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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 June 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 August 5, 2008, there were 26,984,710 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June 30, 2008 (unaudited) and December 31, 2007                         |  | 3    
|                              |  |                                                                                                              
|                              |  | Condensed Consolidated Statements of OperationsThree and six months ended June 30, 2008 and 2007 (unaudited) |  | 4    
|                              |  |                                                                                                              
|                              |  | Condensed Consolidated Statements of Cash FlowsSix months ended June 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 4.                       |  | Submission of Matters to a Vote of Security Holders                                                           |  | 29-30
|                              |  |                                                                                                              
|Item 5.                       |  | Other Information                                                                                             |  | 30   
|                              |  |                                                                                                              
|Item 6.                       |  | Exhibits                                                                                                      |  | 31   
|                              | 
|SIGNATURES                    |  | 32                                                                                                           



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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)



|                                                                                                                                            |  |              |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                            |  | June 30,2008 |         |   | December 31,2007 |  
|                                                                                                                                            |  | (Unaudited)  |         |   |                  |  
|Assets                                                                                                                                      |  |              |         |   |                  |   |         |  
|Current assets:                                                                                                                             |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                   |  | $            | 45,460  |   |                  | $ | 35,517  |  
|Accounts receivable, net of allowance for doubtful accounts of $2,470 and $3,420, respectively                                              |  |              | 9,411   |   |                  |   | 10,101  |  
|Dining credits, net of allowance for doubtful accounts of $20,268 and $21,257, respectively                                                 |  |              | 87,547  |   |                  |   | 94,880  |  
|Deferred income taxes                                                                                                                       |  |              | 10,919  |   |                  |   | 10,014  |  
|Prepaid expenses                                                                                                                            |  |              | 1,241   |   |                  |   | 1,675   |  
|Income taxes receivable                                                                                                                     |  |              | 1,024   |   |                  |   | 3,036   |  
|                                                                                                                                            |  |              |         |   |                  |   |         |  
|Total current assets                                                                                                                        |  |              | 155,602 |   |                  |   | 155,223 |  
|Property and equipment, net of accumulated depreciation and amortization of $26,240 and $24,592, respectively                               |  |              | 11,413  |   |                  |   | 11,818  |  
|Other assets                                                                                                                                |  |              | 265     |   |                  |   | 233     |  
|Goodwill                                                                                                                                    |  |              | 8,117   |   |                  |   | 8,117   |  
|Deferred income taxes                                                                                                                       |  |              | 201     |   |                  |   | 1,153   |  
|                                                                                                                                            |  |              |         |   |                  |   |         |  
|Total assets                                                                                                                                |  | $            | 175,598 |   |                  | $ | 176,544 |  
|                                                                                                                                            |  |              |         |   |                  |   |         |  
|Liabilities and Stockholders Equity                                                                                                        |  |              |         |   |                  |   |         |  
|Current liabilities:                                                                                                                        |  |              |         |   |                  |   |         |  
|Accounts payabledining credits                                                                                                             |  | $            | 4,217   |   |                  | $ | 7,080   |  
|Accounts payablemember benefits                                                                                                            |  |              | 7,096   |   |                  |   | 7,672   |  
|Accounts payabletrade                                                                                                                      |  |              | 1,584   |   |                  |   | 1,573   |  
|Accrued compensation                                                                                                                        |  |              | 2,665   |   |                  |   | 1,280   |  
|Other current liabilities                                                                                                                   |  |              | 3,467   |   |                  |   | 4,237   |  
|Deferred membership fee income                                                                                                              |  |              | 656     |   |                  |   | 750     |  
|Litigation and related accruals, current                                                                                                    |  |              | 5,894   |   |                  |   | 2,987   |  
|Convertible subordinated debentures                                                                                                         |  |              | 52,900  |   |                  |   | 55,000  |  
|                                                                                                                                            |  |              |         |   |                  |   |         |  
|Total current liabilities                                                                                                                   |  |              | 78,479  |   |                  |   | 80,579  |  
|Litigation and related accruals, net of current portion                                                                                     |  |              |        |   |                  |   | 3,123   |  
|                                                                                                                                            |  |              |         |   |                  |   |         |  
|Total liabilities                                                                                                                           |  |              | 78,479  |   |                  |   | 83,702  |  
|                                                                                                                                            |  |              |         |   |                  |   |         |  
|Stockholders equity:                                                                                                                       |  |              |         |   |                  |   |         |  
|Common stock, par value $0.02 per share; authorized 70,000 shares; issued 27,127 shares; outstanding 26,966 and 26,851 shares, respectively |  |              | 542     |   |                  |   | 542     |  
|Additional paid-in capital                                                                                                                  |  |              | 67,157  |   |                  |   | 66,787  |  
|Accumulated other comprehensive income:                                                                                                     |  |              |         |   |                  |   |         |  
|Foreign currency translation, net of income taxes                                                                                           |  |              | 769     |   |                  |   | 827     |  
|Retained earnings                                                                                                                           |  |              | 29,912  |   |                  |   | 26,845  |  
|Treasury stock, at cost (161 and 276 shares, respectively)                                                                                  |  |              | (1,261  | ) |                  |   | (2,159  | )
|                                                                                                                                            |  |              |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                  |  |              | 97,119  |   |                  |   | 92,842  |  
|                                                                                                                                            |  |              |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                  |  | $            | 175,598 |   |                  | $ | 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 EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                            |  | 2008                       |        |   | 2007                     |   |         | 2008 |  |   | 2007    |  
|Operating revenues:                                                         |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Sales                                                                       |  | $                          | 65,723 |   |                          | $ | 56,822  |      |  | $ | 124,786 |   |  | $ | 109,738 |  
|Cost of sales                                                               |  |                            | 34,876 |   |                          |   | 28,351  |      |  |   | 65,495  |   |  |   | 54,787  |  
|Provision for losses                                                        |  |                            | 3,259  |   |                          |   | 2,574   |      |  |   | 5,484   |   |  |   | 4,849   |  
|Member benefits                                                             |  |                            | 7,718  |   |                          |   | 9,717   |      |  |   | 15,068  |   |  |   | 19,165  |  
|                                                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total direct expenses                                                       |  |                            | 45,853 |   |                          |   | 40,642  |      |  |   | 86,047  |   |  |   | 78,801  |  
|                                                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net revenue                                                                 |  |                            | 19,870 |   |                          |   | 16,180  |      |  |   | 38,739  |   |  |   | 30,937  |  
|Membership fees and other income                                            |  |                            | 318    |   |                          |   | 445     |      |  |   | 669     |   |  |   | 919     |  
|                                                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total operating revenues                                                    |  |                            | 20,188 |   |                          |   | 16,625  |      |  |   | 39,408  |   |  |   | 31,856  |  
|                                                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Operating expenses:                                                         |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Salaries and benefits                                                       |  |                            | 5,620  |   |                          |   | 4,788   |      |  |   | 10,864  |   |  |   | 10,276  |  
|Sales commissions and expenses                                              |  |                            | 4,606  |   |                          |   | 5,308   |      |  |   | 9,863   |   |  |   | 10,469  |  
|Professional fees                                                           |  |                            | 892    |   |                          |   | 478     |      |  |   | 1,513   |   |  |   | 1,348   |  
|Member and merchant marketing                                               |  |                            | 1,090  |   |                          |   | 2,086   |      |  |   | 2,025   |   |  |   | 3,673   |  
|Depreciation and amortization                                               |  |                            | 1,402  |   |                          |   | 1,201   |      |  |   | 2,790   |   |  |   | 2,328   |  
|General and administrative                                                  |  |                            | 3,013  |   |                          |   | 3,392   |      |  |   | 6,534   |   |  |   | 7,082   |  
|Litigation and related expenses                                             |  |                            |       |   |                          |   | (11,631 | )    |  |   |        |   |  |   | (11,631 | )
|                                                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                    |  |                            | 16,623 |   |                          |   | 5,622   |      |  |   | 33,589  |   |  |   | 23,545  |  
|                                                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Operating income                                                            |  |                            | 3,565  |   |                          |   | 11,003  |      |  |   | 5,819   |   |  |   | 8,311   |  
|Other income (expense):                                                     |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Interest and other income                                                   |  |                            | 130    |   |                          |   | 662     |      |  |   | 398     |   |  |   | 1,498   |  
|Interest expense and financing costs                                        |  |                            | (560   | ) |                          |   | (710    | )    |  |   | (1,156  | ) |  |   | (1,593  | )
|Gain on extinguishment of convertible subordinate debentures                |  |                            |       |   |                          |   |        |      |  |   | 128     |   |  |   |        |  
|                                                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Income before income tax provision                                          |  |                            | 3,135  |   |                          |   | 10,955  |      |  |   | 5,189   |   |  |   | 8,216   |  
|Income tax provision                                                        |  |                            | 1,226  |   |                          |   | 3,828   |      |  |   | 2,122   |   |  |   | 3,078   |  
|                                                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net income                                                                  |  | $                          | 1,909  |   |                          | $ | 7,127   |      |  | $ | 3,067   |   |  | $ | 5,138   |  
|                                                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net income available for common stockholders                                |  | $                          | 1,909  |   |                          | $ | 7,579   |      |  | $ | 3,067   |   |  | $ | 5,138   |  
|                                                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings per share of common stock:                                         |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                       |  | $                          | 0.07   |   |                          | $ | 0.26    |      |  | $ | 0.11    |   |  | $ | 0.19    |  
|                                                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Diluted                                                                     |  | $                          | 0.07   |   |                          | $ | 0.24    |      |  | $ | 0.11    |   |  | $ | 0.19    |  
|                                                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Weighted average number of common and common equivalent shares outstanding: |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                       |  |                            | 27,164 |   |                          |   | 27,018  |      |  |   | 27,136  |   |  |   | 26,934  |  
|                                                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Diluted                                                                     |  |                            | 27,312 |   |                          |   | 30,992  |      |  |   | 27,394  |   |  |   | 27,064  |  
|                                                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  

