Steiner Leisure 10Q 2008 Q3 Quarterly report


SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q
(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008
OR
o	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: 0-28972

STEINER LEISURE LIMITED (Exact name of Registrant as Specified in its Charter)


Commonwealth of The Bahamas			98-0164731
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

Suite 104A, Saffrey Square
Nassau, The Bahamas			Not Applicable
(Address of principal executive offices)			(Zip Code)

(242) 356-0006 (Registrant's telephone number, including area code)

Indicate by check4 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 [ ] 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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

On October 28, 2008, the registrant had 15,533,908 common shares, par value (U.S.) $.01 per share, outstanding.

STEINER LEISURE LIMITED AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION			Page No.

ITEM 1.	Unaudited Financial Statements			3

	Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007			3

	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2008 and 2007			4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007			5

	Notes to Condensed Consolidated Financial Statements			7

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			16

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk			30

ITEM 4.	Controls and Procedures			30

PART II. OTHER INFORMATION

ITEM 1A.		Risk Factors		31

ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds		31

ITEM 6.		Exhibits		32

SIGNATURES AND CERTIFICATIONS				33

PART I. - FINANCIAL INFORMATION
Item 1.Unaudited Financial Statements
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
	September 30,			December 31,
	2008			2007
ASSETS		(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	27,620,000		$	30,510,000
Accounts receivable, net		22,640,000			26,408,000
Accounts receivable - students, net		19,743,000			15,998,000
Inventories		28,127,000			33,964,000
Prepaid expenses and other current assets		11,030,000			9,771,000
Total current assets		109,160,000			116,651,000
PROPERTY AND EQUIPMENT, net		60,440,000			65,183,000
GOODWILL		75,027,000			71,829,000
OTHER ASSETS:
Intangible assets, net		6,267,000			5,311,000
Other		9,543,000			13,237,000
Total other assets		15,810,000			18,548,000
Total assets	$	260,437,000		$	272,211,000
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	10,957,000		$	15,149,000
Accrued expenses		30,718,000			31,122,000
Revolving line of credit		--			7,700,000
Current portion of deferred rent		1,082,000			1,079,000
Current portion of deferred tuition revenue		22,007,000			15,568,000
Gift certificate liability		3,143,000			3,424,000
Income taxes payable		2,491,000			2,290,000
Total current liabilities		70,398,000			76,332,000
DEFERRED INCOME TAX LIABILITIES, NET		2,181,000			1,374,000
LONG-TERM DEFERRED RENT		10,203,000			10,943,000
LONG-TERM DEFERRED TUITION REVENUE		1,393,000			587,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred shares, $.0l par value; 10,000,000 shares authorized, none
issued and outstanding		--			--
Common shares, $.0l par value; 100,000,000 shares authorized,
22,590,000 shares issued in 2008 and 22,443,000 shares issued in 2007		226,000			224,000
Additional paid-in capital		127,417,000			119,428,000
Accumulated other comprehensive income		2,691,000			6,721,000
Retained earnings		284,388,000			250,322,000
Treasury shares, at cost, 7,309,000 shares in 2008 and 6,059,000
shares in 2007		(238,460,000	)		(193,720,000	)
Total shareholders' equity		176,262,000			182,975,000
Total liabilities and shareholders' equity	$	260,437,000		$	272,211,000

The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets.

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2008			2007			2008			2007
REVENUES:
Services	$	96,400,000		$	92,682,000		$	276,843,000		$	263,498,000
Products		48,283,000			47,749,000			140,229,000			130,509,000
Total revenues		144,683,000			140,431,000			417,072,000			394,007,000
COST OF REVENUES:
Cost of services		79,079,000			75,269,000			226,514,000			212,253,000
Cost of products		31,240,000			35,185,000			97,199,000			93,901,000
Total cost of revenues		110,319,000			110,454,000			323,713,000			306,154,000
Gross profit		34,364,000			29,977,000			93,359,000			87,853,000
OPERATING EXPENSES:
Administrative		8,667,000			8,332,000			24,485,000			23,841,000
Salary and payroll taxes		10,578,000			9,452,000			31,599,000			28,092,000
Total operating expenses		19,245,000			17,784,000			56,084,000			51,933,000
Income from operations		15,119,000			12,193,000			37,275,000			35,920,000
OTHER INCOME (EXPENSE):
Interest expense		(32,000	)		(132,000	)		(247,000	)		(280,000	)
Other income		103,000			397,000			354,000			1,352,000
Total other income (expense)		71,000			265,000			107,000			1,072,000
Income before provision for income taxes		15,190,000			12,458,000			37,382,000			36,992,000
PROVISION FOR INCOME TAXES		1,398,000			1,085,000			3,316,000			3,278,000
Net income	$	13,792,000		$	11,373,000		$	34,066,000		$	33,714,000
Income per share:
Basic	$	0.91		$	0.69		$	2.20		$	2.00
Diluted	$	0.89		$	0.68		$	2.17		$	1.96

