##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
Commission File No. 000-25064
 
 
 
 HEALTH FITNESS CORPORATION
 (Exact name of registrant as specified in its charter)
 Minnesota
    
    No. 41-1580506(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (IRS Employer
Identification No.)
 3600 American Boulevard West, Bloomington, Minnesota 55431
(Address of Principal Executive Offices)
 Registrants telephone number (952) 831-6830
 
 þ o
  o o þ
 o þ




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HEALTH FITNESS CORPORATION
EXPLANATORY NOTE
 rd
   Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratio
   2




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##### 



HEALTH FITNESS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
 Table of Contents
 PAGEPART I. FINANCIAL INFORMATIONITEM 1. Consolidated Financial Statements (unaudited)Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    
    4Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006
    
    
    5Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006
    
    
    6Notes to Consolidated Financial Statements
    
    
    7ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24ITEM 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATION
    
    
    25ITEM 1. Legal Proceedings
    
    
    25ITEM 1A. Risk Factors
    
    
    25ITEMS 2-3. Not Applicable
    
    
    26ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    26ITEM 5. Other Information
    
    
    26ITEM 6. Exhibits
    
    
    26Signatures
    
    
    27Exhibit Index
    
    
    28Statement Re: Computation of Earnings Per ShareSection 302 CertificationSection 302 CertificationSection 906 CertificationSection 906 Certification
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##### Table of Contents



PART I.  FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 HEALTH FITNESS CORPORATION
 
 CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 September 30,
    
    
    December 31,2007
    
    
    2006(Restated)ASSETSCURRENT ASSETSCash
    
    $
    251,760
    
    
    $
    987,465Trade and other accounts receivable, less allowances of $215,300
and $283,100
    
    
    12,511,532
    
    
    
    12,404,856Inventories
    
    
    677,592
    
    
    
    326,065Prepaid expenses and other
    
    
    698,593
    
    
    
    375,824Deferred tax assets
    
    
    217,476
    
    
    
    217,476Total current assets
    
    
    14,356,953
    
    
    
    14,311,686PROPERTY AND EQUIPMENT, net
    
    
    1,171,795
    
    
    
    767,675OTHER ASSETSGoodwill
    
    
    14,542,383
    
    
    
    14,509,469Software technology, less accumulated amortization of $686,400
and $370,200
    
    
    1,526,783
    
    
    
    1,658,575Trademark, less accumulated amortization of $320,700 and $246,300
    
    
    172,372
    
    
    
    246,809Other intangible assets, less accumulated amortization of
$223,800 and $166,500
    
    
    305,293
    
    
    
    362,528Deferred tax assets
    
    
    437,010
    
    
    
    437,010Other
    
    
    14,011
    
    
    
    24,597$
    32,526,600
    
    
    $
    32,318,349LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESTrade accounts payable
    
    $
    1,154,040
    
    
    $
    1,811,939Accrued salaries, wages, and payroll taxes
    
    
    2,483,172
    
    
    
    3,249,424Accrued acquisition earnout
    
    
    
    
    
    
    1,475,000Other accrued liabilities
    
    
    366,761
    
    
    
    120,044Accrued self funded insurance
    
    
    286,981
    
    
    
    201,053Line of credit
    
    
    848,460
    
    
    
    Deferred revenue
    
    
    1,180,252
    
    
    
    1,663,121Total current liabilities
    
    
    6,319,666
    
    
    
    8,520,581LONG-TERM OBLIGATIONS
    
    
    
    
    
    
    COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCommon stock, $0.01 par value; 50,000,000 shares authorized;
19,913,590 and 19,220,217 shares issued and outstanding
    
    
    198,990
    
    
    
    192,202Additional paid-in capital
    
    
    29,284,933
    
    
    
    27,565,901Accumulated comprehensive income
    
    
    (53,534
    )
    
    
    (35,186
    )Accumulated deficit
    
    
    (3,223,455
    )
    
    
    (3,925,149
    )26,206,934
    
    
    
    23,797,768$
    32,526,600
    
    
    $
    32,318,349
  4




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HEALTH FITNESS CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Restated)REVENUE
    
    $
    17,153,058
    
    
    $
    16,340,380
    
    
    $
    50,722,258
    
    
    $
    46,482,771COSTS OF REVENUE
    
    
    12,268,332
    
    
    