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)



|                                                                                            |  |                          |        |   |      |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------- | -
|                                                                                            |  | Six Months EndedJune 30, |       
|                                                                                            |  | (Unaudited)              |       
|                                                                                            |  | 2008                     |        |   | 2007 |  
|Cash flows from operating activities:                                                       |  |                          |        |   |      |   |         |  
|Net income                                                                                  |  | $                        | 3,067  |   |      | $ | 5,138   |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                          |        |   |      |   |         |  
|Depreciation and amortization                                                               |  |                          | 2,790  |   |      |   | 2,328   |  
|Loss (gain) on disposal of fixed assets                                                     |  |                          | 45     |   |      |   | (5      | )
|Amortization of deferred financing costs                                                    |  |                          | 209    |   |      |   | 278     |  
|Provision for losses                                                                        |  |                          | 5,484  |   |      |   | 4,849   |  
|Stock-based compensation                                                                    |  |                          | 1,399  |   |      |   | 364     |  
|Deferred income taxes                                                                       |  |                          | 47     |   |      |   | 4,159   |  
|Gain on extinguishment of convertible subordinate debentures                                |  |                          | (128   | ) |      |   |        |  
|Changes in assets and liabilities:                                                          |  |                          |        |   |      |   |         |  
|Accounts receivable                                                                         |  |                          | 57     |   |      |   | (2,692  | )
|Dining credits including accounts payabledining credits                                    |  |                          | (471   | ) |      |   | (14,748 | )
|Prepaid expenses                                                                            |  |                          | 395    |   |      |   | 364     |  
|Income taxes receivable                                                                     |  |                          | 2,011  |   |      |   | (1,208  | )
|Other assets                                                                                |  |                          | (228   | ) |      |   | 335     |  
|Accounts payablemember benefits                                                            |  |                          | (573   | ) |      |   | 877     |  
|Accounts payabletrade                                                                      |  |                          | (109   | ) |      |   | (410    | )
|Accrued compensation                                                                        |  |                          | 1,386  |   |      |   | (2,391  | )
|Other liabilities                                                                           |  |                          | (779   | ) |      |   | (985    | )
|Deferred membership fee income                                                              |  |                          | (94    | ) |      |   | (134    | )
|Litigation and related accruals                                                             |  |                          | (216   | ) |      |   | (12,224 | )
|                                                                                            |  |                          |        |   |      |   |         |  
|Net cash provided by (used in) operating activities                                         |  |                          | 14,292 |   |      |   | (16,105 | )
|                                                                                            |  |                          |        |   |      |   |         |  
|Cash flows from investing activities:                                                       |  |                          |        |   |      |   |         |  
|Purchases of available for sale securities                                                  |  |                          |       |   |      |   | (1,125  | )
|Sales of available for sale securities                                                      |  |                          |       |   |      |   | 650     |  
|Additions to property and equipment, net                                                    |  |                          | (2,412 | ) |      |   | (4,258  | )
|                                                                                            |  |                          |        |   |      |   |         |  
|Net cash used in investing activities                                                       |  |                          | (2,412 | ) |      |   | (4,733  | )
|                                                                                            |  |                          |        |   |      |   |         |  
|Cash flows from financing activities:                                                       |  |                          |        |   |      |   |         |  
|Tax benefit from the exercise of stock options                                              |  |                          |       |   |      |   | 27      |  
|Proceeds from the exercise of stock options                                                 |  |                          |       |   |      |   | 249     |  
|Purchase of convertible subordinate debentures                                              |  |                          | (1,963 | ) |      |   |        |  
|                                                                                            |  |                          |        |   |      |   |         |  
|Net cash (used in) provided by financing activities                                         |  |                          | (1,963 | ) |      |   | 276     |  
|                                                                                            |  |                          |        |   |      |   |         |  
|Effect of exchange rate on cash and cash equivalents                                        |  |                          | 26     |   |      |   | (217    | )
|Net increase (decrease) in cash and cash equivalents                                        |  |                          | 9,943  |   |      |   | (20,779 | )
|Cash and cash equivalents:                                                                  |  |                          |        |   |      |   |         |  
|Beginning of the period                                                                     |  |                          | 35,517 |   |      |   | 52,496  |  
|                                                                                            |  |                          |        |   |      |   |         |  
|End of the period                                                                           |  | $                        | 45,460 |   |      | $ | 31,717  |  
|                                                                                            |  |                          |        |   |      |   |         |  
|Supplemental disclosures of cash flow information:                                          |  |                          |        |   |      |   |         |  
|Cash paid during the period for:                                                            |  |                          |        |   |      |   |         |  
|Interest                                                                                    |  | $                        | 860    |   |      | $ | 1,138   |  
|                                                                                            |  |                          |        |   |      |   |         |  
|Income taxes                                                                                |  | $                        | 65     |   |      | $ | 100     |  
|                                                                                            |  |                          |        |   |      |   |         |  

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 June 30, 2008, unaudited condensed consolidated results of operations of the Company for the three and six months ended June 30, 2008 and 2007 and unaudited condensed
consolidated statements of cash flows of the Company for the six months ended June 30, 2008 and 2007 have been made. Operating results for the three and six months ended June 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 (SEC) 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, frequent dining programs, reporting of program results,
customer feedback through member comments as well as access to capital that the Company offers. 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 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. The Company also seeks 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 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 has purchased only if a member dines at a participating restaurant when rewards are available and pays using a payment card that the member has registered with the Company. The
Companys revenue is equal to a percentage of the members total dining transaction amount. 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. Prior to May 23, 2008 we were listed on the American Stock Exchange under the symbol IRN.



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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 $134 and $130 for the three months ended June 30, 2008 and 2007, respectively and $267 and $260 for the six months ended June 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 the November 2, 2005 lease is from November 7, 2005 through August 31, 2008 and the term of the October 22, 2003 lease is month-to-month. The Company paid rent for these storage spaces of $3 for each of the three months
ended June 30, 2008 and 2007 and $7 and $5 for each of the six months ended June 30, 2008 and 2007, respectively.

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



|                               |  |   |      
|------------------------------ |  | - | -----
|Remaining two quarters of 2008 |  | $ | 274  
|Year ended December 31, 2009   |  |   | 554  
|Year ended December 31, 2010   |  |   | 569  
|Year ended December 31, 2011   |  |   | 361  
|                               |  |   |      
|Total minimum lease payments   |  | $ | 1,758
|                               |  |   |      

