective yield basis over the life of the loan.

Legal Contingencies

We review the status
of significant legal matters and assess our potential financial exposure with respect to such legal matters on at least a quarterly basis. If the potential loss from any claim or legal proceeding is considered probable and the amount can be
reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related
to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and legal proceedings and may revise our estimates.
Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position.



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

As a means of explaining our operations and results, the following table illustrates the relationship between revenue and expense categories for the
three months ended September 30, 2008 and 2007. These percentages have been rounded to the nearest tenth.



|                                       |  |                                                            |   |  |      
|-------------------------------------- |  | ---------------------------------------------------------- | - |  | -----
|                                       |  | Percentage of Salesfor the Three Months EndedSeptember 30,
|                                       |  | 2008                                                       |   |  | 2007 
|Sales                                  |  | 100.0                                                      |   |  | 100.0
|Cost of sales                          |  | 53.2                                                       |   |  | 50.1 
|Provision for losses                   |  | 4.7                                                        |   |  | 5.6  
|Member benefits                        |  | 12.7                                                       |   |  | 15.3 
|                                       |  |                                                            |   |  |      
|Net revenue                            |  | 29.3                                                       |   |  | 29.1 
|                                       |  |                                                           
|Membership fees and other income       |  | 0.5                                                        |   |  | 0.7  
|                                       |  |                                                            |   |  |      
|Total operating revenue                |  | 29.8                                                       |   |  | 29.8 
|                                       |  |                                                            |   |  |      
|Salaries and benefits                  |  | 8.7                                                        |   |  | 8.9  
|Sales commission and expenses          |  | 7.9                                                        |   |  | 8.9  
|Professional fees                      |  | 1.3                                                        |   |  | 0.6  
|Member and merchant marketing expenses |  | 1.6                                                        |   |  | 3.1  
|Depreciation and amortization          |  | 2.0                                                        |   |  | 2.1  
|General and administrative expenses    |  | 5.0                                                        |   |  | 5.0  
|                                       |  |                                                            |   |  |      
|Total operating expenses               |  | 26.5                                                       |   |  | 28.5 
|                                       |  |                                                            |   |  |      
|Operating income                       |  | 3.3                                                        |   |  | 1.3  
|                                       |  |                                                           
|Other (expense) income, net            |  | (0.1                                                       | ) |  | 1.0  
|                                       |  |                                                            |   |  |      
|Income before income tax provision     |  | 3.2                                                        |   |  | 2.3  
|Income tax provision                   |  | 0.8                                                        |   |  | 0.3  
|                                       |  |                                                            |   |  |      
|Net income                             |  | 2.4                                                        |   |  | 2.0  
|                                       |  |                                                            |   |  |      



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Operating Revenues

The following table sets forth for the periods presented our sales, components of our costs of sales and certain other information for each of our two marketing programs. We use the term dining credits to
refer to the portion of future member transactions that we purchase. Our Marketing Credits Program contracts include a fee for marketing, customer feedback through member comments and ratings, and frequency programs. We include all components of the
Marketing Credits Program, including this fee, in Marketing Credits Program sales and revenues because we analyze our business in this manner. Financial information regarding our interest income from the RCR Loan product we offered is included in
the Marketing Credits Program sales strictly for purposes of our income statement.



|                                                               |  |                                          |        |   |                          |   |        |       |  |   |                         |   |  |                          |        |   |       |   |        |   |  |   |         |  
|-------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ------------------------ | - | ------ | ----- |  | - | ----------------------- | - |  | ------------------------ | ------ | - | ----- | - | ------ | - |  | - | ------- | -
|                                                               |  | For the Three Months Ended September 30, |       
|                                                               |  | 2008                                     |        |   | 2007                     |  
|                                                               |  | MarketingCreditsProgram                  |        |   | MarketingServicesProgram |   |        | Total |  |   | MarketingCreditsProgram |   |  | MarketingServicesProgram |        |   | Total |  
|Merchant count as of September 30, 2008 and 2007, respectively |  |                                          | 6,449  |   |                          |   | 3,306  |       |  |   | 9,755                   |   |  |                          | 6,188  |   |       |   | 3,045  |   |  |   | 9,233   |  
|Number of qualified transactions                               |  |                                          | 1,670  |   |                          |   | 816    |       |  |   | 2,486                   |   |  |                          | 1,440  |   |       |   | 727    |   |  |   | 2,167   |  
|Average transaction amount                                     |  | $                                        | 44.18  |   |                          | $ | 46.05  |       |  | $ | 44.79                   |   |  | $                        | 47.07  |   |       | $ | 47.25  |   |  | $ | 47.13   |  
|Qualified transaction amount                                   |  | $                                        | 73,780 |   |                          | $ | 37,574 |       |  | $ | 111,354                 |   |  | $                        | 67,786 |   |       | $ | 34,349 |   |  | $ | 102,135 |  
|Sales yield                                                    |  |                                          | 76.5   | % |                          |   | 16.1   | %     |  |   | 56.1                    | % |  |                          | 75.6   | % |       |   | 17.2   | % |  |   | 56.0    | %
|Sales                                                          |  | $                                        | 56,402 |   |                          | $ | 6,040  |       |  | $ | 62,442                  |   |  | $                        | 51,267 |   |       | $ | 5,913  |   |  | $ | 57,180  |  
|Cost of dining credits                                         |  | $                                        | 32,994 |   |                          | $ |       |       |  | $ | 32,994                  |   |  | $                        | 28,349 |   |       | $ |       |   |  | $ | 28,349  |  
|Processing fee                                                 |  |                                          | 161    |   |                          |   | 91     |       |  |   | 252                     |   |  |                          | 190    |   |       |   | 113    |   |  |   | 303     |  
|                                                               |  |                                          |        |   |                          |   |        |       |  |   |                         |   |  |                          |        |   |       |   |        |   |  |   |         |  
|Total cost of sales                                            |  | $                                        | 33,155 |   |                          | $ | 91     |       |  | $ | 33,246                  |   |  | $                        | 28,539 |   |       | $ | 113    |   |  | $ | 28,652  |  
|                                                               |  |                                          |        |   |                          |   |        |       |  |   |                         |   |  |                          |        |   |       |   |        |   |  |   |         |  
|Provision for losses                                           |  | $                                        | 2,949  |   |                          | $ |       |       |  | $ | 2,949                   |   |  | $                        | 3,171  |   |       | $ |       |   |  | $ | 3,171   |  
|Member benefits                                                |  | $                                        | 3,636  |   |                          | $ | 1,609  |       |  | $ | 5,245                   |   |  | $                        | 4,483  |   |       | $ | 2,333  |   |  | $ | 6,816   |  
|Bonus rewards                                                  |  |                                          | 1,038  |   |                          |   | 529    |       |  |   | 1,567                   |   |  |                          | 320    |   |       |   | 170    |   |  |   | 490     |  
|Partner Commissions                                            |  |                                          | 747    |   |                          |   | 367    |       |  |   | 1,114                   |   |  |                          | 788    |   |       |   | 630    |   |  |   | 1,418   |  
|                                                               |  |                                          |        |   |                          |   |        |       |  |   |                         |   |  |                          |        |   |       |   |        |   |  |   |         |  
|Total member benefits                                          |  | $                                        | 5,421  |   |                          | $ | 2,505  |       |  | $ | 7,926                   |   |  | $                        | 5,591  |   |       | $ | 3,133  |   |  | $ | 8,724   |  
|                                                               |  |                                          |        |   |                          |   |        |       |  |   |                         |   |  |                          |        |   |       |   |        |   |  |   |         |  
|Net revenue                                                    |  | $                                        | 14,877 |   |                          | $ | 3,444  |       |  | $ | 18,321                  |   |  | $                        | 13,966 |   |       | $ | 2,667  |   |  | $ | 16,633  |  
|                                                               |  |                                          |        |   |                          |   |        |       |  |   |                         |   |  |                          |        |   |       |   |        |   |  |   |         |  