    11,061,752
    
    
    
    36,272,205
    
    
    
    33,439,649GROSS PROFIT
    
    
    4,884,726
    
    
    
    5,278,628
    
    
    
    14,450,053
    
    
    
    13,043,122OPERATING EXPENSESSalaries
    
    
    2,775,532
    
    
    
    2,045,284
    
    
    
    7,819,407
    
    
    
    6,187,653Other selling, general and administrative
    
    
    1,835,136
    
    
    
    1,133,118
    
    
    
    5,008,770
    
    
    
    3,471,455Amortization of acquired intangible assets
    
    
    42,771
    
    
    
    96,986
    
    
    
    128,311
    
    
    
    313,058Total operating expenses
    
    
    4,653,439
    
    
    
    3,275,388
    
    
    
    12,956,488
    
    
    
    9,972,166OPERATING INCOME
    
    
    231,287
    
    
    
    2,003,240
    
    
    
    1,493,565
    
    
    
    3,070,956OTHER INCOME (EXPENSE)Interest expense
    
    
    (16,681
    )
    
    
    (1,681
    )
    
    
    (23,371
    )
    
    
    (5,831
    )Change in fair value of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    841,215Other, net
    
    
    (4,432
    )
    
    
    (2,529
    )
    
    
    (1,856
    )
    
    
    7,532EARNINGS BEFORE INCOME TAXES
    
    
    210,174
    
    
    
    1,999,030
    
    
    
    1,468,338
    
    
    
    3,913,872INCOME TAX EXPENSE
    
    
    193,151
    
    
    
    825,189
    
    
    
    766,644
    
    
    
    1,352,884NET EARNINGS
    
    
    17,023
    
    
    
    1,173,841
    
    
    
    701,694
    
    
    
    2,560,988Deemed dividend to preferred shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,576,454Dividend to preferred shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,410NET EARNINGS APPLICABLE TO
COMMON SHAREHOLDERS
    
    $
    17,023
    
    
    $
    1,173,841
    
    
    $
    701,694
    
    
    $
    888,124NET EARNINGS PER SHARE:Basic
    
    $
    0.00
    
    
    $
    0.06
    
    
    $
    0.04
    
    
    $
    0.05Diluted
    
    
    0.00
    
    
    
    0.06
    
    
    
    0.03
    
    
    
    0.00WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    19,834,858
    
    
    
    18,963,948
    
    
    
    19,618,221
    
    
    
    17,665,550Diluted
    
    
    20,866,935
    
    
    
    19,550,662
    
    
    
    20,577,345
    
    
    
    18,410,033
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HEALTH FITNESS CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine Months EndedSeptember 30,2007
    
    
    2006(Restated)CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings
    
    $
    701,694
    
    
    $
    2,560,988Adjustments to reconcile net earnings to net cash used in operating activities:Depreciation
    
    
    255,001
    
    
    
    117,593Amortization
    
    
    447,865
    
    
    
    571,256Warrant valuation
    
    
    
    
    
    
    (841,215
    )Stock-based compensation
    
    
    683,036
    
    
    
    341,553Deferred taxes
    
    
    
    
    
    
    (30,160
    )Change in assets and liabilities:Trade and other accounts receivable
    
    
    (106,675
    )
    
    
    (2,001,058
    )Inventories
    
    
    (350,415
    )
    
    
    (113,176
    )Prepaid expenses and other
    
    
    (323,881
    )
    
    
    (403,693
    )Other assets
    
    
    10,587
    
    
    
    17,501Trade accounts payable
    
    
    (681,928
    )
    
    
    187,437Accrued liabilities and other
    
    
    (433,607
    )
    
    
    (209,515
    )Deferred revenue
    
    
    (482,869
    )
    
    
    (187,369
    )Net cash used in operating activities
    
    
    (281,192
    )
    
    
    10,142CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (837,843
    )
    
    
    (584,863
    )Business acquisition, net of cash acquired
    
    
    (32,914
    )
    
    
    Accrued acquisition earnout
    
    
    (737,500
    )
    
    
    Other
    
    
    
    
    
    
    (100,599
    )Net cash used in investing activities
    
    
    (1,608,257
    )
    