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 $7 for the three months ended June 30, 2007 and $14 for the six months ended June 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 will pay the remaining installments to members of the Settlement Class and class counsel as scheduled in the third quarter of 2008 and
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 June 30, 2008 was $5,894. Of this amount, $2,516 was paid during July of 2008 with the remaining balance 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 (benefit) was $38 and ($2) for the three months ended June 30, 2008 and 2007, respectively and $76 and $183 for
the six months ended June 30, 2008 and 2007, respectively. The remaining balance of $168 as of June 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 atJune 30,2008
|California Class Action Suit:             |  |                            |        |             |   |        |             |  |   |                   |   |  |                 |      |                            |  |             |     |  |                   |       |                 |   |                        |   |  |   |     |  |   |    |  |   |      
|Expense for Class                         |  | $                          | 16,740 |             | $ | (1,427 | )           |  | $ | (12,597           | ) |  | $               |     |                            |  | $           | 133 |  | $                 | 2,849 |                 | $ | (261                   | ) |  | $ |    |  | $ | 38 |  | $ | 2,626
|Related legal and administrative expenses |  |                            | 11,710 |             |   | (7,862 | )           |  |   | (746              | ) |  |                 |     |                            |  |             | 159 |  |                   | 3,261 |                 |   | (181                   | ) |  |   | 150 |  |   | 38 |  |   | 3,268
|Dining credits reserve                    |  |                            |       |             |   |       |             |  |   | 126               |   |  |                 | (126 | )                          |  |             |    |  |                   |      |                 |   |                       |   |  |   |    |  |   |   |  |   |     
|                                          |  |                            |        |             |   |        |             |  |   |                   |   |  |                 |      |                            |  |             |     |  |                   |       |                 |   |                        |   |  |   |     |  |   |    |  |   |      
|Total California litigation               |  |                            | 28,450 |             |   | (9,289 | )           |  |   | (13,217           | ) |  |                 | (126 | )                          |  |             | 292 |  |                   | 6,110 |                 |   | (442                   | ) |  |   | 150 |  |   | 76 |  |   | 5,894
|                                          |  |                            |        |             |   |        |             |  |   |                   |   |  |                 |      |                            |  |             |     |  |                   |       |                 |   |                        |   |  |   |     |  |   |    |  |   |      
|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 |                 | $ | (442                   | ) |  | $ | 150 |  | $ | 76 |  | $ | 5,894
|                                          |  |                            |        |             |   |        |             |  |   |                   |   |  |                 |      |                            |  |             |     |  |                   |       |                 |   |                        |   |  |   |     |  |   |    |  |   |      

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 2,957 for the three months ended June 30, 2008 and 3,012 and 3,913 for the six months ended June 30, 2008 and
2007, respectively, were excluded as their effect would have been anti-dilutive.

For periods with potentially dilutive securities,
incremental shares and adjustments to net income are determined using the if converted and treasury stock method as follows.



|                                                                                           |  |                            |        |                          |   |        |  |      |        |  |   |       
|------------------------------------------------------------------------------------------ |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                                                                           |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                                                                                           |  | 2008                       |        | 2007                     |   | 2008   |  | 2007
|Net income                                                                                 |  | $                          | 1,909  |                          | $ | 7,127  |  | $    | 3,067  |  | $ | 5,138 
|Convertible debentures, net of tax                                                         |  |                            |       |                          |   | 452    |  |      |       |  |   |      
|                                                                                           |  |                            |        |                          |   |        |  |      |        |  |   |       
|Net income available for common stockholders                                               |  | $                          | 1,909  |                          | $ | 7,579  |  | $    | 3,067  |  | $ | 5,138 
|                                                                                           |  |                            |        |                          |   |        |  |      |        |  |   |       
|Weighted average number of shares of common stock and common stock equivalents outstanding |  |                            |        |                          |   |        |  |      |        |  |   |       
|Basic                                                                                      |  |                            | 27,164 |                          |   | 27,018 |  |      | 27,136 |  |   | 26,934
|Stock options and restricted stock                                                         |  |                            | 148    |                          |   | 61     |  |      | 258    |  |   | 130   
|Convertible debentures                                                                     |  |                            |       |                          |   | 3,913  |  |      |       |  |   |      
|                                                                                           |  |                            |        |                          |   |        |  |      |        |  |   |       
|Diluted                                                                                    |  |                            | 27,312 |                          |   | 30,992 |  |      | 27,394 |  |   | 27,064
|                                                                                           |  |                            |        |                          |   |        |  |      |        |  |   |       
|Earnings per share                                                                         |  |                            |        |                          |   |        |  |      |        |  |   |       
|Basic                                                                                      |  | $                          | 0.07   |                          | $ | 0.26   |  | $    | 0.11   |  | $ | 0.19  
|                                                                                           |  |                            |        |                          |   |        |  |      |        |  |   |       
|Diluted                                                                                    |  | $                          | 0.07   |                          | $ | 0.24   |  | $    | 0.11   |  | $ | 0.19  
|                                                                                           |  |                            |        |                          |   |        |  |      |        |  |   |       



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Note 5  Business and Credit Concentrations

As of June 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 six months ended June 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 six months ended June 30, 2007. The following table illustrates the Companys partner sales concentration as a percentage of total sales:



|                                                      |  |                            |   |  |                          |   |  |      |   |  |      |  
|----------------------------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                                                      |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                                                      |  | 2008                       |   |  | 2007                     |   |  | 2008 |   |  | 2007 |  
|Airlines                                              |  | 56.3                       | % |  | 57.2                     | % |  | 56.1 | % |  | 58.3 | %
|All partners that each represent 10% or more of sales |  | 55.1                       | % |  | 41.0                     | % |  | 54.4 | % |  | 41.1 | %

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 two quarters of 2008               |  | $ | 14,440
|2009                                         |  |   | 10,260
|2010                                         |  |   | 6,960 
|2011                                         |  |   | 360   
|2012                                         |  |   | 360   
|2013                                         |  |   | 180   
|                                             |  |   |       
|Total minimum partner and vendor obligations |  | $ | 32,560
|                                             |  |   |       

As of June 30, 2008, the Company has recorded a liability totaling $1,744 related to its minimum purchase
obligations.

Note 7  Comprehensive Income (Loss)

The Companys comprehensive income (loss) was as follows:



|                                        |  |                            |       |      |                          |       |      |  |   |       |   |  |   |       |  
|--------------------------------------- |  | -------------------------- | ----- | ---- | ------------------------ | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                        |  | Three Months EndedJune 30, |       |      | Six Months EndedJune 30, |      
|                                        |  | 2008                       |       | 2007 |                          |       | 2008 |  |   | 2007  |  
|Net income                              |  | $                          | 1,909 |      | $                        | 7,127 |      |  | $ | 3,067 |   |  | $ | 5,138 |  
|Other comprehensive (loss) income:      |  |                            |       |      |                          |       |      |  |   |       |   |  |   |       |  
|Foreign currency translation adjustment |  |                            | 29    |      |                          | (54   | )    |  |   | (58   | ) |  |   | (57   | )
|                                        |  |                            |       |      |                          |       |      |  |   |       |   |  |   |       |  
|Total comprehensive income              |  | $                          | 1,938 |      | $                        | 7,073 |      |  | $ | 3,009 |   |  | $ | 5,081 |  
|                                        |  |                            |       |      |                          |       |      |  |   |       |   |  |   |       |  

Note 8  Subsequent Event

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 lenders. 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 $15,000 of the credit facility to purchase its 3.25% Convertible Subordinated Debentures. The Company may use advances for working capital, capital expenditures, for permitted acquisitions and for other
purposes described in the credit facility.



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##### Table of Contents

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 does not currently have any borrowings outstanding under this credit facility.



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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 inability to obtain sufficient cash and refinance the repurchase of our
convertible subordinated debentures, (iii) our dependence upon our relationships with payment card issuers, transaction processors, presenters and aggregators, (iv) changes to payment card association rules and practices, (v) economic
changes, (vi) 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, (vii) our dependence on our relationships with
airlines and other reward program partners for a significant number of members, (viii) the concentration of a significant amount of our rewards currency in one industry group, the airline industry, (ix) our inability to attract and retain
active members, (x) the filing of class action lawsuits against us, (xi) changes in our programs that affect the rate of rewards, (xii) our inability to maintain an adequately-staffed sales force, (xiii) our inability to maintain
an appropriate balance between the number of members and the number of participating merchants in each market, (xiv) our minimum purchase obligations and performance requirements, (xv) network interruptions, processing interruptions or
processing errors, (xvi) susceptibility to a changing regulatory environment, (xvii) increased operating costs or loss of members due to privacy concerns of our program partners, payment card processors and the public, (xviii) the
failure of our security measures, (xix) the loss of key personnel, (xx) increasing competition, and (xxi) 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 and frequent dining programs, reporting of program results, customer feedback through
member comments as well as access to capital that we offer. 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. We 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. We
also seek 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 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 have purchased only if a member dines at a
participating restaurant when rewards are available and pays using a payment card that the member has registered with us. Our revenue is equal to a percentage of the members total dining transaction amount. 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.



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##### Table of Contents

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 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 revenues because we analyze our business in this manner.

Since the beginning of 2007, we have focused on increasing, in a risk-based and responsible manner, both the number of restaurants that participate in
our programs and the size of our dining credits portfolio. We believe that a larger base of restaurants and larger portfolio of dining credits should result in increased revenues over time. We have supported these efforts by developing and training
our sales force to recruit new restaurants and retain existing restaurants in line with our growth strategy. We believe our sales force becomes more effective over time as each individual sales person gains experience. We have maintained adequate
sales staffing since the beginning of 2007, which contributed to an increase in the number of participating restaurants each quarter since the beginning of 2007.

We ended the second quarter of 2008 with 1,096, or 12.6% more participating restaurants than the second quarter of 2007. This achievement significantly contributed to a 15.7% and 13.7% increase in sales for the
three and six months ended June 30, 2008, respectively as compared to the same period in the prior year, and positive net income and operating cash flow for the three month and six month periods ending June 30, 2008.