In analyzing sales, we focus on three key metrics: merchant count, qualified transaction amount
and sales yield. Merchant count is the number of merchants active in our program at the end of each period. Qualified transaction amount represents the total dollar value of all member dining transactions that qualify for a benefit, and therefore
provide revenue to us. Sales yield represents the percentage of the qualified transaction amount that we retain as revenue.

Ending
merchant count as of September 30, 2008 was 9,755 compared to 9,233 as of September 30, 2007, an increase of 5.7% The increase in total merchant count was driven by a 4.2% increase in Marketing Credits Program merchants to 6,449 merchants
and an 8.6% increase in Marketing Services Program merchants to 3,306 merchants.

We continually evaluate our dining credits purchase
policies by monitoring the performance of our dining credits portfolio and observing current economic trends facing the restaurant industry. During 2007, we made efforts to retain desirable merchants by increasing, on a risk-adjusted basis, the
amount of dining credits that we purchased, and lengthened the period of time it takes our members to use the dining credits at the restaurants. The longer dining credits usage periods from these deals contributed to an increase in our dining
credits portfolio balance and merchant count throughout 2007. During the fourth quarter of 2007, we began to shorten the dining credits usage period of new dining credits purchased from certain merchants as a result of our assessment of the overall
economic trends facing the restaurant industry. Shortening the dining credits usage period for a deal reduces our risk exposure with respect to that deal, but also decreases the revenue that we may realize from that deal and may shorten the period
of time the restaurant participates in our program if we are unable to renew the restaurants participation in our programs. Our net dining credits balance as of September 30, 2008 decreased to $82,389 from $94,880 at December 31,
2007 due in part to the decrease in the dining credits net usage period.

Qualified transaction amounts at our participating merchants
increased $9,219, or 9.0%, to $111,354 for the three months ended September 30, 2008 compared to the same period in the prior year as a result of the increase in merchant count as well as an increase in the number of qualified transactions
between periods. Average transaction amount decreased $2.34, or 5.0%, to $44.79 for the three months ended September 30, 2008 due to a decline in the average amount a member spends on each transaction and a shift in the mix of restaurants on
our program.



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Total sales yield increased slightly to 56.1% for the three months ended September 30, 2008 compared
to 56.0% for the same period in the prior year mainly due to the increase in sales yield in the Marketing Credits Program, offset by a decrease in sales yield in the Marketing Services Program. The Marketing Credits Program sales yield increased to
76.4% during the three months ended September 30, 2008 compared to 75.6% during the same period in the prior year. Beginning in the fourth quarter of 2007, we shortened usage periods of new Marketing Credits deals, which resulted in a higher
cost of sales. In order to maintain profitability of Marketing Credits deals that have a higher cost of sales, we require a higher sales yield on these transactions. Sales yield for the Marketing Services Program decreased to 16.1% during the three
months ended September 30, 2008 from 17.2% for the same period in the prior year as we have continued to lower the price of this product in select markets.

Sales for the three months ended September 30, 2008 increased 9.2% as compared with the same period in the prior year primarily due to an increase in merchant count and a higher Marketing Credits sales yield,
partially offset by a decline in Marketing Services Program sales yield and a lower average transaction amount. Marketing Credits sales increased 10.0% during the three months ended September 30, 2008 as compared to the same period in the prior
year and Marketing Services Program sales increased 2.1% between periods. For the three months ended September 30, 2008, revenues increased at a higher rate than merchant count as compared with the same period in the prior year primarily due to
a shift in the mix of merchants towards more Marketing Credits merchants.

Cost of sales increased to 53.2% of total sales and 58.8% of
Marketing Credit Program sales for the three months ended September 30, 2008 compared to 50.1% of total sales and 55.7% of Marketing Credit Program sales for the same period in the prior year. This increase was due to our effort, beginning in
the fourth quarter of 2007, to shorten usage periods of new Marketing Credits deals. Marketing Credits deals with shorter usage periods typically have a higher cost of sales because we purchase dining credits with a shorter usage period at a lower
discount.

The provision for losses decreased as a percentage of sales to 4.7% of total sales and 5.2% of Marketing Credits Program sales
for the three months ended September 30, 2008 compared with 5.6% of total sales and 6.2% of Marketing Credits Program sales for the same period in the prior year. The provision for both periods included reserves for both our dining credits
portfolio and RCR Loan notes. The provision for losses for RCR Loan notes was ($23) and $420 for the three months ended September 30, 2008 and 2007, respectively. We decided to exit the RCR Loan product effective January 2008, although we
continue to service RCR Loan notes that we previously purchased. Excluding the impact of the RCR Loan notes provision, our provision for losses as a percentage of sales remained flat at approximately 4.8% of total sales and 5.4% of Marketing Credits
Program sales.