    
    (685,462
    )CASH FLOWS FROM FINANCING ACTIVITIES:Costs from issuance of preferred stock
    
    
    (17,415
    )
    
    
    (161,725
    )Proceeds from the issuance of common stock
    
    
    190,329
    
    
    
    171,287Proceeds from the exercise of stock options
    
    
    132,370
    
    
    
    3,706Payment of dividend to preferred shareholders
    
    
    
    
    
    
    (96,410
    )Borrowings under line of credit
    
    
    17,416,233
    
    
    
    Repayments under line of credit
    
    
    (16,567,773
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    1,153,744
    
    
    
    (83,142
    )NET DECREASE IN CASH
    
    
    (735,705
    )
    
    
    (758,462
    )CASH AT BEGINNING OF PERIOD
    
    
    987,465
    
    
    
    1,471,505CASH AT END OF PERIOD
    
    $
    251,760
    
    
    $
    713,043Supplemental cash flow information:Cash paid for interest
    
    $
    19,835
    
    
    $
    788Cash paid for taxes
    
    
    143,750
    
    
    
    521,640Non-cash investing and financing activities affecting cash flows:Common stock issued for accrued acquisition earnout
    
    
    737,500
    
    
    
    Deemed dividend to preferred shareholders
    
    
    
    
    
    
    (1,576,454
    )Conversion of warrant liability to additional paid in capital
    
    
    
    
    
    
    1,369,674
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Consolidation
 Cash
 Trade and Other Accounts Receivable
 7




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##### Table of Contents



Inventories
 Property and Equipment
 Software Development Costs Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed
   Goodwill Accounting for Goodwill
 Intangible Assets
 8




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##### Table of Contents



Revenue Recognition 
    Net Earnings Per Common Share
 Stock-Based Compensation
 Fair
Values of Financial Instruments 
 Valuation of Derivative Instruments
 Income Taxes
 9




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##### Table of Contents



Use of Estimates
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUE:Fitness ManagementStaffing Services
    
    $
    10,042,463
    
    
    $
    10,129,304
    
    
    $
    29,843,968
    
    
    $
    29,781,526Program and Consulting Services
    
    
    579,607
    
    
    
    593,604
    
    
    
    1,901,553
    
    
    
    1,793,60310,622,070
    
    
    
    10,722,908
    
    
    
    31,745,521
    
    
    
    31,575,129Health ManagementStaffing Services
    
    
    4,017,025
    
    
    
    3,652,879
    
    
    
    11,617,304
    
    
    
    10,068,134Program and Consulting Services
    
    
    2,513,963
    
    
    
    1,964,593
    
    
    
    7,359,433
    
    
    
    4,839,5086,530,988
    
    
    
    5,617,472
    
    
    
    18,976,737
    
    
    
    14,907,642Total RevenueStaffing Services
    
    
    14,059,488
    
    
    
    13,782,183
    
    
    
    41,461,272
    
    
    
    39,849,660Program and Consulting Services
    
    
    3,093,570
    
    
    
    2,558,197
    
    
    
    9,260,986
    
    
    
    6,633,111$
    17,153,058
    
    
    $
    16,340,380
    
    
    $
    50,722,258
    
    
    $
    46,482,771GROSS PROFIT:Fitness ManagementStaffing Services
    
    $
    2,176,722
    
    
    $
    2,672,146
    
    
    $
    6,278,653
    
    
    $
    6,674,676Program and Consulting Services
    
    
    294,052
    
    
    
    277,366
    
    
    
    877,902
    
    
    
    860,2352,470,774
    
    
    
    2,949,512
    
    
    
    7,156,555
    
    
    
    7,534,911Health ManagementStaffing Services
    
    
    1,036,109
    
    
    
    1,118,053
    
    
    
    2,958,681
    
    
    
    2,653,074Program and Consulting Services
    
    
    1,377,843
    
    
    
    1,211,063
    
    
    
    4,334,817
    
    
    
    2,855,1372,413,952
    
    
    
    2,329,116
    
    
    
    7,293,498
    
    
    
    5,508,211Total Gross ProfitStaffing Services
    
    
    3,212,831
    
    
    
    3,790,199
    
    
    
    9,237,334
    
    
    
    9,327,750Program and Consulting Services
    
    
    1,671,895
    
    
    