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

	Nine Months Ended
	September 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	34,066,000		$	33,714,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,047,000			9,095,000
Stock-based compensation		6,061,000			5,232,000
Provision for doubtful accounts		1,313,000			1,932,000

(Increase) decrease in:
Accounts receivable		(2,773,000	)		(1,305,000	)
Inventories		4,605,000			(5,197,000	)
Prepaid expenses and other current assets		(1,417,000	)		(2,935,000	)
Other assets		3,719,000			(9,747,000	)
Increase (decrease) in:
Accounts payable		(3,666,000	)		(1,223,000	)
Accrued expenses		(142,000	)		4,031,000
Income taxes payable		1,099,000			305,000
Deferred tuition revenue		4,550,000			1,206,000
Deferred rent		(737,000	)		7,388,000
Gift certificate liability		(281,000	)		(136,000	)
Net cash provided by operating activities		55,444,000			42,360,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(4,404,000	)		(14,480,000	)
Acquisitions, net of cash acquired		(3,633,000	)		(250,000	)
Net cash used in investing activities		(8,037,000	)		(14,730,000	)

(Continued)

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

	Nine Months Ended
	September 30,
	2008			2007
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury shares	$	(44,740,000	)	$	(48,507,000	)
Borrowings on long-term debt		15,000,000			10,000,000
Payments on long-term debt		(22,700,000	)		(10,000,000	)
Proceeds from share option exercises		1,926,000			4,043,000
Debt issuance costs		--			(92,000	)
Net cash used in financing activities		(50,514,000	)		(44,556,000	)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH		217,000			227,000
NET DECREASE, IN CASH
AND CASH EQUIVALENTS		(2,890,000	)		(16,699,000	)
CASH AND CASH EQUIVALENTS,
Beginning of period		30,510,000			38,909,000
CASH AND CASH EQUIVALENTS,
End of period	$	27,620,000		$	22,210,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:

Interest	$	233,000		$	280,000

Income taxes	$	2,305,000		$	3,003,000

The accompanying notes to consolidated financial statements are an integral part of these statements.

STEINER LEISURE LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008
(Unaudited)

(1)	BASIS OF PRESENTATION OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

The accompanying unaudited condensed consolidated financial statements for each period include the condensed consolidated balance sheets, statements of income and cash flows of Steiner Leisure Limited (including its subsidiaries, "Steiner Leisure," the "Company," "we" and "our"). All significant intercompany items and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted pursuant to the SEC's rules and regulations. However, management believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, the unaudit ed condensed consolidated financial statements reflect all material adjustments (which include normal recurring adjustments) necessary to present fairly our unaudited financial position, results of operations and cash flows. The unaudited results of operations for the three and nine months ended September 30, 2008 and cash flows for the nine months ended September 30, 2008 are not necessarily indicative of the results of operations or cash flows that may be expected for the remainder of 2008. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007. The December 31, 2007 Consolidated Balance Sheet included herein was extracted from the December 31, 2007 audited Consolidated Balance Sheet included in our 2007 Annual Report on Form 10-K.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the assessment of the realization of accounts receivable - students, inventories, deferred tax assets, long-lived assets and goodwill and the useful lives of intangible assets and property and equipment.

(2)	ORGANIZATION:

Steiner Leisure is a worldwide provider of spa services. The Company, incorporated in the Bahamas, commenced operations effective November 1995 with the contributions of substantially all of the assets and certain of the liabilities of the Maritime Division (the "Maritime Division") of Steiner Group Limited, subsequently known as STGR Limited ("Steiner Group"), a U.K. company and an affiliate of the Company, and all of the outstanding common stock of Coiffeur Transocean (Overseas), Inc. ("CTO"), a Florida corporation and a wholly-owned subsidiary of Steiner Group. These operations consisted almost entirely of offering spa services and products on cruise ships. The contributions of the net assets of the Maritime Division and CTO were recorded at historical cost in a manner similar to a pooling of interests.

