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

OVERVIEW

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Allowance for Losses

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

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

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

Deferred Tax Assets Valuation Allowance

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

Impairment Loss on Goodwill

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

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

Revenue Recognition

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

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.

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

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



                                                     Percentage of Sales
                                                 for the Three Months Ended
                                                        September 30,
                                                  2008                2007
      Sales                                          100.0               100.0
      Cost of sales                                   53.2                50.1
      Provision for losses                             4.7                 5.6
      Member benefits                                 12.7                15.3

      Net revenue                                     29.3                29.1

      Membership fees and other income                 0.5                 0.7

      Total operating revenue                         29.8                29.8

      Salaries and benefits                            8.7                 8.9
      Sales commission and expenses                    7.9                 8.9
      Professional fees                                1.3                 0.6
      Member and merchant marketing expenses           1.6                 3.1
      Depreciation and amortization                    2.0                 2.1
      General and administrative expenses              5.0                 5.0

      Total operating expenses                        26.5                28.5

      Operating income                                 3.3                 1.3

      Other (expense) income, net                     (0.1 )               1.0

      Income before income tax provision               3.2                 2.3
      Income tax provision                             0.8                 0.3

      Net income                                       2.4                 2.0

. . .