Net write-offs totaled $2,106 during the three months ended September 30, 2008 as compared to net recoveries of $496
during the same period in the prior year. In early 2007, we updated our write-off policy to further define when an account should be written-off. As a result of this updated policy, there was a slower write-off of assets in the gross dining credits
asset and an increase in the allowance for doubtful accounts during 2007. As of the beginning of 2008, we further refined the write-off policy to include a time period in which an account should be written-off. As a result, we recognized higher
write-offs during the nine months ended September 30, 2008 as compared with the prior year. In particular, we saw higher net write-offs during the first quarter of 2008 as compared to the second and third quarters of 2008 due in part to the
change in policy. Because a majority of these 2008 write-offs were previously reserved in the allowance for doubtful accounts, the change in this policy did not materially affect the provision for losses during the three months ended
September 30, 2008.

Member benefits expense decreased to $7,926, or 12.7% of sales for the three months ended September 30, 2008
compared with $8,724, or 15.3% of sales for the same period in the prior year. We implemented revised benefit offerings with most of our partners that went into effect during the first quarter of 2008. These revised offerings resulted in lower
overall member benefit costs. During the three months ended September 30, 2008 we have driven increases in qualified transactions, active members and overall revenues while decreasing total member benefits expense by $798 compared to the prior
year. Offsetting this cost savings was an increase of $1,778 in bonus benefits paid to highly engaged members and an expense of $355 recorded during the three months ended September 30, 2008 relating to our minimum purchase obligations with
various partners. We accrued an additional amount towards our minimum purchase obligations in consideration of anticipated member usage for the remainder of 2008 given our revised benefit offerings. There was no such expense during the same period
in the prior year.



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Net revenues increased to $18,321, or 29.3% of sales during the three months ended September 30,
2008 as compared to $16,633 or 29.1% of sales during the same period in the prior year. The increase was mainly due to an increase in sales and a decrease in member benefits expense, partially offset by an increase in cost of sales.

Membership and other income decreased $101 or 24.7% for the three months ended September 30, 2008 compared with the same period in the prior year.
The decrease can be primarily attributed to the decline in fee paying members. Beginning in mid-2008, we introduced a new membership program that eliminates annual fees for certain members.

Operating Expenses

Salaries and benefits
increased $351, or 6.9%, to $5,414 for the three months ended September 30, 2008 from $5,063 for the same period in the prior year primarily due to an increase in management incentive compensation accruals.

Sales commissions and expenses decreased to 7.9% of sales for the three months ended September 30, 2008 compared to 8.9% of sales for the same
period in the prior year due to a decrease in sales employee headcount, primarily in connection with the discontinuation of the RCR Loan Program and increased productivity of the sales force, partially offset by an increase in the sales incentive
compensation expense.

Professional fees increased $467, to $836 for the three months ended September 30, 2008 as compared to $369 for
the same period in the prior year. The increase can be primarily attributed to an increase in general legal and accounting fees.

Member
and merchant marketing expenses decreased $774 or 44.2% for the three months ended September 30, 2008 compared with the same period in the prior year as we continue to migrate our marketing efforts away from direct print mail and focus on more
cost-efficient email and internet marketing. While our marketing expenses have decreased $774 compared with the same period in the prior year, we continue to see increases in total revenues, total qualified transactions and active members.

Depreciation and amortization costs increased $129 or 11.5% for the three months ended September 30, 2008 compared to the same period
in the prior year as we continue to invest in the development of our websites, technology investments supporting the automation of internal processes, leasehold improvements for our office space and general information technology investments.

General and administrative expenses increased $213 or 7.3% for the three months ended September 30, 2008 compared to the same period
in the prior year. The increase was primarily due to an increase in severance expenses offset by a decrease in rent expense.

Other Income and
Expense

Interest and other income decreased $407 to $229 for the three months ended September 30, 2008 compared with the same
period in the prior year as a result of lower short term investments balances and a change in investment strategy which resulted in lower interest rates year over year. Interest expense and financing costs decreased $337 to $446 due to a decrease in
interest expense recorded for our convertible subordinated debentures as a result of our purchase of $15,000 of our outstanding convertible subordinated debentures in late 2007, $2,100 in the first quarter of 2008, and $38,112 in the third quarter
of 2008 as discussed below under Liquidity and Capital Resources. In addition, we recorded gains of $138 and $739 during the three-months ended September 30, 2008 and 2007, respectively, relating to the purchase of outstanding convertible
debentures as discussed below.

Income tax provision

Our effective tax rate for the three months ended September 30, 2008 was 25.6% compared with 13.5% for the same period in prior year. The increase in the effective tax rate primarily resulted from a decrease in
the level of tax-exempt interest recorded, partially offset by a decrease in the effective state tax rate.

Net income

Net income was $1,492 for the three months ended September 30, 2008 compared with $1,145 for the same period in the prior year. The increase is
mainly due to an increase in sales and a decrease in member benefit expense, partially offset by an increase in the cost of sales.



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Basic weighted average number of shares outstanding increased to 27,201 for the three months ended
September 30, 2008 compared to 27,038 for the same period in the prior year primarily due to the issuance of shares upon the vesting of restricted stock unit awards. Diluted weighted average shares outstanding increased to 27,455 for the three
months ended September 30, 2008 compared to 27,120 for the same period in the prior year due to the issuance of shares upon the vesting of restricted stock unit awards and an increase in the dilutive effect of restricted stock units
outstanding.



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##### Table of Contents

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

As a means of explaining our operations and results, the following table illustrates the relationship between revenue and expense categories for the nine
months ended September 30, 2008 and 2007. These percentages have been rounded to the nearest tenth.