(3)	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

(a)	Inventories

Inventories, consisting principally of beauty products, are stated at the lower of cost (first-in, first-out) or market. Manufactured finished goods include the cost of raw material, labor and overhead. Inventories consist of the following:

		September 30,		December 31,
		2008		2007
Finished goods	$	22,427,000	$	23,397,000
Raw materials		5,700,000		10,567,000
	$	28,127,000	$	33,964,000

(b)	Property and Equipment

We review long-lived assets for impairment whenever events or changes in circumstances indicate, based on estimated future cash flows, that the carrying amount of these assets may not be fully recoverable. In certain cases, the determination of fair value is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of the assets in question.

(c)

Goodwill

Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test. The impairment loss is the amount, if any, by which the implied fair value of goodwill is less than the carrying or book value. On each of January 1, 2008 and 2007, the Company performed the required annual impairment test and determined there was no impairment. The Company believes that, as of September 30, 2008, no indicators of impairment were present which would warrant an interim impairment test. We have five operating segments, (1) Maritime, (2) Resorts, (3) Product Distribution, (4) Training, and (5) Schools. The Maritime, Resorts, Product Distribution and Schools operating segments have associated goodwill and each of them has been determined to be a reporting unit under paragraph 30 of SFAS 142 and Topic D-101 of the Financial Accounting Standards Board Emergin g Issues Task Force.

(d)	Income Taxes

The Company files a consolidated income tax return for its United States subsidiaries. In addition, the Company's foreign subsidiaries file income tax returns in their respective countries of incorporation, where required. The Company follows SFAS 109, "Accounting for Income Taxes." SFAS 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. SFAS 109 permits the recognition of deferred tax assets. Deferred income tax provisions and benefits are based on the changes to the asset or liability from period to period. We believe that a large percentage of our shipboard income is foreign-source income, not effectively connected to a business we conduct in the United States and, therefore, not subject to United States income taxation.

(e)	Translation of Foreign Currencies

Assets and liabilities of foreign subsidiaries are translated at the rate of exchange in effect at the balance sheet date; equity and other items at historical rates; income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments are reflected in the accumulated other comprehensive income in the condensed consolidated balance sheets. Foreign currency gains and losses resulting from transactions, including intercompany transactions, are included in the condensed consolidated statements of income. The transaction gains (losses), which are reflected in Administrative expenses, were approximately ($1,155,000) and $320,000 for the three months ended September 30, 2008 and 2007, respectively, and approximately ($840,000) and $444,000 for the nine months ended September 30, 2008 and 2007, respectively. The transaction gains (losses) which are reflected in Cost of products were approximately $2,598,000 and ($488,000) for the three months ended September 30, 2008 and 2007, respectively, and approximately $2,648,000 and ($965,000) for the nine months ended September 30, 2008 and 2007, respectively.

(f)	Earnings Per Share

Basic earnings per share is computed by dividing the net income available to common shareholders by the weighted average number of outstanding common shares. The calculation of diluted earnings per share is similar to basic earnings per share, except that the denominator includes dilutive common share equivalents such as share options and restricted shares. A reconciliation between basic and diluted earnings per share is as follows:

		Three Months Ended September 30,					Nine Months Ended September 30,
		2008			2007		2008			2007

Net income	$	13,792,000		$	11,373,000	$	34,066,000		$	33,714,000
Income allocable to holders of Steiner Education Group, Inc. options		(76,000	)		- --		(64,000	)		(37,000	)
Net income for diluted earnings per share	$	13,716,000		$	11,373,000	$	34,002,000		$	33,677,000

Weighted average shares outstanding used in calculating basic earnings per share		15,211,000			16,519,000		15,451,000			16,818,000
Dilutive common share equivalents		208,000			318,000		198,000			364,000
Weighted average common and common share equivalents used in calculating diluted earnings per share		15,419,000			16,837,000		15,649,000			17,182,000

Income per common share:
Basic	$	0.91		$	0.69	$	2.20		$	2.00

Diluted	$	0.89		$	0.68	$	2.17		$	1.96

Options and restricted shares outstanding which are not included in the calculation of diluted earnings per share because their impact is anti- dilutive		184,000			172,000		227,000			16,000

The impact of the Steiner Education Group, Inc. options was $76,000 for the three months ended September 30, 2008 and $64,000 and $37,000 for the nine months ended September 30, 2008 and 2007, respectively. The impact was anti-dilutive for the three months ended September 30, 2007.

The Company issued 99,000 and 93,000 of its common shares upon the exercise of share options during the three months ended September 30, 2008 and 2007, respectively, and issued 128,000 and 134,000 common shares upon the exercise of share options during the nine months ended September 30, 2008 and 2007, respectively.