From time to time, we may decide to modify the amount of dining credits we purchase from restaurants and that decision affects the amount of time it
takes to use the dining credits at a particular restaurant. We make the decision to modify the amount of dining credits we purchase based upon our review of internal and external conditions. In analyzing the appropriate amount of dining credits to
purchase and, therefore, the length of the dining credits usage period for a restaurant, we consider the overall economic condition of the restaurant industry, the performance of participating restaurants generally and the individual
restaurants credit profile or business experience. For example, during 2007, we increased the amount of dining credits purchased from select restaurants that met our due diligence and risk assessment requirements and, therefore, increased
the usage period of those dining credits because we wanted to increase the retention of desirable restaurants without sacrificing the risk profile of the dining credits portfolio. The lengthening of the dining credits usage period for select
restaurants contributed to an increase in our dining credits portfolio and an increase in the number of participating restaurants each quarter during 2007. Beginning in December 2007, we have become more conservative in light of the economic and
credit uncertainty facing both the restaurant industry and consumers and to conserve liquidity due to the upcoming redemption of our convertible subordinated debentures in October 2008, as further discussed below under Liquidity and Capital
Resources. 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. 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. With more restaurants in our dining credits portfolio and a lower average usage period,
even if the size of the dining credits portfolio remains the same, we realize more revenue from our Marketing Credits deals more quickly. 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.

Our net dining credits portfolio as of
June 30, 2008 decreased to $87,547 from $94,880 at December 31, 2007. This decrease was due primarily to the more conservative dining credits purchasing policies discussed above, as well as increased sales. 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. The higher usage of dining credits reduced our dining credits portfolio. We intend
to continue these conservative dining credits purchasing policies during the current climate of economic and credit uncertainty.

Our more
conservative dining credits purchasing policies impacted 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, in some cases may result in increased restaurant attrition. Shortening the



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timeframe by purchasing fewer dining credits may require additional sales resources for retention efforts, and reduce the total revenue that we may 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 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 12.1% of sales for the six months ended June 30, 2008 as compared to 17.5% of sales for the same period of the prior year, while we increased member engagement as evidenced by
the increase in qualified transactions amount, active members and sales. The combined effectiveness of our new website platform, email marketing and rewards structure has generated higher revenues and improved member engagement at a lower cost.

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.

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 are 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 account 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 credits balances that were large or slow moving as we did previously. 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. 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. As a result of this updated policy, we recognized higher write-offs in 2008 as compared with the prior year.



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We also 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 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 JUNE 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 June 30, 2008 and 2007. These percentages have been rounded to the nearest tenth.



|                                       |  |                                                       |  |       |  
|-------------------------------------- |  | ----------------------------------------------------- |  | ----- | -
|                                       |  | Percentage of Salesfor the Three Months EndedJune 30, | 
|                                       |  | 2008                                                  |  | 2007  |  
|Sales                                  |  | 100.0                                                 |  | 100.0 |  
|Cost of sales                          |  | 53.1                                                  |  | 49.9  |  
|Provision for losses                   |  | 5.0                                                   |  | 4.5   |  
|Member benefits                        |  | 11.7                                                  |  | 17.1  |  
|                                       |  |                                                       |  |       |  
|Net revenue                            |  | 30.2                                                  |  | 28.5  |  
|Membership fees and other income       |  | 0.5                                                   |  | 0.8   |  
|                                       |  |                                                       |  |       |  
|Total operating revenue                |  | 30.7                                                  |  | 29.3  |  
|                                       |  |                                                       |  |       |  
|Salaries and benefits                  |  | 8.6                                                   |  | 8.4   |  
|Sales commission and expenses          |  | 7.0                                                   |  | 9.3   |  
|Professional fees                      |  | 1.4                                                   |  | 0.8   |  
|Member and merchant marketing expenses |  | 1.7                                                   |  | 3.7   |  
|Depreciation and amortization          |  | 2.1                                                   |  | 2.1   |  
|General and administrative expenses    |  | 4.6                                                   |  | 6.0   |  
|Litigation and related expenses        |  |                                                      |  | (20.5 | )
|                                       |  |                                                       |  |       |  
|Total operating expenses               |  | 25.3                                                  |  | 9.9   |  
|                                       |  |                                                       |  |       |  
|Operating income                       |  | 5.4                                                   |  | 19.4  |  
|Other expense, net                     |  | 0.6                                                   |  | 0.1   |  
|                                       |  |                                                       |  |       |  
|Income before income tax provision     |  | 4.8                                                   |  | 19.3  |  
|Income tax provision                   |  | 1.9                                                   |  | 6.7   |  
|                                       |  |                                                       |  |       |  
|Net income                             |  | 2.9                                                   |  | 12.5  |  
|                                       |  |                                                       |  |       |  



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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 June 30, |       
|                                                          |  | 2008                                |        |   | 2007                     |  
|                                                          |  | MarketingCreditsProgram             |        |   | MarketingServicesProgram |   |        | Total |  |   | MarketingCreditsProgram |   |  | MarketingServicesProgram |        |   | Total |  
|Merchant count as of June 30, 2008 and 2007, respectively |  |                                     | 6,646  |   |                          |   | 3,123  |       |  |   | 9,769                   |   |  |                          | 5,928  |   |       |   | 2,745  |   |  |   | 8,673   |  
|Number of qualified transactions                          |  |                                     | 1,724  |   |                          |   | 785    |       |  |   | 2,509                   |   |  |                          | 1,430  |   |       |   | 740    |   |  |   | 2,170   |  
|Average transaction amount                                |  | $                                   | 45.27  |   |                          | $ | 46.75  |       |  | $ | 45.73                   |   |  | $                        | 48.16  |   |       | $ | 48.84  |   |  | $ | 48.39   |  
|                                                          |  |                                     |        |   |                          |  
|Qualified transaction amount                              |  | $                                   | 78,039 |   |                          | $ | 36,702 |       |  | $ | 114,741                 |   |  | $                        | 68,872 |   |       | $ | 36,138 |   |  | $ | 105,010 |  
|Sales yield                                               |  |                                     | 76.5   | % |                          |   | 16.3   | %     |  |   | 57.3                    | % |  |                          | 73.4   | % |       |   | 17.3   | % |  |   | 54.1    | %
|Sales                                                     |  | $                                   | 59,723 |   |                          | $ | 6,000  |       |  | $ | 65,723                  |   |  | $                        | 50,580 |   |       | $ | 6,242  |   |  | $ | 56,822  |  
|Cost of dining credits                                    |  | $                                   | 34,528 |   |                          | $ |       |       |  | $ | 34,528                  |   |  | $                        | 28,077 |   |       | $ |       |   |  | $ | 28,077  |  
|Processing fee                                            |  |                                     | 207    |   |                          |   | 141    |       |  |   | 348                     |   |  |                          | 193    |   |       |   | 81     |   |  |   | 274     |  
|                                                          |  |                                     |        |   |                          |   |        |       |  |   |                         |   |  |                          |        |   |       |   |        |   |  |   |         |  
|Total cost of sales                                       |  | $                                   | 34,735 |   |                          | $ | 141    |       |  | $ | 34,876                  |   |  | $                        | 28,270 |   |       | $ | 81     |   |  | $ | 28,351  |  
|                                                          |  |                                     |        |   |                          |   |        |       |  |   |                         |   |  |                          |        |   |       |   |        |   |  |   |         |  
|Provision for losses                                      |  | $                                   | 3,259  |   |                          | $ |       |       |  | $ | 3,259                   |   |  | $                        | 2,574  |   |       | $ |       |   |  | $ | 2,574   |  
|                                                          |  |                                     |        |   |                          |  
|Member benefits                                           |  | $                                   | 4,078  |   |                          | $ | 1,530  |       |  | $ | 5,608                   |   |  | $                        | 4,995  |   |       | $ | 2,368  |   |  | $ | 7,363   |  
|Bonus rewards                                             |  |                                     | 694    |   |                          |   | 324    |       |  |   | 1,018                   |   |  |                          | 633    |   |       |   | 332    |   |  |   | 965     |  
|Partner Commissions                                       |  |                                     | 755    |   |                          |   | 337    |       |  |   | 1,092                   |   |  |                          | 961    |   |       |   | 428    |   |  |   | 1,389   |  
|                                                          |  |                                     |        |   |                          |   |        |       |  |   |                         |   |  |                          |        |   |       |   |        |   |  |   |         |  
|Total member benefits                                     |  | $                                   | 5,527  |   |                          | $ | 2,191  |       |  | $ | 7,718                   |   |  | $                        | 6,589  |   |       | $ | 3,128  |   |  | $ | 9,717   |  
|                                                          |  |                                     |        |   |                          |   |        |       |  |   |                         |   |  |                          |        |   |       |   |        |   |  |   |         |  
|Net revenue                                               |  | $                                   | 16,202 |   |                          | $ | 3,668  |       |  | $ | 19,870                  |   |  | $                        | 13,147 |   |       | $ | 3,033  |   |  | $ | 16,180  |  
|                                                          |  |                                     |        |   |                          |   |        |       |  |   |                         |   |  |                          |        |   |       |   |        |   |  |   |         |  

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 June 30, 2008 was 9,769 compared to 8,673 as of June 30, 2007, an increase of 12.6% The increase in total merchant count was driven by a 12.1% increase in Marketing Credits Program merchants to 6,646 merchants and a
13.8% increase in Marketing Services Program merchants to 3,123 merchants.