|                                       |  |                                                           |   |  |       |  
|-------------------------------------- |  | --------------------------------------------------------- | - |  | ----- | -
|                                       |  | Percentage of Salesfor the Nine Months EndedSeptember 30, |  
|                                       |  | 2008                                                      |   |  | 2007  |  
|Sales                                  |  | 100.0                                                     |   |  | 100.0 |  
|Cost of sales                          |  | 52.7                                                      |   |  | 50.0  |  
|Provision for losses                   |  | 4.5                                                       |   |  | 4.8   |  
|Member benefits                        |  | 12.3                                                      |   |  | 16.7  |  
|                                       |  |                                                           |   |  |       |  
|Net revenue                            |  | 30.5                                                      |   |  | 28.5  |  
|Membership fees and other income       |  | 0.5                                                       |   |  | 0.8   |  
|                                       |  |                                                           |   |  |       |  
|Total operating revenue                |  | 31.0                                                      |   |  | 29.3  |  
|                                       |  |                                                           |   |  |       |  
|Salaries and benefits                  |  | 8.7                                                       |   |  | 9.2   |  
|Sales commission and expenses          |  | 7.9                                                       |   |  | 9.3   |  
|Professional fees                      |  | 1.3                                                       |   |  | 1.0   |  
|Member and merchant marketing expenses |  | 1.6                                                       |   |  | 3.3   |  
|Depreciation and amortization          |  | 2.1                                                       |   |  | 2.1   |  
|General and administrative expenses    |  | 5.2                                                       |   |  | 6.0   |  
|Litigation and related expenses        |  |                                                          |   |  | (7.0  | )
|                                       |  |                                                           |   |  |       |  
|Total operating expenses               |  | 26.8                                                      |   |  | 23.9  |  
|                                       |  |                                                           |   |  |       |  
|Operating income                       |  | 4.2                                                       |   |  | 5.4   |  
|Other (expense) income, net            |  | (0.4                                                      | ) |  | 0.3   |  
|                                       |  |                                                           |   |  |       |  
|Income before income tax provision     |  | 3.8                                                       |   |  | 5.7   |  
|Income tax provision                   |  | 1.4                                                       |   |  | 2.0   |  
|                                       |  |                                                           |   |  |       |  
|Net income                             |  | 2.4                                                       |   |  | 3.8   |  
|                                       |  |                                                           |   |  |       |  



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##### Table of Contents

Operating Revenues

The following table sets forth for the periods presented our sales, components of our costs of sales and certain other information for each of our two marketing programs. We use the term dining credits to
refer to the portion of future member transactions that we purchase. Our Marketing Credits Program contracts include a fee for marketing, customer feedback through member comments and ratings, member feedback and frequency programs. We include all
components of the Marketing Credits Program, including this fee, in Marketing Credits Program sales and revenues because we analyze our business in this manner. We use the term merchant in this discussion to refer to restaurants, bars
and clubs. Financial information regarding our interest income from the RCR Loan product we offered previously is included in the Marketing Credits Program sales strictly for purposes of our income statement.



|                                                               |  |                                         |         |   |                          |   |         |       |  |   |                         |   |  |                          |         |   |       |   |         |   |  |   |         |  
|-------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ------------------------ | - | ------- | ----- |  | - | ----------------------- | - |  | ------------------------ | ------- | - | ----- | - | ------- | - |  | - | ------- | -
|                                                               |  | For the Nine Months Ended September 30, |        
|                                                               |  | 2008                                    |         |   | 2007                     |  
|                                                               |  | MarketingCreditsProgram                 |         |   | MarketingServicesProgram |   |         | Total |  |   | MarketingCreditsProgram |   |  | MarketingServicesProgram |         |   | Total |  
|Merchant count as of September 30, 2008 and 2007, respectively |  |                                         | 6,449   |   |                          |   | 3,306   |       |  |   | 9,755                   |   |  |                          | 6,188   |   |       |   | 3,045   |   |  |   | 9,233   |  
|Number of qualified transactions                               |  |                                         | 4,915   |   |                          |   | 2,377   |       |  |   | 7,292                   |   |  |                          | 4,271   |   |       |   | 2,151   |   |  |   | 6,422   |  
|Average transaction amount                                     |  | $                                       | 45.43   |   |                          | $ | 46.15   |       |  | $ | 45.67                   |   |  | $                        | 47.49   |   |       | $ | 48.28   |   |  | $ | 47.75   |  
|Qualified transaction amount                                   |  | $                                       | 223,306 |   |                          | $ | 109,707 |       |  | $ | 333,013                 |   |  | $                        | 202,833 |   |       | $ | 103,842 |   |  | $ | 306,675 |  
|Sales yield                                                    |  |                                         | 75.8    | % |                          |   | 16.3    | %     |  |   | 56.2                    | % |  |                          | 73.5    | % |       |   | 17.3    | % |  |   | 54.4    | %
|Sales                                                          |  | $                                       | 169,360 |   |                          | $ | 17,868  |       |  | $ | 187,228                 |   |  | $                        | 148,981 |   |       | $ | 17,937  |   |  | $ | 166,918 |  
|Cost of dining credits                                         |  | $                                       | 97,860  |   |                          | $ |        |       |  | $ | 97,860                  |   |  | $                        | 82,615  |   |       | $ |        |   |  | $ | 82,615  |  
|Processing fee                                                 |  |                                         | 567     |   |                          |   | 314     |       |  |   | 881                     |   |  |                          | 551     |   |       |   | 273     |   |  |   | 824     |  
|                                                               |  |                                         |         |   |                          |   |         |       |  |   |                         |   |  |                          |         |   |       |   |         |   |  |   |         |  
|Total cost of sales                                            |  | $                                       | 98,427  |   |                          | $ | 314     |       |  | $ | 98,741                  |   |  | $                        | 83,166  |   |       | $ | 273     |   |  | $ | 83,439  |  
|                                                               |  |                                         |         |   |                          |   |         |       |  |   |                         |   |  |                          |         |   |       |   |         |   |  |   |         |  
|Provision for losses                                           |  | $                                       | 8,433   |   |                          | $ |        |       |  | $ | 8,433                   |   |  | $                        | 8,020   |   |       | $ |        |   |  | $ | 8,020   |  
|Member benefits                                                |  | $                                       | 11,748  |   |                          | $ | 4,723   |       |  | $ | 16,471                  |   |  | $                        | 14,085  |   |       | $ | 6,974   |   |  | $ | 21,059  |  
|Bonus rewards                                                  |  |                                         | 2,429   |   |                          |   | 1,204   |       |  |   | 3,633                   |   |  |                          | 1,867   |   |       |   | 962     |   |  |   | 2,829   |  
|Partner Commissions                                            |  |                                         | 1,963   |   |                          |   | 927     |       |  |   | 2,890                   |   |  |                          | 2,586   |   |       |   | 1,415   |   |  |   | 4,001   |  
|                                                               |  |                                         |         |   |                          |   |         |       |  |   |                         |   |  |                          |         |   |       |   |         |   |  |   |         |  
|Total member benefits                                          |  | $                                       | 16,140  |   |                          | $ | 6,854   |       |  | $ | 22,994                  |   |  | $                        | 18,538  |   |       | $ | 9,351   |   |  | $ | 27,889  |  
|                                                               |  |                                         |         |   |                          |   |         |       |  |   |                         |   |  |                          |         |   |       |   |         |   |  |   |         |  
|Net revenue                                                    |  | $                                       | 46,360  |   |                          | $ | 10,700  |       |  | $ | 57,060                  |   |  | $                        | 39,257  |   |       | $ | 8,313   |   |  | $ | 47,570  |  
|                                                               |  |                                         |         |   |                          |   |         |       |  |   |                         |   |  |                          |         |   |       |   |         |   |  |   |         |  