(g)	Stock-Based Compensation

No share options were granted during the three months ended September 30, 2008 and 2007. The Company granted approximately 19,000 and 16,000 restricted shares during the nine months ended September 30, 2008 and 2007, respectively. No other stock-based compensation was granted during the three and nine months ended September 30, 2008 and 2007, respectively.

(h)	Advertising Costs

Substantially all of our advertising costs are charged to expense as incurred, except costs which result in tangible assets, such as brochures, which are recorded as prepaid expenses and charged to expense as consumed. Advertising costs were approximately $3,651,000 and $3,730,000 for the three months ended September 30, 2008 and 2007, respectively, and approximately $11,075,000 and $10,711,000 for the nine months ended September 30, 2008 and 2007, respectively. At September 30, 2008 and December 31, 2007, the amounts of advertising costs included in prepaid expenses were not material.

(i)	Recent Accounting Pronouncements

In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a formal framework for measuring fair value and expands disclosure requirements with respect to fair value measurements. SFAS 157 applies prospectively to fair value measurements performed after the required effective dates as follows: on January 1, 2008, the standard applied to the measurements of fair values of financial instruments and recurring fair value measurements of non-financial assets and liabilities; on January 1, 2009, the standard will apply to non-recurring measurements of non-financial assets and liabilities such as our measurement of potential impairments of goodwill, other intangibles and other long-lived assets. On January 1, 2008, we adopted the provisions of SFAS 157 for our measurement of fair value of financial instruments and recurring fair value measurements of non-financial assets and liabilities. These pro visions did not have a material impact on our Consolidated Financial Statements. We do not expect the adoption of the remaining provisions of SFAS 157 to have a material impact on our Consolidated Financial Statements.

In February 2007, FASB issued SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement 115" ("SFAS 159"). SFAS 159 became effective for us on January 1, 2008. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent report date. On January 1, 2008, we adopted SFAS 159. At adoption we did not elect to apply the fair value option to any eligible items and, accordingly, the adoption of the standard did not have an impact on our Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 requires that a noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated financial statements. It also calls for consistency in the manner of reporting changes in the parent's ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. SFAS 160 is effective for us beginning in 2009. We are currently evaluating the impact SFAS 160 may have on our Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141R broadens the guidance of SFAS 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations. SFAS 141R expands on required disclosures to improve the statement users' abilities to evaluate the nature and financial effects of business combinations. SFAS 141R will impact our accounting for business combinations completed beginning January 1, 2009.

(j)	Revenue Recognition

Tuition revenue and revenue related to certain nonrefundable fees and charges at our massage and beauty schools are recognized monthly on a straight-line basis over the term of the course of study. At the time a student begins attending a school, a liability (unearned tuition) is recorded for all academic services to be provided and a tuition receivable is recorded for the portion of the tuition not paid up front in cash. Revenue related to sales of program materials, books and supplies are, generally, recognized when the program materials, books and supplies are delivered. We include the revenue related to sales of program materials, books and supplies in the Services Revenue financial statement caption in our Consolidated Statements of Income. If a student withdraws from one of our schools prior to the completion of the academic term, we refund the portion of the tuition already paid that, pursuant to our refund policy and applicable federal and state law and accr editing agency standards, we are not entitled to retain.

(4)	ACQUISITION:

On August 4, 2008, we completed the acquisition of the assets of the Connecticut Center for Massage Therapy, Inc. ("CCMT") which operated a post-secondary massage therapy school with a total of three campuses located in Connecticut. We acquired CCMT to expand our Schools segment and to assist in its future growth. The purchase price for CCMT was approximately $4.3 million in cash, plus the post-closing payment described below. The results of operations of CCMT are included in our results of operations for the period subsequent to August 4, 2008. This acquisition is not significant and, as a result, no pro forma information is required to be presented in this report.

In accordance with SFAS No. 141, "Business Combinations," we applied the purchase method of accounting to record this transaction. The preliminary purchase price allocation for the acquisition was as follows:

Accounts receivable - students	$	1,813,000
Inventories		79,000
Other current assets		51,000
Property and equipment		41,000
Goodwill and intangibles		4,531,000
Other assets		28,000
Accounts payable and accrued expenses		(215,000	)
Deferred tuition revenue		(2,695,000	)
Cash used in acquisition, net of cash acquired	$	3,633,000

Subsequent to August 4, 2008, we paid the previous owner of CCMT approximately $112,000 related to the finalization of a post-closing working capital adjustment. This amount was recorded as an increase to goodwill as of September 30, 2008.