    1,488,429
    
    
    
    5,212,719
    
    
    
    3,715,372$
    4,884,726
    
    
    $
    5,278,628
    
    
    $
    14,450,053
    
    
    $
    13,043,122
 10




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##### Table of Contents



For the Three Months Ended
    
    
    For the Three Months EndedMarch 31,
    
    
    March 31,
    
    
    June 30,
    
    
    June 30,2007
    
    
    2007
    
    
    2007
    
    
    2007As Reported
    
    
    Reclassified
    
    
    As Reported
    
    
    ReclassifiedREVENUE:Fitness Management
    
    $
    9,992,684
    
    
    $
    9,980,516
    
    
    $
    9,848,487
    
    
    $
    9,820,989Staffing Services
    
    
    696,233
    
    
    
    694,234
    
    
    
    667,347
    
    
    
    627,712Program and Consulting Services
    
    
    10,688,917
    
    
    
    10,674,750
    
    
    
    10,515,834
    
    
    
    10,448,701Health ManagementStaffing Services
    
    
    3,667,338
    
    
    
    3,679,504
    
    
    
    3,893,275
    
    
    
    3,920,775Program and Consulting Services
    
    
    2,233,778
    
    
    
    2,235,779
    
    
    
    2,570,058
    
    
    
    2,609,6915,901,116
    
    
    
    5,915,283
    
    
    
    6,463,333
    
    
    
    6,530,466Total RevenueStaffing Services
    
    
    13,660,022
    
    
    
    13,660,020
    
    
    
    13,741,762
    
    
    
    13,741,764Program and Consulting Services
    
    
    2,930,011
    
    
    
    2,930,013
    
    
    
    3,237,405
    
    
    
    3,237,403Total Revenue
    
    $
    16,590,033
    
    
    $
    16,590,033
    
    
    $
    16,979,167
    
    
    $
    16,979,167GROSS PROFIT:Fitness ManagementStaffing Services
    
    $
    2,109,181
    
    
    $
    2,099,858
    
    
    $
    2,012,802
    
    
    $
    2,002,073Program and Consulting Services
    
    
    364,851
    
    
    
    362,851
    
    
    
    246,668
    
    
    
    220,9992,474,032
    
    
    
    2,462,709
    
    
    
    2,259,470
    
    
    
    2,223,072Health ManagementStaffing Services
    
    
    907,236
    
    
    
    911,965
    
    
    
    999,876
    
    
    
    1,010,607Program and Consulting Services
    
    
    1,428,626
    
    
    
    1,435,220
    
    
    
    1,496,087
    
    
    
    1,521,7542,335,862
    
    
    
    2,347,185
    
    
    
    2,495,963
    
    
    
    2,532,361Total Gross ProfitStaffing Services
    
    
    3,016,417
    
    
    
    3,011,823
    
    
    
    3,012,678
    
    
    
    3,012,680Program and Consulting Services
    
    
    1,793,477
    
    
    
    1,798,071
    
    
    
    1,742,755
    
    
    
    1,742,753Total Gross Profit
    
    $
    4,809,894
    
    
    $
    4,809,894
    
    
    $
    4,755,433
    
    
    $
    4,755,433
    .
 
 11




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12




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##### Table of Contents



.
 Stock Options
     Options Outstanding
    
    Options ExercisableWeighted Average
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of
    
    
    
    Number
    
    Contractual Life
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    
    
    Outstanding
    
    In Years
    
    Price
    
    Exercisable
    
    Price$0.30  $0.39
    
    
    
    
    
    145,200
    
    
    
    1.12
    
    
    $
    0.39
    
    
    
    145,200
    
    
    $
    0.390.47    0.69
    
    
    
    
    
    342,500
    
    
    
    1.09
    
    
    
    0.52
    
    
    
    342,500
    
    
    
    0.520.95    1.25
    
    
    
    
    
    239,000
    
    
    
    2.76
    
    
    
    1.15
    
    
    
    179,250
    
    
    
    1.161.26    2.27
    
    
    
    
    
    436,100
    
    
    
    4.14
    
    
    
    1.86
    
    
    
    365,825
    
    
    
    1.842.28    3.00
    
    
    
    
    
    1,190,500
    
    
    