Our Marketing Credits Program merchant count increased each
quarter since the beginning of 2007. We maintained an adequately staffed sales force in 2007 and through the first half of 2008, which contributed to the increase in merchant count. We grew our Marketing Credits Program merchant count without
compromising the quality of the merchants in the portfolio or the profitability of deals by both demonstrating the value of our services and continuing to apply our due diligence and risk assessment procedures. 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 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 June 30, 2008 decreased to $87,547 from $94,750 at March 31,
2008.



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Qualified transaction amounts at our participating merchants increased $9,731, or 9.3%, to $114,741 for
the three months ended June 30, 2008 compared to the same period in the prior year as a result of the increase in merchant count. Qualified transaction amounts increased at a slower rate than our merchant count mainly due to the management of
our members share of individual restaurants business, a decline in average member transaction amount and a change in the composition of our merchant portfolio to include more merchants at lower price points.

Total sales yield increased to 57.3% for the three months ended June 30, 2008 compared to 54.1% for the same period in the prior year mainly due to
both the increase in sales yield in the Marketing Credits Program and a higher proportion of merchants participating in the Marketing Credits Program, offset by a decrease in sales yield of the Marketing Services Program. The Marketing Credits
Program sales yield increased to 76.5% during the three months ended June 30, 2008 compared to 73.4% 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 16.4% during the three months ended June 30, 2008 from 17.3% for the same period in the prior year as we have lowered the price of this product in select markets.

Sales for the three months ended June 30, 2008 increased 15.7% as compared with the same period in the prior year primarily due to an increase in merchant count, a change in our merchant mix that resulted in a
higher proportion of our merchants in the Marketing Credits Program in relation to the Marketing Services Program and higher Marketing Credits sales yield, partially offset by a decline in Marketing Services Program Sales and a lower average
transaction amount. Marketing Credits sales increased 18.1% during the three months ended June 30, 2008 as compared to the same period in the prior year while Marketing Services Program sales decreased 3.9% between periods.

Cost of sales increased to 53.1% of total sales and 58.4% of Marketing Credit Program sales for the three months ended June 30, 2008 compared to
49.9% of total sales and 56.1% 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.

The provision for losses increased as a percentage of
sales to 5.0% of total sales and 5.5% of Marketing Credits Program sales for the three months ended June 30, 2008 compared with 4.5% of total sales and 5.1% of Marketing Credits Program sales for the same period in the prior year. As previously
discussed under Critical Accounting Policies and Estimates, we refined our allowance methodology for estimating losses in the portfolio to incorporate additional risk elements. 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. This contributed to an increase in the allowance as a percentage of the gross dining credits asset 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 $229 and $13 for the three months ended June 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 $2,681 during the three months ended June 30, 2008 as compared to net recoveries of $174 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 six months ended June 30, 2008 as compared with the prior year. Because a
majority of this amount was 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 June 30, 2008.

Member benefits expense decreased to $7,718, or 11.7% of sales for the three months ended June 30, 2008 compared with $9,717, or 17.1% of sales for
the same period in the prior year. As described above, we implemented revised benefit offerings with most of our partners that went into effect during the first quarter of 2008. This revised structure resulted in lower member benefit costs. In
addition, member benefits as a percentage of sales decreased as a result of the increase in sales yield. Partially offsetting this cost savings was an expense of $891 recorded during the three months ended June 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 $19,870, or 30.2% of sales during the three months ended June 30, 2008 as
compared to $16,180 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 $127 or 28.5% for the three months ended June 30, 2008 compared with the same period in the prior year. The
decrease can be primarily attributed to the decline in fee paying members and the impact of an earn-your-dues dining program in which members earn their annual fees through the reduction of their cash back rewards savings. Beginning in mid-2008, we
introduced a new membership program that eliminated annual fees and we expect further decreases in fee paying members over time.

Operating Expenses

Salaries and benefits increased $832, or 17.4%, to $5,620 for the three months ended June 30, 2008 from $4,788 for the same
period in the prior year primarily due to an increase in management incentive compensation accruals.

Sales commissions and expenses
decreased to 7.0% of sales for the three months ended June 30, 2008 compared to 9.3% of sales for the same period in the prior year due to a decrease in salary expense and travel costs related to sales employee headcount reductions, 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 accruals.

Professional fees increased $414, or 86.6%, to $892 for the three months ended June 30, 2008 as compared to $478 for the same period in the prior
year. The increase can be primarily attributed to an increase in legal fees, partially offset by a decrease in accounting fees.

Member and
merchant marketing expenses decreased $996 or 47.7% for the three months ended June 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.

Depreciation and amortization costs increased $201 or 16.7% for the three months ended
June 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 $379 or 11.2% for the three months ended
June 30, 2008 compared to the same period in the prior year. The decrease was primarily due to a decrease in rent and office expenses, a decrease in severance expenses and a decrease in management travel costs, offset by an increase in stock
compensation expense related to changing the vesting structure of restricted stock units for our Board of Directors from a three-year vesting period to vesting in the period they are granted.

During the three months ended June 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 this Quarterly Report on Form 10-Q.

Other
Income and Expense

Interest and other income decreased $532 to $130 for the three months ended June 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 $150 to $560 due to a
decrease in interest expense recorded for our convertible subordinate debentures as a result of our purchase of $15,000 of our outstanding convertible subordinate debentures in late 2007 and $2,100 in the first quarter of 2008 as discussed below
under Liquidity and Capital Resources.

Income tax provision

Our effective tax rate for the three months ended June 30, 2008 was 39.1% compared with 34.9% for the same period in the prior year. The increase primarily resulted from an increase in the effective rate of state
and local taxes and a decrease in tax-exempt interest recorded during the three months ended June 30, 2008.



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Net income

Net income was $1,909 for the three months ended June 30, 2008 compared with $7,127 for the same period in the prior year. During 2007, we reversed litigation and related expenses of $11,606 relating to the
California class action suit, while in the three months ended June 30, 2008 we experienced an increase in sales and a decrease in member benefit expense.

Basic weighted average number of shares outstanding increased to 27,164 for the three months ended June 30, 2008 compared to 27,018 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 second quarter of 2008. Diluted weighted average shares outstanding decreased to 27,312 for the three months ended June 30, 2008 compared to 30,992 for the same period in the prior
year due to the purchase of a portion of our outstanding convertible subordinate debentures.



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##### Table of Contents

RESULTS OF OPERATIONS  COMPARISON OF THE SIX MONTHS ENDED JUNE 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 six
months ended June 30, 2008 and 2007. These percentages have been rounded to the nearest tenth.



|                                       |  |                                                     |  |       |  
|-------------------------------------- |  | --------------------------------------------------- |  | ----- | -
|                                       |  | Percentage of Salesfor the Six Months EndedJune 30, | 
|                                       |  | 2008                                                |  | 2007  |  
|Sales                                  |  | 100.0                                               |  | 100.0 |  
|Cost of sales                          |  | 52.5                                                |  | 49.9  |  
|Provision for losses                   |  | 4.4                                                 |  | 4.4   |  
|Member benefits                        |  | 12.1                                                |  | 17.5  |  
|                                       |  |                                                     |  |       |  
|Net revenue                            |  | 31.0                                                |  | 28.2  |  
|Membership fees and other income       |  | 0.5                                                 |  | 0.8   |  
|                                       |  |                                                     |  |       |  
|Total operating revenue                |  | 31.6                                                |  | 29.0  |  
|                                       |  |                                                     |  |       |  
|Salaries and benefits                  |  | 8.7                                                 |  | 9.4   |  
|Sales commission and expenses          |  | 7.9                                                 |  | 9.5   |  
|Professional fees                      |  | 1.2                                                 |  | 1.2   |  
|Member and merchant marketing expenses |  | 1.6                                                 |  | 3.4   |  
|Depreciation and amortization          |  | 2.2                                                 |  | 2.1   |  
|General and administrative expenses    |  | 5.2                                                 |  | 6.5   |  
|Litigation and related expenses        |  |                                                    |  | (10.6 | )
|                                       |  |                                                     |  |       |  
|Total operating expenses               |  | 26.9                                                |  | 21.5  |  
|                                       |  |                                                     |  |       |  
|Operating income                       |  | 4.7                                                 |  | 7.6   |  
|Other expense, net                     |  | 0.5                                                 |  | 0.1   |  
|                                       |  |                                                     |  |       |  
|Income before income tax provision     |  | 4.2                                                 |  | 7.5   |  
|Income tax provision                   |  | 1.7                                                 |  | 2.8   |  
|                                       |  |                                                     |  |       |  
|Net income                             |  | 2.5                                                 |  | 4.7   |  
|                                       |  |                                                     |  |       |  