The intangible assets of CCMT that we acquired are as follows:

	At August 4, 2008
	Life		Value
Rights of CCMT under the U.S. Department of Education Title IV Program		Indefinite	$	870,000
Trade name		Indefinite		430,000
Non-compete		4		13,000
Website		3		20,000
			$	1,333,000

The fair values of the Title IV rights, non-compete agreements and website were based on a discounted cash flow method; the fair value of the trade name was based on the relief from royalty method.

(5)	CONTINGENCIES:

In connection with the sales of the Company's day spa assets to third parties, the Company remains liable under certain leases for those day spas in the event third party lease assignees fail to pay rent under such leases. The total amount that the Company remains liable for under such assigned leases, if the assignees fail to make the required payments, was approximately $0.8 million as of September 30, 2008.

(6)	ACCRUED EXPENSES:

Accrued expenses consists of the following:

		September 30,		December 31,
		2008		2007

Operative commissions	$	3,509,000	$	4,085,000
Minimum cruise line commissions		6,824,000		8,224,000
Payroll and bonuses		8,276,000		5,723,000
Rent		902,000		834,000
Spa build-outs		784,000		2,559,000
Other		10,423,000		9,697,000
Total	$	30,718,000	$	31,122,000

(7)	LONG-TERM DEBT:

In July 2001, we entered into a credit agreement with a syndicate of banks that provided for a term loan of $45 million and a revolving facility of up to $10 million. Borrowings under the credit agreement bear interest primarily at London Interbank Offered Rate ("LIBOR") - based rates plus a spread that is dependent upon our financial performance. Borrowings under the term loans were used to fund our July 2001 acquisitions of land-based spas and under the revolving facility were used for working capital needs. We have repaid both of these credits. On June 30, 2005, we entered into an amended and restated credit agreement with one of the banks in the original syndicate. The terms and conditions of the new agreement are substantially the same as the former agreement, except that there was no term loan component and the aggregate amount available for borrowing under the revolving line of credit was increased from $10 million to $20 million and the maturity date of the revolving facility was extended two years to July 2, 2007. Effective June 29, 2006, we entered into a second amended and restated credit agreement with that bank, which increased the aggregate amount available for borrowing under the revolving line of credit from $20 million to $30 million. Effective June 28, 2007, we entered into a third amended and restated credit agreement which extended the maturity date of the revolving facility three years to July 2, 2010. During the three months ended March 31, 2008, we borrowed $15.0 million under the revolving facility to purchase treasury shares and repay prior borrowings. The $15.0 million was repaid during the three months ended June 30, 2008. As of September 30, 2008, there was $30.0 million available under the revolving facility. The credit agreement contains customary affirmative, negative and financial covenants, including limitations on dividends, capital expenditures and funded debt, and requirements to maintain prescribed interest expense and fixed charge coverage rati os. As of September 30, 2008, we were in compliance with these financial covenants. At September 30, 2008, the interest rate under the revolving credit facility was 4.1%.

(8)	COMPREHENSIVE INCOME:

We follow SFAS 130, "Reporting Comprehensive Income," which establishes standards for reporting and disclosure of comprehensive income and its components in financial statements. The components of Steiner Leisure's comprehensive income are as follows:

		Three Months Ended September 30,					Nine Months Ended September 30,
		2008			2007		2008			2007

Net income	$	13,792,000		$	11,373,000	$	34,066,000		$	33,714,000
Foreign currency translation adjustments, net of taxes		(4,090,000	)		800,000		(4,030,000	)		2,123,000
Comprehensive income	$	9,702,000		$	12,173,000	$	30,036,000		$	35,837,000

(9)	SHAREHOLDERS' EQUITY:

In July 2007, our board of directors approved the purchase of an additional 1,500,000 shares in the open market or other transactions under our previously approved share repurchase plan. In February 2008, our Board of Directors approved a new share repurchase plan under which up to $100.0 million of common shares can be purchased, and terminated the prior plan. During the nine months ended September 30, 2008, we purchased approximately 1,250,000 shares for approximately $44.7 million. During the nine months ended September 30, 2007, we purchased approximately 1,115,000 shares for approximately $48.5 million.

(10)	SEGMENT INFORMATION:

We follow SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." Our operating segments are aggregated into reportable business segments based upon similar economic characteristics, products, services, customers and delivery methods. Additionally, the operating segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by our chief executive officer in determining how to allocate the Company's resources and evaluate performance.