Ending merchant count as of September 30, 2008 was 9,755 compared to 9,233 as of
September 30, 2007, an increase of 5.7% The increase in total merchant count was driven by a 4.2% increase in Marketing Credits Program merchants to 6,449 merchants and an 8.6% increase in Marketing Services Program merchants to 3,306
merchants.

Qualified transaction amounts at our participating merchants increased $26,338, or 8.6%, to $333,013 for the nine months ended
September 30, 2008 compared to the same period in the prior year as a result of the increase in merchant count as well as an increase in the number of qualified transactions. Average transaction amount decreased $2.08, or 4.4%, to $45.67 for
the nine months ended September 30, 2008 due to a decline in the average amount a member spends on each transaction and a shift in the mix of restaurants on our program.

Total sales yield increased to 56.2% for the nine months ended September 30, 2008 compared to 54.4% for the same period in the prior year mainly due
to the increase in sales yield in the Marketing Credits Program offset by a decrease in sales yield in the Marketing Services Program. The Marketing Credits Program sales yield increased to 75.8% during the nine months ended September 30, 2008
compared to 73.5% during the same period in the prior year. Beginning in the fourth quarter of 2007, we shortened usage periods of new Marketing Credits deals, which resulted in a higher cost of sales. In order to maintain profitability of Marketing
Credits deals that have a higher cost of sales, we require a higher sales yield on these transactions. Sales yield for the Marketing Services Program decreased to 16.3% during the nine months ended September 30, 2008 from 17.3% for the same
period in the prior year as we have continued to lower the price of this product in select markets.



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Sales for the nine months ended September 30, 2008 increased 12.2% as compared with the same period
in the prior year primarily due to an increase in merchant count and higher Marketing Credits sales yield. Marketing Credits sales increased 13.7% during the nine months ended September 30, 2008 as compared to the same period in the prior year
while Marketing Services Program sales decreased slightly.

Cost of sales increased to 52.7% of total sales and 58.1% of Marketing Credit
Program sales for the nine months ended September 30, 2008 compared to 50.0% of total sales and 55.8% of Marketing Credit Program sales for the same period in the prior year. This increase was due to our effort, beginning in the fourth quarter
of 2007, to shorten usage periods of new Marketing Credits deals. Marketing Credits deals with shorter usage periods typically have a higher cost of sales because we purchase dining credits with a shorter usage period at a lower discount.

The provision for losses decreased to 4.5% of total sales and 5.0% of Marketing Credits Program sales for the nine months ended
September 30, 2008 compared with 4.8% of total sales and 5.4% of Marketing Credits Program sales for the same period in the prior year. As previously discussed in Critical Accounting Policies and Estimates, the revised methodology was applied
to our entire portfolio and resulted in approximately $1,500 of additional provision for losses expense during the three months ended June 30, 2008. The provision for both periods included reserves for both our dining credits portfolio and RCR
Loan notes. The provision for losses for RCR Loan notes was $420 and $698 for the nine months ended September 30, 2008 and 2007, respectively. We decided to exit the RCR Loan product effective January 2008, although we continue to service RCR
Loan notes that we previously purchased.

Net write-offs totaled $9,530 during the nine months ended September 30, 2008 as compared to
net recoveries of $1,123 during the same period in the prior year. As previously discussed, we updated our write-off policy in the beginning of 2008 to further refine when an account should be written-off. Due in part to this updated policy, we
recognized higher write-offs in 2008 as compared with the prior year. Because a majority of these 2008 write-offs were previously reserved in the allowance for doubtful accounts, the change in this policy did not materially affect the provision for
losses during the nine months ended September 30, 2008.

Member benefits expense decreased to $22,994 or 12.3% of sales for the nine
months ended September 30, 2008 compared with $27,889, or 16.7% of sales for the same period in the prior year. As described above, we implemented revised benefit offerings with all but one of our partners that went into effect during the first
quarter of 2008. These revised offerings resulted in lower overall member benefit costs. In addition, member benefits as a percentage of sales decreased as a result of the increase in sales yield. During the nine months ended September 30, 2008
we have driven increases in qualified transactions, active members and overall revenues while decreasing total member benefits expense $4,895 compared to the prior year. Offsetting this cost savings was an increase of $803 in bonus benefits paid to
highly engaged members and an expense of $2,098 recorded during the nine months ended September 30, 2008 relating to our minimum purchase obligations with various partners. There was no such expense during the same period in the prior year.

Net revenues increased to $57,060, or 30.5% of sales during the nine months ended September 30, 2008 as compared to $47,570 or 28.5%
of sales during the same period in the prior year. The increase was mainly due to an increase in sales and a decrease in member benefits expense, partially offset by an increase in cost of sales.

Membership and other income decreased $351 or 26.4% for the nine months ended September 30, 2008 compared with the same period in the prior year.
The decrease can be primarily attributed to the decline in fee paying members. Beginning in mid-2008, we introduced a new membership program that eliminates annual fees for certain members.

Operating Expenses

Salaries and benefits
increased $939, or 6.1%, to $16,278 for the nine months ended September 30, 2008 from $15,339 for the same period in the prior year primarily due to an increase in management incentive compensation accruals and an increase in stock based
compensation expense from the issuance of restricted stock unit awards, offset by a decrease in salary expense from a reduction in general and administrative headcount.

Sales commissions and expenses decreased to 7.9% of sales for the nine months ended September 30, 2008 compared to 9.3% of sales for the same period in the prior year due to a decrease in sales employee
headcount, primarily in connection with the discontinuation of the RCR Loan Program, partially offset by an increase in the sales incentive compensation expense.

Professional fees increased $632, or 36.8%, to $2,349 for the nine months ended September 30, 2008 as compared to $1,717 for the same period in the prior year. The increase can be primarily attributed to an
increase in general legal fees.