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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, 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 Six Months Ended June 30, |        
|                                                          |  | 2008                              |         |   | 2007                     |  
|                                                          |  | MarketingCreditsProgram           |         |   | MarketingServicesProgram |   |        | Total |  |   | MarketingCreditsProgram |   |  | MarketingServicesProgram |         |   | Total |  
|Merchant count as of June 30, 2008 and 2007, respectively |  |                                   | 6,646   |   |                          |   | 3,123  |       |  |   | 9,769                   |   |  |                          | 5,928   |   |       |   | 2,745  |   |  |   | 8,673   |  
|Number of qualified transactions                          |  |                                   | 3,245   |   |                          |   | 1,561  |       |  |   | 4,806                   |   |  |                          | 2,831   |   |       |   | 1,424  |   |  |   | 4,255   |  
|Average transaction amount                                |  | $                                 | 46.08   |   |                          | $ | 46.21  |       |  | $ | 46.12                   |   |  | $                        | 47.70   |   |       | $ | 48.80  |   |  | $ | 48.07   |  
|                                                          |  |                                   |         |   |                          |  
|Qualified transaction amount                              |  | $                                 | 149,526 |   |                          | $ | 72,133 |       |  | $ | 221,659                 |   |  | $                        | 135,047 |   |       | $ | 69,493 |   |  | $ | 204,540 |  
|Sales yield                                               |  |                                   | 75.5    | % |                          |   | 16.4   | %     |  |   | 56.3                    | % |  |                          | 72.4    | % |       |   | 17.3   | % |  |   | 53.7    | %
|Sales                                                     |  | $                                 | 112,958 |   |                          | $ | 11,828 |       |  | $ | 124,786                 |   |  | $                        | 97,714  |   |       | $ | 12,024 |   |  | $ | 109,738 |  
|Cost of dining credits                                    |  | $                                 | 64,866  |   |                          | $ |       |       |  | $ | 64,866                  |   |  | $                        | 54,266  |   |       | $ |       |   |  | $ | 54,266  |  
|Processing fee                                            |  |                                   | 406     |   |                          |   | 223    |       |  |   | 629                     |   |  |                          | 361     |   |       |   | 160    |   |  |   | 521     |  
|                                                          |  |                                   |         |   |                          |   |        |       |  |   |                         |   |  |                          |         |   |       |   |        |   |  |   |         |  
|Total cost of sales                                       |  | $                                 | 65,272  |   |                          | $ | 223    |       |  | $ | 65,495                  |   |  | $                        | 54,627  |   |       | $ | 160    |   |  | $ | 54,787  |  
|                                                          |  |                                   |         |   |                          |   |        |       |  |   |                         |   |  |                          |         |   |       |   |        |   |  |   |         |  
|Provision for losses                                      |  | $                                 | 5,484   |   |                          | $ |       |       |  | $ | 5,484                   |   |  | $                        | 4,849   |   |       | $ |       |   |  | $ | 4,849   |  
|                                                          |  |                                   |         |   |                          |  
|Member benefits                                           |  | $                                 | 8,112   |   |                          | $ | 3,114  |       |  | $ | 11,226                  |   |  | $                        | 9,602   |   |       | $ | 4,641  |   |  | $ | 14,243  |  
|Bonus rewards                                             |  |                                   | 1,391   |   |                          |   | 675    |       |  |   | 2,066                   |   |  |                          | 1,547   |   |       |   | 792    |   |  |   | 2,339   |  
|Partner Commissions                                       |  |                                   | 1,216   |   |                          |   | 560    |       |  |   | 1,776                   |   |  |                          | 1,798   |   |       |   | 785    |   |  |   | 2,583   |  
|                                                          |  |                                   |         |   |                          |   |        |       |  |   |                         |   |  |                          |         |   |       |   |        |   |  |   |         |  
|Total member benefits                                     |  | $                                 | 10,719  |   |                          | $ | 4,349  |       |  | $ | 15,068                  |   |  | $                        | 12,947  |   |       | $ | 6,218  |   |  | $ | 19,165  |  
|                                                          |  |                                   |         |   |                          |   |        |       |  |   |                         |   |  |                          |         |   |       |   |        |   |  |   |         |  
|Net revenue                                               |  | $                                 | 31,483  |   |                          | $ | 7,256  |       |  | $ | 38,739                  |   |  | $                        | 25,291  |   |       | $ | 5,646  |   |  | $ | 30,937  |  
|                                                          |  |                                   |         |   |                          |   |        |       |  |   |                         |   |  |                          |         |   |       |   |        |   |  |   |         |  

Ending merchant count as of June 30, 2008 was 9,769 compared to 8,673 as of June 30,
2007, an increase of 12.6% The increase in total Merchant Count was driven by a 12.1% increase in Marketing Credits Program merchants to 6,646 merchants and a 13.8% increase in Marketing Services Program merchants to 3,123 merchants.

Qualified transaction amounts at our participating merchants increased $17,119, or 8.4%, to $221,659 for the six months ended June 30, 2008 compared
to the same period in the prior year as a result of the increase in merchant count. Qualified transaction amounts increased at a slower rate than our merchant count mainly due to the management of our members share of individual
restaurants business a decline in membership of certain partner programs, a decline in average member transaction amount and a change in the composition of our merchant portfolio to include more merchants with lower prices.

Total sales yield increased to 56.3% for the six months ended June 30, 2008 compared to 53.7% for the same period in the prior year mainly due to
both the increase in sales yield in the Marketing Credits Program and a higher proportion of merchants participating in the Marketing Credits Program, offset by a decrease in sales yield of the Marketing Services Program. The Marketing Credits
Program sales yield increased to 75.5% during the six months ended June 30, 2008 compared to 72.4% 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 16.4% during the six months ended June 30, 2008 from 17.3% for the same period in the prior year as we have lowered the price of this product in select markets.



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Sales for the six months ended June 30, 2008 increased 13.7% as compared with the same period in the
prior year primarily due to an increase in merchant count, a change in our merchant mix that resulted in a higher proportion of our merchants in the Marketing Credits Program in relation to the Marketing Services Program and higher Marketing Credits
sales yield. Marketing Credits sales increased 15.6% during the six months ended June 30, 2008 as compared to the same period in the prior year while Marketing Services Program sales decreased 1.6% between periods.

Cost of sales increased to 52.5% of total sales and 58.0% of Marketing Credit Program sales for the six months ended June 30, 2008 compared to 49.9%
of total sales and 56.1% 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.

The provision for losses remained the same as a percentage
of total sales at 4.4% and decreased slightly to 4.9% of Marketing Credits Program sales for the six months ended June 30, 2008 compared with 5.0% 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 $627 and $278 for the six months ended June 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 $7,424 during the six months ended June 30, 2008 as compared to net write-offs of $279 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. As a result of this updated policy, we recognized higher write-offs in 2008
as compared with the prior year. Because a majority of this amount was previously reserved in the allowance for doubtful accounts, the change in this policy did not materially affect the provision for losses during the six months ended June 30,
2008.

Member benefits expense decreased to $15,068 or 12.1% of sales for the six months ended June 30, 2008 compared with $19,165, or
17.5% 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. This revised structure resulted in lower
member benefit costs. In addition, member benefits as a percentage of sales decreased as a result of the increase in sales yield. Partially offsetting this cost savings was an expense of $1,678 recorded during the six months ended June 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 $38,739, or 31.0% of sales during the six months ended June 30, 2008 as compared to $30,937 or 28.2% 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, offset by an increase in cost of sales.

Membership and other income decreased $250 or 27.2% for the
six months ended June 30, 2008 compared with the same period in the prior year. The decrease can be primarily attributed to the decline in fee paying members and the impact of an earn-your-dues dining program in which members earn their annual
fees through the reduction of their cash back rewards savings. Beginning in mid-2008, we introduced a new membership program that eliminated annual fees and we expect further decreases in fee paying members over time.