    4.46
    
    
    
    2.74
    
    
    
    398,625
    
    
    
    2.702,353,300
    
    
    
    3.53
    
    
    $
    1.95
    
    
    
    1,431,400
    
    
    $
    1.53
  13




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Three Months EndedSeptember 30,2007
    
    2006Risk-free interest rate
    
    
    4.28
    %
    
    
    4.57
    %Expected volatility
    
    
    39.2
    %
    
    
    54.8
    %Expected life (in years)
    
    
    3.0
    
    
    
    3.78Dividend yield
    
    
    
    
    
    
    
  Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Aggregate
    
    
    AverageExercise
    
    
    Intrinsic
    
    
    RemainingOptions
    
    
    Price
    
    
    Value
    
    
    TermOutstanding at June 30, 2007
    
    
    2,370,150
    
    
    $
    1.92Granted
    
    
    30,000
    
    
    
    2.98Forfeited
    
    
    0
    
    
    
    Exercised
    
    
    (46,850
    )
    
    
    1.26Expired
    
    
    0
    
    
    
    Outstanding at September 30, 2007
    
    
    2,353,300
    
    
    $
    1.95
    
    
    $
    2,854,016
    
    
    
    3.59Exercisable at September 30, 2007
    
    
    1,431,400
    
    
    $
    1.53
    
    
    $
    2,328,580
    
    
    
    2.92
  Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Aggregate
    
    
    AverageExercise
    
    
    Intrinsic
    
    
    RemainingOptions
    
    
    Price
    
    
    Value
    
    
    TermOutstanding at December 31, 2006
    
    
    2,250,900
    
    
    $
    1.64Granted
    
    
    640,500
    
    
    
    2.82Forfeited
    
    
    (34,375
    )
    
    
    2.75Exercised
    
    
    (313,725
    )
    
    
    0.78Expired
    
    
    (190,000
    )
    
    
    3.00Outstanding at September 30, 2007
    
    
    2,353,300
    
    
    $
    1.95
    
    
    $
    2,854,016
    
    
    
    3.59Exercisable at September 30, 2007
    
    
    1,431,400
    
    
    $
    1.53
    
    
    $
    2,328,580
    
    
    
    2.92
 Restricted Stock
 Equity Incentive Plan
 14




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##### Table of Contents



Accrued Acquisition Earnout
 .
      Accounting for Convertible Securities with Beneficial
Conversion Features or
Contingently Adjustable Conversion Ratio
  15




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##### Table of Contents



The following table presents the effect of the restatement on our consolidated balance sheet as of
December 31, 2006:
 As Reported
    
    Restatement
    
    As RestatedSTOCKHOLDERS EQUITYCommon stock, $0.01 par value
    
    $
    192,202
    
    
    
    
    
    
    $
    192,202Additional paid-in capital
    
    
    25,989,447
    
    
    
    1,576,454
    
    
    
    27,565,901Accumulated comprehensive income
    
    
    (35,186
    )
    
    
    
    
    
    
    (35,186
    )Accumulated deficit
    
    
    (2,348,695
    )
    
    
    (1,576,454
    )
    
    
    (3,925,149
    )$
    23,797,768
    
    
    
    
    
    
    $
    23,797,768
 The following table presents the effect of the restatement on our consolidated statement of
operations for the nine months ended September 30, 2006:
 As Reported
    
    Restatement
    
    As RestatedNET EARNINGS
    
    $
    2,560,988
    
    
    
    
    
    
    $
    2,560,988Deemed dividend to preferred shareholders
    
    
    
    
    
    
    1,576,454
    
    
    
    1,576,454Dividend to preferred shareholders
    
    
    96,410
    
    
    
    
    
    
    
    96,410NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS
    
    $
    2,464,578
    
    
    $
    (1,576,454
    )
    
    $
    888,124NET EARNINGS PER COMMON SHARE:Basic
    
    $
    0.14
    
    
    
    
    
    
    $
    0.05Diluted
    
    
    0.09
    
    
    
    
    
    
    
    0.00WEIGHTED AVERAGE COMMON SHARES OUTSTANDINGBasic
    
    
    17,665,550
    
    
    
    
    
    
    
    17,665,550Diluted
    
    
    19,680,363
    
    
    
    
    
    
    