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Member and merchant marketing expenses decreased $2,422 or 44.6% for the nine months ended
September 30, 2008 compared with the same period in the prior year as we continue to migrate our marketing efforts away from direct print mail and focus on more cost-efficient email marketing. While our marketing expenses have decreased $2,422,
we continue to see increases in total revenues, total qualified transactions and active members compared with the same period in the prior year.

Depreciation and amortization costs increased $591 or 17.2% for the nine months ended September 30, 2008 compared to the same period in the prior year as we continue to invest in the development of our websites, technology investments
supporting the automation of internal processes, leasehold improvements for our office space and general information technology investments.

General and administrative expenses decreased $335 or 3.3% for the nine months ended September 30, 2008 compared to the same period in the prior year. The decrease was primarily due to a decrease in rent, office, and travel expenses,
offset by an increase in stock compensation expense of $724 due to the accelerated vesting of restricted stock units for our Board of Directors during the three months ended March 31, 2008.

During the nine months ended September 30, 2007, we reversed $11,631 in litigation and related expenses which consisted of $11,606 relating to the
California class action lawsuit and $25 relating to the Source Inc. litigation as discussed in Note 3 of the unaudited condensed consolidated financial statements.

Other Income and Expense

Interest and other income decreased $1,507 to $627 for the nine months ended
September 30, 2008 compared with the same period in the prior year as a result of lower cash and cash equivalent balances and a change in investment strategy which resulted in lower interest rates period over period. Interest expense and
financing costs decreased $774 to $1,602 due to a decrease in interest expense recorded for our convertible subordinated debentures as a result of our purchase of $15,000 of our outstanding convertible subordinated debentures in late 2007, $2,100 in
the first quarter of 2008, and $38,112 in third quarter of 2008 as discussed below under Liquidity and Capital Resources. In addition, we recorded gains of $266 and $739 during the nine-months ended September 30, 2008 and 2007, respectively,
relating to the purchase of outstanding convertible debentures as discussed below.

Income tax provision

Our effective rate for the nine months ended September 30, 2008 was 36.6% compared with 34.1% for the same period in the prior year. The increase
primarily resulted from a higher level of tax-exempt interest recorded during the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2008.

Net income

Net income was $4,559 for the nine months ended September 30, 2008 compared
with $6,283 for the same period in the prior year. The decrease in net income was a result of an expense reversal during 2007 relating to the California class action suit, offset by an increase in sales and a decrease in member benefit expense in
2008.

Basic weighted average number of shares outstanding increased to 27,157 for the nine months ended September 30, 2008 compared
to 26,969 for the same period in the prior year primarily due to the issuance of shares upon the vesting of restricted stock unit awards during the first and second quarters of 2008. Diluted weighted average shares outstanding increased to 27,443
for the nine months ended September 30, 2008 compared to 27,098 for the same period in the prior year primarily due to the issuance of shares upon the vesting of restricted stock unit awards and an increase in the dilutive effect of restricted
stock unit awards.

LIQUIDITY AND CAPITAL RESOURCES

General

Cash and cash equivalents were $18,457 as of September 30, 2008, a decrease of
$17,060 from December 31, 2007. During the nine months ended September 30, 2008, net cash provided by operating activities was $26,359, primarily due to an increase in sales.

Net cash used in investing activities for the nine months ended September 30, 2008 was $3,607 from our investments in capital expenditures. Capital
expenditures consisted principally of continued development of our websites and general information technology investments.



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Net cash used in financing activities was $39,758 for the nine months ended September 30, 2008
mainly due to the purchase of a portion of our outstanding convertible subordinated debentures below par.

We intend to continue to put our
cash to use in dining credits while strictly adhering to our purchasing and credit policies because we believe that investing in this portfolio will contribute to long-term, profitable growth. In addition, we intend to continue investing in capital
expenditures to support member and merchant marketing, customer feedback through member comments and ratings and improving our internal processes and operating efficiency.

Convertible Subordinated Debentures

On October 15, 2003, we completed a private
placement of $70,000 principal amount of our 3.25% Convertible Subordinated Debentures with a final maturity date of October 15, 2023. The net proceeds from the offering were $67,500 and the issuance costs of $2,500 were amortized over
five years. During the nine months ended September 30, 2008, we purchased $40,212 of the Convertible Subordinated Debentures for $39,870, including accrued interest, utilizing a portion of our cash and cash equivalents balances and recognized a
gain on extinguishment of $266. The outstanding balance of the convertible subordinated debentures as of September 30, 2008 was $14,788.

On October 15, 2008, we purchased $14,588 of the convertible subordinated debentures pursuant to a repurchase offer as required by the indenture governing the convertible subordinated debentures. The purchase price was $14,828,
equal to 100% of the principal amount of the debentures, together with accrued and unpaid interest. We repurchased the remaining $200 of convertible subordinated debentures on October 20, 2008 for a purchase price of $200. The
purchases of the final $14,788 of the convertible subordinated debentures were funded from our cash and cash equivalents balances.

Contractual
Obligations and Commitments

We lease facilities under long-term operating leases. These contractual obligations entered into in the
ordinary course of business are not required to be reflected in our consolidated balance sheets, but may impact our liquidity. The following table sets forth our future minimum lease payments under non-cancelable operating leases, long-term debt and
other contractual obligations and commitments at September 30, 2008:



|                                                                   |  |                        |        |                       |   |        |  |      |        |           |   |               |  |   |       |  |   |    
|------------------------------------------------------------------ |  | ---------------------- | ------ | --------------------- | - | ------ |  | ---- | ------ | --------- | - | ------------- |  | - | ----- |  | - | ---
|                                                                   |  | Payments Due by Period
|Contractual Obligations and Commitments                            |  | Total                  |        | FourthQuarter of 2008 |   | 2009   |  | 2010 |        | 2011-2012 |   | 2013 andafter
|Convertible subordinated debentures (including net interest)       |  | $                      | 15,028 |                       | $ | 15,028 |  | $    |       |           | $ |              |  | $ |      |  | $ |   
|Vendor contracts                                                   |  |                        | 29,193 |                       |   | 11,073 |  |      | 10,260 |           |   | 6,960         |  |   | 720   |  |   | 180
|California class action litigation settlement and related expenses |  |                        | 3,307  |                       |   | 52     |  |      | 3,255  |           |   |              |  |   |      |  |   |   
|Operating leases                                                   |  |                        | 4,371  |                       |   | 452    |  |      | 1,398  |           |   | 1,171         |  |   | 1,150 |  |   | 200
|Revolving credit facility                                          |  |                        | 270    |                       |   | 23     |  |      | 94     |           |   | 94            |  |   | 59    |  |   |   
|                                                                   |  |                        |        |                       |   |        |  |      |        |           |   |               |  |   |       |  |   |    
|Total                                                              |  | $                      | 52,169 |                       | $ | 26,628 |  | $    | 15,007 |           | $ | 8,225         |  | $ | 1,929 |  | $ | 380
|                                                                   |  |                        |        |                       |   |        |  |      |        |           |   |               |  |   |       |  |   |    