We operate in three reportable segments: (1) Spa Operations, which provides spa services onboard cruise ships and at resort hotels; (2) Products, which sells a variety of high quality beauty products to third parties; and (3) Schools, which offers programs in massage therapy and skin care. Amounts included in "Other" include various corporate items such as unallocated overhead and intercompany transactions.

Information about our segments is as follows:

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007

Revenues:
Spa Operations	$	111,598,000		$	112,408,000		$	324,478,000		$	313,852,000
Products		25,474,000			26,524,000			74,323,000			69,111,000
Schools		13,684,000			11,751,000			36,504,000			34,908,000
Other		(6,073,000	)		(10,252,000	)		(18,233,000	)		(23,864,000	)
Total	$	144,683,000		$	140,431,000		$	417,072,000		$	394,007,000
Income from Operations:
Spa Operations	$	8,103,000		$	11,084,000		$	27,382,000		$	30,574,000
Products		2,030,000			1,382,000			3,984,000			4,642,000
Schools		1,516,000			165,000			2,543,000			1,761,000
Other		3,470,000			(438,000	)		3,366,000			(1,057,000	)
Total	$	15,119,000		$	12,193,000		$	37,275,000		$	35,920,000


		September 30,			December 31,
		2008			2007
Identifiable Assets:
Spa Operations	$	158,074,000		$	167,201,000
Products		89,719,000			89,852,000
Schools		77,378,000			75,123,000
Other		(64,734,000	)		(59,965,000	)
Total	$	260,437,000		$	272,211,000

Included in Spa Operations, Products and Schools is goodwill of approximately $32.6 million, $0.2 million and $42.2 million, respectively, as of September 30, 2008 and $32.6 million, $0.2 million and $39.0 million, respectively, as of December 31, 2007.

(11)	GEOGRAPHIC INFORMATION:

The basis for determining the geographic information below is based on the country in which we operate. We are not able to identify the country of origin for the customers to which revenues from our cruise ship operations relate. Geographic information is as follows:

		Three Months Ended September 30,				Nine Months Ended September 30,
		2008		2007		2008		2007

Revenues:
United States	$	24,763,000	$	26,438,000	$	78,368,000	$	79,239,000
United Kingdom		12,754,000		10,914,000		37,934,000		29,808,000
Not connected to a country		96,502,000		92,035,000		267,379,000		253,168,000
Other		10,664,000		11,044,000		33,391,000		31,792,000
Total	$	144,683,000	$	140,431,000	$	417,072,000	$	394,007,000

		September 30,		December 31,
		2008		2007
Property and Equipment, net:
United States	$	25,891,000	$	29,426,000
United Kingdom		5,239,000		5,771,000
Not connected to a country		1,645,000		1,693,000
Other		27,665,000		28,293,000
Total	$	60,440,000	$	65,183,000

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Steiner Leisure Limited is a leading worldwide provider of spa services. We sell our services and products to cruise passengers and at resort spas and day spas primarily in the United States, the Caribbean, the Pacific, Asia and Mexico. Payments to cruise lines, resort spa owners and day spa landlords are based on a percentage of our revenues and, in certain cases, a minimum annual rental or a combination of both. Our revenues are generated principally from our cruise ship operations. Accordingly, our success and our growth are dependent to a significant extent on the success and growth of the travel and leisure industry in general, and on the cruise industry in particular. Our resort spas are dependent on the resort hotel industry for their success. These industries are subject to significant risks that could affect our results of operations.

A significant factor in our financial results is the amounts we are required to pay under our agreements with the cruise lines and resorts. Certain cruise line agreements provide for increases in percentages of revenues and other amounts payable by us over the terms of those agreements. These payments may also be increased under new agreements with cruise lines and resort venue operators that replace expiring agreements. In general, we have experienced increases in these payments as a percentage of revenues upon entering into new agreements with cruise lines.

Another factor that can adversely affect our financial results is regional economic conditions. The overall weakness in the U.S. (where a significant portion of our shipboard and land-based spa customers reside) and other world economies, including increased unemployment, and the problems in the credit and capital markets, have created a challenging environment for the cruise and resort industries upon which we rely to a significant extent, as well as for our retail beauty products sales. The impact on consumers of high fuel costs (which softened somewhat in the third quarter) has added to this turmoil. These conditions have impacted consumer confidence and placed considerable negative pressure on discretionary consumer spending, including spending on cruise and resort vacations and our services and products. As a consequence, our results for the third quarter were adversely affected.