Operating Expenses

Salaries and benefits
increased $588, or 5.7%, to $10,864 for the six months ended June 30, 2008 from $10,276 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 six months ended June 30, 2008 compared to 9.5% of sales for the same period in
the prior year due to a decrease in salary expense and travel costs related to sales employee headcount reductions, primarily in connection with the discontinuation of the RCR Loan Program and increased productivity of the sales force, offset by an
increase in the sales incentive compensation accruals.

Professional fees increased $165, or 12.2%, to $1,513 for the six months ended
June 30, 2008 as compared to $1,348 for the same period in the prior year. The decrease can be primarily attributed to an increase in legal fees, offset by a reduction in accounting fees.

Member and merchant marketing expenses decreased $1,648 or 44.9% for the six months ended June 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.



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Depreciation and amortization costs increased $462 or 19.8% for the six months ended June 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 $548 or 7.7% for the six months ended June 30, 2008 compared to
the same period in the prior year. The decrease was primarily due to a decrease in rent and office expenses, a decrease in severance expenses and a decrease in management travel costs, 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 six months ended June 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 $1,100 to $398 for the six months ended June 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 $437 to $1,156 due to a decrease in interest expense recorded for our convertible subordinate debentures as a result of our purchase of $15,000 of
our outstanding convertible subordinate debentures in late 2007 and $2,100 in the first quarter of 2008 as discussed below under Liquidity and Capital Resources. In addition, we recorded a gain of $128 relating to the purchase of outstanding
convertible subordinated debentures in the first quarter of 2008.

Income tax provision

Our effective rate for the six months ended June 30, 2008 was 40.9% compared with 37.5% for the same period in the prior year. The increase primarily
resulted from an increase in the effective rate of state and local taxes, permanent differences resulting from the issuance of restricted stock units and a decrease in tax-exempt interest recorded during the six months ended June 30, 2008.

Net income

Net income was
$3,067 for the six months ended June 30, 2008 compared with $5,138 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
27,136 for the six months ended June 30, 2008 compared to 26,934 for the same period in the prior year and diluted weighted average shares outstanding increased to 27,394 for the three months ended June 30, 2008 compared to 27,064 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.

LIQUIDITY AND CAPITAL RESOURCES

General

Cash and cash equivalents were $45,460 as of June 30, 2008, an increase of $9,943 from December 31, 2007. During the six months ended
June 30, 2008, cash provided by operating activities was $14,292, primarily due to an increase in sales.

Net cash used in investing
activities for the six months ended June 30, 2008 was $2,412 from our investments in capital expenditures. Capital expenditures consisted principally of continued development of our websites and general information technology investments.

Net cash used in financing activities was $1,963 for the six months ended June 30, 2008 due to the purchase of a portion of our
outstanding convertible subordinate debentures.

We intend to continue to put our cash to use in dining credits 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 our
internal processes.

We believe that our cash and cash equivalents and anticipated cash flows are sufficient to meet our current cash
requirements, subject to cash required to redeem the outstanding convertible debentures as discussed below.



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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. During the six months ended June 30, 2008, we purchased $2,100 of the Convertible Subordinate Debentures for $1,963 utilizing a portion of our cash and cash equivalents reserves and recognized a gain on
extinguishment of $128. The outstanding balance of the convertible subordinate debentures as of June 30, 2008 was $52,900.

Holders of
the debentures may require us to repurchase for cash all or part of their debentures on October 15, 2008 at a price equal to 100% of the principal amount of the debentures, together with accrued and unpaid interest, which we expect holders of
the debentures to do. We currently expect to fund the repurchase, if necessary, out of our cash reserves and advances under our senior secured credit facility described below under the heading Revolving Credit Facility. As more fully set
forth below, 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. If we are not permitted to borrow
under this credit facility prior to October 15, 2008 because these conditions are not met, we expect that we would raise additional cash to purchase the debentures by reducing the amount of dining credits that we purchase. If we were to reduce
the amount of dining credits that we purchase, our Marketing Credits Program revenues would be lower than if we did not reduce the amount of dining credits that we purchase. However, if a condition precedent to our borrowing under the credit
facility is not met shortly before October 15, 2008 that prevents us from borrowing under the credit facility, we may not be able to generate sufficient cash from reducing the purchase of dining credits for the purchase of all debentures on
October 15, 2008. In this event, we would seek alternative financing, but we can offer no assurances that we will be able to obtain alternative financing. Our failure to repurchase the debentures because we do not have cash available or are
unable to raise sufficient cash would cause us to be in default under the debentures and may have a material adverse effect on us.

The
debentures bear interest at 3.25% per annum, payable on April 15 and October 15 of each year. There were no interest payments outstanding at June 30, 2008. The net proceeds from the offering were $67,500 and the issuance costs of
$2,500 are being amortized over five years. If we are not required to repurchase all of the debentures on October 15, 2008, holders of the debentures may require us to repurchase for cash all or part of their debentures on October 15, 2013
and October 15, 2018 or upon a change of control. We may redeem the debentures, in whole or in part, at any time after October 15, 2008 at a price equal to 100% of the principal amount of the debentures, together with accrued and unpaid
interest. At the election of a holder, the debentures are convertible prior to the maturity date into shares of our common stock at an initial conversion price of $17.89 per share, subject to adjustment for certain events, upon the occurrence of any
of the following: (i) the closing price of our common stock on the trading day prior to the conversion date was 110% or more of the conversion price of the debentures on such trading day; (ii) we have called the debentures for redemption;
(iii) the average of the trading prices of the debentures for any five consecutive trading day period was less than the average conversion value for the debentures during that period, subject to certain limitations; or (iv) we make certain
distributions to holders of our common stock or enter into specified corporate transactions. If a holder elects to convert its debentures, the Company may elect to pay cash to such holder in lieu of issuing shares of common stock.

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 June 30, 2008:



|                                                                   |  |                        |        |                               |   |        |  |      |        |           |   |               |  |   |       |  |   |    
|------------------------------------------------------------------ |  | ---------------------- | ------ | ----------------------------- | - | ------ |  | ---- | ------ | --------- | - | ------------- |  | - | ----- |  | - | ---
|                                                                   |  | Payments Due by Period
|Contractual Obligations and Commitments                            |  | Total                  |        | Remaining TwoQuarters of 2008 |   | 2009   |  | 2010 |        | 2011-2012 |   | 2013 andafter
|Convertible subordinated debentures (including net interest)       |  | $                      | 53,760 |                               | $ | 53,760 |  | $    |       |           | $ |              |  | $ |      |  | $ |   
|Vendor contracts                                                   |  |                        | 32,560 |                               |   | 14,440 |  |      | 10,260 |           |   | 6,960         |  |   | 720   |  |   | 180
|California class action litigation settlement and related expenses |  |                        | 6,054  |                               |   | 2,799  |  |      | 3,255  |           |   |              |  |   |      |  |   |   
|Operating leases                                                   |  |                        | 4,838  |                               |   | 919    |  |      | 1,398  |           |   | 1,171         |  |   | 1,150 |  |   | 200
|Revolving credit facility                                          |  |                        | 88     |                               |   | 31     |  |      | 57     |           |   |              |  |   |      |  |   |   
|                                                                   |  |                        |        |                               |   |        |  |      |        |           |   |               |  |   |       |  |   |    
|Total                                                              |  | $                      | 97,300 |                               | $ | 71,949 |  | $    | 14,970 |           | $ | 8,131         |  | $ | 1,870 |  | $ | 380
|                                                                   |  |                        |        |                               |   |        |  |      |        |           |   |               |  |   |       |  |   |    



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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 lenders. 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 $15,000 of the credit facility to purchase our 3.25% Convertible Subordinated Debentures. We may
use advances for working capital, capital expenditures, permitted acquisitions and 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 credit facility contains customary representations,
warranties and covenants and includes customary events of default, including a change of control provision. We do not currently have any borrowings outstanding under this credit facility.

Dining Credits

Dining credits funded (net
dining credits less accounts payabledining credits) was $83,330 at June 30, 2008, a decrease of $4,470 from December 31, 2007. Accounts payable-dining credits represent the unfunded portion of dining credits that we have an option,
but not an obligation, 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. As previously discussed, during the fourth quarter
of 2007 and the first quarter of 2008 we implemented more conservative dining credits purchasing policies aimed at reducing the amount of dining credits we purchase from each merchant, which lowers average usage period of the dining credits
portfolio. We believe that the purchase of future dining credits can generally be funded from cash generated from operations, subject to the cash required to redeem the outstanding convertible debentures.

Off Balance Sheet Arrangements

We have no off
balance sheet arrangements as of June 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 FASB No. 157, Fair Value Measurements. FASB No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. FASB No. 157 was effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities. The adoption of FASB 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, FASB
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 FASB No. 157 include the fair value measurement of goodwill and other
intangible assets for impairment testing. While we are currently evaluating the impact of FASB 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



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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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|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 June 30, 2008, there was no outstanding amount under this revolving credit facility.