Revolving Credit Facility

On November 6, 2007, we entered into a $25,000 senior secured revolving credit facility with RBS Business Capital (the Lender). We
amended this credit facility on August 11, 2008 to, among other matters, increase the amount we may borrow under the credit facility to a maximum of $40,000. The Lender has committed to $25,000 under the credit facility and intends to seek
commitments for the additional $15,000 from other financial institutions. As of September 30, 2008, we had no borrowings against this credit facility. The maturity date of the credit facility is August 11, 2011. The credit facility is
secured by substantially all of our assets. Up to $1,000 of the facility can be used for letters of credit. The interest rates under the credit facility vary and are based on the Lenders prime rate and/or LIBOR. The amount we may borrow is
based on the amount of our accounts receivable and dining credits, as determined under the credit facility. Advances under the credit facility are subject to certain conditions precedent, including the accuracy of certain representations and
warranties and the absence of any default or unmatured default. We may use advances for working capital, capital expenditures, for permitted acquisitions and for other purposes described in the credit facility.

The credit facility has financial covenants that we will maintain a minimum ratio of debt to cash flow, fixed charges to borrowed amounts and certain
ratios related to our dining credits portfolio. The amount of borrowings outstanding may not exceed 2.5 times our trailing twelve-month adjusted earnings before interest expense, income taxes, depreciation and amortization (EBITDA), as
defined in the credit facility. The credit facility contains customary representations, warranties and covenants and includes customary events



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of default, including a change of control provision. We can offer no assurances that we will be in compliance with all conditions precedent and all
representations and warranties at a time when we would like to borrow under the credit facility. Further, we may not be able to borrow the full amount under the credit facility if our dining credits portfolio or adjusted EBITDA decrease
substantially, based on the restrictions described above. These limitations on borrowings may apply if we become more conservative in our dining credits purchases in light of economic conditions and the performance of our restaurants or if our
earnings decline as discussed in the overview section of Managements Discussion and Analysis of Financial Condition and Results of Operations. We were in compliance with all of the covenants under this facility as of September 30, 2008.

Dining Credits

Dining credits
funded (net dining credits less accounts payabledining credits) was $77,770 at September 30, 2008, a decrease of $10,030 from December 31, 2007. Accounts payable-dining credits represent the unfunded portion of dining credits that we
have an option to purchase from our merchants. The decrease between periods in dining credits funded is due primarily to increased sales and a decline in the purchases of new dining credits on a per merchant basis. As previously discussed, during
the fourth quarter of 2007 we implemented more conservative dining credits purchasing policies aimed at reducing the amount of dining credits we purchase from each merchant, which lowers the average usage period of the dining credits portfolio. We
have continued to adhere to these more conservative dining credits purchasing policies throughout 2008. We believe that the purchase of future dining credits can generally be funded from cash generated from operations or from the utilization of our
revolving credit facility.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements as of September 30, 2008 or December 31, 2007.

Litigation

We have entered into a settlement agreement to settle a class action lawsuit in California as discussed in Note 3 of the Notes to
Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The district court issued an order granting formal approval of the settlement that became final on September 24, 2007 after no appeal was taken. The terms of the
settlement and the impact on us is discussed in greater detail in Note 3 of this Quarterly Report on Form 10-Q, our previously filed Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and some of our Current Reports on Form 8-K.

RECENT ACCOUNTING PRONOUNCEMENTS

In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 was effective for fiscal years beginning after November 15, 2007 for financial assets and
liabilities. The adoption of SFAS No. 157 for financial assets and liabilities did not have an effect on our results of operations or financial position as we do not have any financial assets and liabilities that are measured at fair value on a
periodic basis. For nonfinancial assets and liabilities, SFAS No. 157 is effective for fiscal years beginning after November 15, 2008. The nonfinancial assets and liabilities for which we have not applied the provisions of SFAS
No. 157 include the fair value measurement of goodwill and other intangible assets for impairment testing. While we are currently evaluating the impact of SFAS No. 157 for nonfinancial assets and liabilities on our consolidated financial
statements, we do not believe the impact will be material to our results of operations.

In December 2007, the FASB issued
SFAS No. 141 (revised December 2007), Business Combinations (SFAS 141R), which replaces FASB Statement No. 141, Business Combinations. This statement requires an acquirer to recognize
identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their full fair values at that date, with limited exceptions. Assets and liabilities assumed that arise from
contractual contingencies as of the acquisition date must also be measured at their acquisition-date full fair values. SFAS 141R requires the acquirer to recognize goodwill as of the acquisition date, and in the case of a bargain purchase
business combination, the acquirer shall recognize a gain. Acquisition-related costs are to be expensed in the periods in which the costs are incurred and the services are received. Additional presentation and disclosure requirements have also been
established to enable financial statement users to evaluate and understand the nature and financial effects of business combinations. SFAS 141R is to be applied prospectively for acquisition dates on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. We will adopt SFAS 141R when required in 2009.



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##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

Our exposure to market risk for changes in interest rates is limited to the exposure related to our revolving credit facility which is tied to market rates. Our revolving credit facility is tied to the Eurodollar rate, which is basically
LIBOR, plus an applicable rate. The Eurodollar rate is subject to interest rate risk. However, as of September 30, 2008, there was no outstanding amount under this revolving credit facility.