    18,410,033
 The following table presents the effect of the restatement on our consolidated statement of cash
flows for the nine months ended September 30, 2006:
 As Reported
    
    Restatement
    
    As RestatedNoncash investing and financing activities affecting cash flows:Deemed to preferred shareholders
    
    
    

    
    $
    (1,576,454
    )
    
    $
    (1,576,454
    )
 16




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Critical Accounting Policies.
 General.
 Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006REVENUE
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %COSTS OF REVENUE
    
    
    71.5
    
    
    
    67.7
    
    
    
    71.5
    
    
    
    71.9GROSS PROFIT
    
    
    28.5
    
    
    
    32.3
    
    
    
    28.5
    
    
    
    28.1OPERATING EXPENSESSalaries
    
    
    16.2
    
    
    
    12.5
    
    
    
    15.4
    
    
    
    13.3Other selling, general and administrative
    
    
    10.7
    
    
    
    6.9
    
    
    
    9.9
    
    
    
    7.5Amortization of acquired intangible assets
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.2
    
    
    
    0.7Total operating expenses
    
    
    27.2
    
    
    
    20.0
    
    
    
    25.5
    
    
    
    21.5OPERATING INCOME
    
    
    1.3
    
    
    
    12.3
    
    
    
    3.0
    
    
    
    6.6OTHER INCOME (EXPENSE)
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    1.8EARNINGS BEFORE INCOME TAXES
    
    
    1.2
    
    
    
    12.3
    
    
    
    2.9
    
    
    
    8.4INCOME TAX EXPENSE
    
    
    1.1
    
    
    
    5.1
    
    
    
    1.5
    
    
    
    2.9NET EARNINGS
    
    
    0.1
    
    
    
    7.2
    
    
    
    1.4
    
    
    
    5.5Dividend to preferred shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.6NET EARNINGS APPLICABLE TO
COMMON SHAREHOLDERS
    
    
    0.1
    %
    
    
    7.2
    %
    
    
    1.4
    %
    
    
    1.9
    %
 Results of Operations for the quarter ended September 30, 2007 compared to the quarter ended
September 30, 2006.
 17




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Revenue.
 .
   Gross Profit.
     18




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##### Table of Contents



Operating Expenses and Operating Income.
   Other Income and Expense.
 Income Taxes.
  Dividend and Deemed Dividend to Preferred Shareholders.
 Net Earnings Applicable to Common Shareholders.
 19




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Results of Operations for the nine months ended September 30, 2007 compared to the nine months
ended September 30, 2006.
 Revenue.
 .
   Gross Profit.
     20




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##### Table of Contents



Operating Expenses and Operating Income.
   Other Income and Expense.
 Valuation of Derivative Instruments,
 Income Taxes.
  Dividend and Deemed Dividend to Preferred Shareholders.
 Net Earnings Applicable to Common Shareholders.
 21




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LIQUIDITY AND CAPITAL RESOURCES
      22




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INFLATION
  OFF-BALANCE SHEET ARRANGEMENTS
  PRIVATE SECURITIES LITIGATION REFORM ACT
   23




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RECENTLY PASSED LEGISLATION
 Sarbanes-Oxley.
  HIPAA.
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   24




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ITEM 4. CONTROLS AND PROCEDURES
  
 PART II.  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
   Any further restatements of our financial statements may divert managements attention, result
in litigation or otherwise harm our business.
  25




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  26




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SIGNATURES
  Dated:  November 19, 2007
    
    HEALTH FITNESS CORPORATIONBy
    /s/ Gregg O. LehmanGregg O. LehmanPresident and Chief Executive Officer
(Principal Executive Officer)By
    /s/ Wesley W. WinnekinsWesley W. WinnekinsChief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 27




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##### Table of Contents



Exhibit No.
    
    Description10.1
    
    Fifth Amendment dated September 27, 2007 to Credit Agreement,
dated August 22, 2003, between the Company and Wells Fargo
Bank, N.A.  incorporated by reference to Exhibit 10.1 to our
Form 8-K filed November 14, 2007**11.0
    
    Statement re: Computation of Earnings per Share**31.1
    
    Certification of President and Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**31.2
    
    Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002**32.1
    
    Certification of President and Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**32.2
    
    Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 
 **
    
    Filed herewith 28