High fuel costs also increase our product delivery and employee travel costs.

If the current weak economic environment continues for an extended period of time or worsens, spending on cruise and resort vacations and on beauty products would likely continue to be adversely affected. This could materially, adversely affect our business, financial condition and results of operations.

Other factors also can adversely affect our financial results. The U.S. Dollar has been weak in recent years against the U.K. Pound Sterling and the Euro. This weakness affected our results of operations because we pay for the administration of recruitment and training of our shipboard personnel and the manufacturing of raw materials and of our products in U.K. Pounds Sterling and Euros. The U.S. Dollar has strengthened significantly in recent months; favorably affecting our results, however, to the extent that the U.K. Pound Sterling or the Euro again becomes stronger against the U.S. Dollar, our results of operations and financial condition could be adversely affected.

Weather also can impact our results. The multiple hurricanes that hit the Southern United States and other regions in the second half of each of 2004 and 2005 caused cancellation or disruption of certain cruises and the closure of certain of our resort spas and campuses of our massage and beauty schools, which had adverse effects on us. In addition, the strong tsunami that hit various Asian regions in December 2004 resulted in damage to, and the closing of, most of our operations in the Maldives during much of 2005. In 2006, we closed two campuses of the Utah College of Massage Therapy, Inc. ("UCMT") for several days due to severe snow conditions. In addition, an increasing percentage of cruise passengers who use our services are repeat customers of ours. These repeat customers are less likely to purchase our products than new customers.

Historically, a significant portion of our operations has been conducted on ships through entities that are not subject to income taxation in the United States or other jurisdictions. To the extent that our non-shipboard income increases as a percentage of our overall income, the percentage of our overall income that will be subject to tax would increase.

We develop and sell a variety of high quality beauty products under our Elemis and La Therapie brands. We also sell products of third parties. An increasing amount of revenues have come from our sales of products through third party retail outlets, our web sites, mail order and other channels. However, as our product sales grow, continued increases in the rate of such growth are more difficult to attain.

Revenues from our massage and beauty schools, which consist almost entirely of student tuition payments, are derived to a significant extent from the proceeds of loans issued under the U.S. Department of Education (the "DOE") Title IV program and, accordingly, we must comply with a number of regulatory requirements in order to maintain the eligibility of our students and prospective students for loans under this program.

Some of our students also need other funding sources to pay for all or a portion of their tuition at our schools. It has become more difficult for students to obtain such non-Title IV funding, without which some existing and prospective students would be unable to attend our schools. This could have a material adverse effect on the results of operations and financial condition of our schools.

We offer payment plans to help students pay that portion of their education expense not covered by financial aid programs, including plans under which balances are unsecured and not guaranteed. Losses related to unpaid student balances could have a material adverse effect on the results of operations and financial condition of our schools.

Key Performance Indicators

Spa Operations. A measure of performance we have used in connection with our periodic financial disclosure relating to our cruise line operations is that of revenue per staff per day.In using that measure, we have differentiated between our revenue per staff per day on ships with large spas and other ships we serve. Our revenue per staff per day has been affected by the increasing requirements of cruise lines that we place additional non-revenue producing staff on ships with large spas to help maintain a high quality guest experience. We also utilize, as a measure of performance for our cruise line operations, our average revenue per week. We use these measures of performance because they assist us in determining the productivity of our staff, which we believe is a critical element of our operations.With respect to our resort spas, we measure our performance primarily through average weekly revenue over applicable periods of time.

Schools. With respect to our massage and beauty schools, we measure performance primarily by the number of new student enrollments and the rate of retention of our students. A new student enrollment occurs each time a new student commences classes at one of our schools.

Products.With respect to sales of our products, other than on cruise ships and at our resort and day spas, we measure performance by revenues.

Growth

We seek to grow our business by attempting to obtain contracts for new cruise ships brought into service by our existing cruise line customers and for existing and new ships of other cruise lines, seeking new venues for our resort spas, developing new products and services, seeking additional channels for the distribution of our retail products and seeking to increase the student enrollments at our post-secondary massage and beauty schools. We also consider growth, among other things,through appropriate strategic transactions, including acquisitions and joint ventures.