Cash equivalents consist of overnight investments and money market funds with maturities of less than three months.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of
Disclosure Controls and Procedures. We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended (the Exchange Act),
is recorded, processed, summarized and reported accurately within the time periods specified in the Securities and Exchange Commissions rules and forms. As of the end of the period covered by this report, an evaluation was performed under the
supervision and with the participation of management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures
(pursuant to Exchange Act Rule 13a-15). Based upon this evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of such date. The conclusions of the CEO and CFO from this evaluation were communicated to
the Audit Committee.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over
financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

PART IIOTHER INFORMATION



|Item 6. | Exhibits
|------- | --------



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                              
|3.1         |  | Restated Certificate of Incorporation of Rewards Network Inc. is incorporated herein by reference to Exhibit 4.1 to Rewards Network Inc.s Registration Statement on Form S-3 (File No.
333-111390), filed on December 19, 2003.                                                                                                                                                                                                         
|            | 
|3.2         |  | By-Laws of Rewards Network Inc., as amended, are incorporated herein by reference to Exhibit 3.2 to Rewards Network Inc.s Annual Report on Form 10-K (File No. 001-13806), filed on March
12, 2004.                                                                                                                                                                                                                                     
|            | 
|4.1         |  | Letter Agreement, dated as of June 12, 2002, between iDine Rewards Network Inc. and Samstock, L.L.C. is incorporated herein by reference to Exhibit 4.11 to Amendment No. 1 to iDine Rewards
Network Inc.s Annual Report on Form 10-K (File No. 001-13806), filed on October 7, 2003.                                                                                                                                                   
|            | 
|4.2         |  | Second Amended and Restated Investment Agreement, dated as of June 30, 1999, among Transmedia Network Inc., Samstock, L.L.C., EGI-Transmedia Investors, L.L.C. and Robert M. Steiner, as
trustee, is incorporated herein by reference to Exhibit 4.3 to Amendment No. 1 to Transmedia Network Inc.s Registration Statement on Form S-2 (File No. 333-84947), filed on October 5, 1999.                                                  
|            | 
|4.3         |  | Amendment, dated February 5, 2003, to the Second Amended and Restated Investment Agreement, dated as of June 30, 1999, among iDine Rewards Network Inc., Samstock, L.L.C., and the former
members and distributees of EGI-Transmedia Investors, L.L.C., is incorporated herein by reference to Exhibit 4.13 to Amendment No. 1 to iDine Rewards Network Inc.s Annual Report on Form 10-K (File No. 001-13806), filed on October 7,
2003.
|            | 
|10.1        |  | First Amendment to Loan and Security Agreement, dated as of August 11, 2008, between Rewards Network Inc. and each of its domestic subsidiaries signatory thereto and RBS Business Capital is
incorporated herein by reference to Exhibit 10.1 to Rewards Network Inc.s Quarterly Report on Form 10-Q (File No. 001-13806), filed on August 11, 2008.                                                                                   
|            | 
|31.1*       |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer                                                                                                                                                                                                                                                                                                                                                                    
|            | 
|31.2*       |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer                                                                                                                                                                                                                                                                                                                                                                    
|            | 
|32.1*       |  | Section 1350 Certification of Chief Executive Officer                                                                                                                                                                                                                                                                                                                                                                                    
|            | 
|32.2*       |  | Section 1350 Certification of Chief Financial Officer                                                                                                                                                                                                                                                                                                                                                                                    



|* | Filed herewith
|- | --------------



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                 |  |                                                                                                                                     
|---------------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|                 |  | REWARDS NETWORK INC.                                                                                                                
|                 | 
|November 6, 2008 |  | /s/ CHRISTOPHER J. LOCKE                                                                                                            
|                 |  | Christopher J. Locke Senior Vice President and Chief Financial Officer (Principal Financial Officer and on behalf of the registrant)



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##### Table of Contents

Exhibit Index



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                              
|3.1         |  | Restated Certificate of Incorporation of Rewards Network Inc. is incorporated herein by reference to Exhibit 4.1 to Rewards Network Inc.s Registration Statement on Form S-3 (File No.
333-111390), filed on December 19, 2003.                                                                                                                                                                                                         
|            | 
|3.2         |  | By-Laws of Rewards Network Inc., as amended, are incorporated herein by reference to Exhibit 3.2 to Rewards Network Inc.s Annual Report on Form 10-K (File No. 001-13806), filed on March
12, 2004.                                                                                                                                                                                                                                     
|            | 
|4.1         |  | Letter Agreement, dated as of June 12, 2002, between iDine Rewards Network Inc. and Samstock, L.L.C. is incorporated herein by reference to Exhibit 4.11 to Amendment No. 1 to iDine Rewards
Network Inc.s Annual Report on Form 10-K (File No. 001-13806), filed on October 7, 2003.                                                                                                                                                   
|            | 
|4.2         |  | Second Amended and Restated Investment Agreement, dated as of June 30, 1999, among Transmedia Network Inc., Samstock, L.L.C., EGI-Transmedia Investors, L.L.C. and Robert M. Steiner, as
trustee, is incorporated herein by reference to Exhibit 4.3 to Amendment No. 1 to Transmedia Network Inc.s Registration Statement on Form S-2 (File No. 333-84947), filed on October 5, 1999.                                                  
|            | 
|4.3         |  | Amendment, dated February 5, 2003, to the Second Amended and Restated Investment Agreement, dated as of June 30, 1999, among iDine Rewards Network Inc., Samstock, L.L.C., and the former
members and distributees of EGI-Transmedia Investors, L.L.C., is incorporated herein by reference to Exhibit 4.13 to Amendment No. 1 to iDine Rewards Network Inc.s Annual Report on Form 10-K (File No. 001-13806), filed on October 7,
2003.
|            | 
|10.1        |  | First Amendment to Loan and Security Agreement, dated as of August 11, 2008, between Rewards Network Inc. and each of its domestic subsidiaries signatory thereto and RBS Business Capital is
incorporated herein by reference to Exhibit 10.1 to Rewards Network Inc.s Quarterly Report on Form 10-Q (File No. 001-13806), filed on August 11, 2008.                                                                                   
|            | 
|31.1*       |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer                                                                                                                                                                                                                                                                                                                                                                    
|            | 
|31.2*       |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer                                                                                                                                                                                                                                                                                                                                                                    
|            | 
|32.1*       |  | Section 1350 Certification of Chief Executive Officer                                                                                                                                                                                                                                                                                                                                                                                    
|            | 
|32.2*       |  | Section 1350 Certification of Chief Financial Officer                                                                                                                                                                                                                                                                                                                                                                                    



|* | Filed herewith
|- | --------------



31