On October 15, 2003, we issued $70,000 in convertible subordinated debentures. The interest rate on the debentures is fixed at 3.25% per annum.
During 2007, we purchased $15,000 principal amount of these convertible subordinated debentures and during the three months ended March 31, 2008 we purchased $2,100 principal amount of these convertible subordinated debentures. The market value
of the debentures will fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest and the market value of the debentures will generally fluctuate in
tandem with changes in the price of our common stock.

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 (SEC) 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 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------



|(a) | Meeting of Stockholders
|--- | -----------------------

Our annual
meeting of stockholders was held on May 12, 2008.



|(b) | Election of Directors
|--- | ---------------------

At our annual
meeting of stockholders, the stockholders elected the following persons to the Board of Directors: (1) Donald J. Liebentritt, (2) Ronald L. Blake, (3) Raymond A. Gross, (4) F. Philip Handy (5) Marc C. Particelli,
(6) Michael J. Soenen, (7) Mark R. Sotir



|(c) | Matters Voted Upon
|--- | ------------------



| | (i) | The stockholders voted as follows with respect to the election of the seven (7) directors (shares in thousands):
| | --- | ----------------------------------------------------------------------------------------------------------------



|                              |  |       
|----------------------------- |  | ------
|Donald J. Liebentritt        
|For                           |  | 24,931
|Withheld/Against              |  | 244   
|Exceptions/Abstain            |  |      
|                              |  |       
|Total shares voted            |  | 25,175
|Broker no vote                |  | 1,776 
|                              |  |       
|Total shares eligible to vote |  | 26,951
|                              |  |       
|                             
|Ronald L. Blake              
|For                           |  | 24,931
|Withheld/Against              |  | 244   
|Exceptions/Abstain            |  |      
|                              |  |       
|Total shares voted            |  | 25,275
|Broker no vote                |  | 1,776 
|                              |  |       
|Total shares eligible to vote |  | 26,951
|                              |  |       
|                             
|Raymond A. Gross             
|For                           |  | 24,931
|Withheld/Against              |  | 244   
|Exceptions/Abstain            |  |      
|                              |  |       
|Total shares voted            |  | 25,275
|Broker no vote                |  | 1,776 
|                              |  |       
|Total shares eligible to vote |  | 26,951
|                              |  |       
|                             
|F. Philip Handy              
|For                           |  | 20,891
|Withheld/Against              |  | 4,284 
|Exceptions/Abstain            |  |      
|                              |  |       
|Total shares voted            |  | 25,175
|Broker no vote                |  | 1,776 
|                              |  |       
|Total shares eligible to vote |  | 26,951
|                              |  |       



29



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##### Table of Contents

|                              |  |       
|----------------------------- |  | ------
|                             
|Marc C. Particelli           
|For                           |  | 25,032
|Withheld/Against              |  | 143   
|Exceptions/Abstain            |  |      
|                              |  |       
|Total shares voted            |  | 25,175
|Broker no vote                |  | 1,776 
|                              |  |       
|Total shares eligible to vote |  | 26,951
|                              |  |       
|                             
|Michael J. Soenen            
|For                           |  | 25,032
|Withheld/Against              |  | 142   
|Exceptions/Abstain            |  |      
|                              |  |       
|Total shares voted            |  | 25,174
|Broker no vote                |  | 1,777 
|                              |  |       
|Total shares eligible to vote |  | 26,951
|                              |  |       
|                             
|Mark R. Sotir                
|For                           |  | 25,032
|Withheld/Against              |  | 143   
|Exceptions/Abstain            |  |      
|                              |  |       
|Total shares voted            |  | 25,175
|Broker no vote                |  | 1,776 
|                              |  |       
|Total shares eligible to vote |  | 26,951
|                              |  |       



| | (ii) | The stockholders also voted to ratify the appointment of our independent registered accounting firm for 2008. The stockholders voted as follows with respect to the ratification of
the appointment of our independent registered accounting firm for 2008 (shares in thousands):
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                              |  |       
|----------------------------- |  | ------
|For                           |  | 25,085
|Withheld/Against              |  | 71    
|Exceptions/Abstain            |  | 19    
|                              |  |       
|Total shares voted            |  | 25,175
|Broker no vote                |  | 1,776 
|                              |  |       
|Total shares eligible to vote |  | 26,951
|                              |  |       



|Item 5. | Other Information
|------- | -----------------

On August 11, 2008, we
entered into a First Amendment to Loan and Security Agreement with RBS Business Capital (the Lender), which amends the Loan and Security Agreement, dated as of November 6, 2007, between the Lender and us. The amendment permits us to
use up to $15 million of borrowings under the credit facility to repurchase our 3.25% Convertible Subordinated Debentures, increases the borrowing limit under the facility from $25 million to $40 million, permits us to use borrowings under the
facility for certain acquisitions and extends the maturity date to August 11, 2011. The amendment also revises the interest rate payable under the credit facility. The Lender has committed to provide up to $25 million under the credit facility
and has agreed to seek to obtain an additional commitment of $15 million from one or more other financial institutions.

The amendment also
revises the financial covenants to provide 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.

We do not currently have any borrowings outstanding under this credit facility.

This summary is qualified in its entirety by reference to the amendment, a copy of which is attached hereto as Exhibit 10.1.



30



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##### Table of Contents

|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.
|            | 
|4.4         |  | Indenture, dated as of October 15, 2003, as amended and restated as of February 4, 2004, between Rewards Network Inc. and LaSalle Bank National Association is incorporated herein by
reference to Exhibit 4.15 to Rewards Network Inc.s Annual Report on Form 10-K (File No. 001-13806), filed on March 12, 2004.                                                                                                                      
|            | 
|4.5         |  | Registration Rights Agreement, dated October 8, 2003, between iDine Rewards Network Inc. and Credit Suisse First Boston LLC is incorporated herein by reference to Exhibit 4.18 to iDine
Rewards Network Inc.s Quarterly Report on Form 10-Q (File No. 001-13806), filed on November 14, 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.                                                                                                                                                                                                                                              
|            | 
|10.2*       |  | Second Amendment to the United Mileage Plus Participation Agreement, dated as of February 8, 2008, between Rewards Network Services Inc. and Mileage Plus Holdings, Inc.                                                                                                                                                                                                                                                                 
|            | 
|10.3*       |  | Processor Agreement, dated as of August 23, 2004, between Rewards Network Inc. and Golden Receiver Systems. Portions of this exhibit have been omitted and separately filed with the Securities
and Exchange Commission pursuant to a request for confidential treatment.                                                                                                                                                                
|            | 
|10.4*       |  | First Amendment to Processor Agreement, dated as of March 1, 2005, between Rewards Network Inc. and Golden Receiver Systems, L.L.C. Portions of this exhibit have been omitted and separately
filed with the Securities and Exchange Commission pursuant to a request for confidential treatment.                                                                                                                                        
|            | 
|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



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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.                                                                                                                
|                | 
|August 11, 2008 |  | /s/ CHRISTOPHER J. LOCKE                                                                                                            
|                |  | Christopher J. Locke Senior Vice President and Chief Financial Officer (Principal Financial Officer and on behalf of the registrant)



32



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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.
|            | 
|4.4         |  | Indenture, dated as of October 15, 2003, as amended and restated as of February 4, 2004, between Rewards Network Inc. and LaSalle Bank National Association is incorporated herein by
reference to Exhibit 4.15 to Rewards Network Inc.s Annual Report on Form 10-K (File No. 001-13806), filed on March 12, 2004.                                                                                                                      
|            | 
|4.5         |  | Registration Rights Agreement, dated October 8, 2003, between iDine Rewards Network Inc. and Credit Suisse First Boston LLC is incorporated herein by reference to Exhibit 4.18 to iDine
Rewards Network Inc.s Quarterly Report on Form 10-Q (File No. 001-13806), filed on November 14, 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.                                                                                                                                                                                                                                              
|            | 
|10.2*       |  | Second Amendment to the United Mileage Plus Participation Agreement, dated as of February 8, 2008, between Rewards Network Services Inc. and Mileage Plus Holdings, Inc.                                                                                                                                                                                                                                                                 
|            | 
|10.3*       |  | Processor Agreement, dated as of August 23, 2004, between Rewards Network Inc. and Golden Receiver Systems. Portions of this exhibit have been omitted and separately filed with the Securities
and Exchange Commission pursuant to a request for confidential treatment.                                                                                                                                                                
|            | 
|10.4*       |  | First Amendment to Processor Agreement, dated as of March 1, 2005, between Rewards Network Inc. and Golden Receiver Systems, L.L.C. Portions of this exhibit have been omitted and separately
filed with the Securities and Exchange Commission pursuant to a request for confidential treatment.                                                                                                                                        
|            | 
|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
|- | --------------



33