Critical Accounting Policies

We have identified the policies outlined below as critical to our business operations and an understanding of our results of operations. This discussion is not intended to be a comprehensive description of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management's judgment in their application. The impact on our business operations and any associated risks related to these policies is discussed under results of operations, below, where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, please see Note 2 in the Notes to the Consolidated Financial Statements in Item 15 of our Annual Report on Form 10-K for 2007 filed with the Securities and Exchange Commission. Note that our preparation of this report on Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Cost of revenues includes:

cost of services, including an allocable portion of wages paid to shipboard employees and wages paid directly to land-based spa employees, payments to cruise lines and land-based spa venue owners and other staff-related shipboard expenses, spa facilities depreciation, as well as, with respect to our schools, directly attributable campus costs such as rent, advertising and employee wages; and

cost of products, including an allocable portion of wages paid to shipboard employees, payments to cruise lines and land-based spa venue owners and other staff-related shipboard expenses, as well as costs associated with development, manufacturing and distribution of products.

Cost of revenues may be affected by, among other things, sales mix, production levels, exchange rates, changes in supplier prices and discounts, purchasing and manufacturing efficiencies, tariffs, duties and freight and inventory costs. Certain cruise line and land-based spa agreements provide for increases in the percentages of services and products revenues and/or, as the case may be, the amount of minimum annual payments over the terms of those agreements. These payments may also be increased under new agreements with cruise lines and resort spa and day spa venue owners that replace expiring agreements.

Cost of products includes the cost of products sold through our various methods of distribution. To a lesser extent, cost of products also includes the cost of products consumed in rendering services. This amount is not a material component of the cost of services rendered and would not be practicable to identify separately. It also includes the effects of changes in foreign currency exchange rates.

Operating expenses include administrative expenses, salary and payroll taxes. In addition, operating expenses include amortization of certain intangibles relating to our acquisitions of resort spas in 2001 and UCMT and CCMT in April 2006 and August 4, 2008, respectively.

Revenue Recognition

We do not have critical accounting policies with respect to revenue recognition other than with respect to our massage therapy and beauty schools.Tuition revenue and revenue related to certain nonrefundable fees and charges at our massage and beauty schools are recognized monthly on a straight-line basis over the term of the course of study. At the time a student begins attending a school, a liability (unearned tuition) is recorded for all academic services to be provided and a tuition receivable is recorded for the portion of the tuition not paid up front in cash. Revenue related to sales of program materials, books and supplies are, generally, recognized when the program materials, books and supplies are delivered. We include the revenue related to sales of program materials, books and supplies in the Services Revenue financial statement caption in our Consolidated Statement of Income. If a student withdraws from one of our schools prior to the completion of the academ ic term, we refund the portion of the tuition already paid that, pursuant to our refund policy and applicable federal and state law and accrediting agency standards, we are not entitled to retain.

Allowance for Doubtful Accounts

We do not have critical accounting policies with respect to allowance for doubtful accounts other than with respect to our massage therapy and beauty schools.We extend unsecured credit to our students for tuition and fees and we record a receivable for the tuition and fees earned in excess of the payment received from or on behalf of a student. We record an allowance for doubtful accounts with respect to accounts receivable using historical collection experience. We review the historical collection experience, consider other facts and circumstances, and adjust the calculation to record an allowance for doubtful accounts as appropriate. If our current collection trends were to differ significantly from our historic collection experience, however, we would make a corresponding adjustment to our allowance. We write off the accounts receivable due from former students when we conclude that collection is not probable.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets in question. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. For certain properties, leasehold improvements are amortized over lease terms, which include renewal periods that may be obtained at our option and that are considered significant to the continuation of our operations and to the existence of leasehold improvements, the value of which would be impaired by our discontinuing use of the leased property. We perform ongoing evaluations of the estimated useful lives of our property and equipment for depreciation purposes. The estimated useful lives are determined and continually evaluated based on the period over which services are expected to be rendered by the asset, industry practice and asset maintenance policies. Maintenance and repa ir items are expensed as incurred.

Goodwill and Intangibles

Pursuant to SFAS 142, goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test. The impairment loss is the amount, if any, by which the implied fair value of goodwill is less than the carrying value. As of September 30, 2008, we had goodwill of $75.0 million and unamortized intangibles of $6.3 million. As of January 1, 2008, we performed the required annual impairment test and determined there was no impairment of goodwill. The Company believes that, as of September 30, 2008, no indicators of impairment were present which would warrant an interim impairment test.

Accounting for Income Taxes

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current income tax exposure together with an assessment of temporary differences resulting from differing treatment of items for tax purposes and accounting purposes, respectively. These differences result in deferred income tax assets and liabilities which are included in our Consolidated Balance Sheets. We must then assess the likelihood that our deferred income tax assets will be recovered from future taxable income and, to the extent that we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in our Consolidated Statement of Income.

Significant management judgment is required in determining our provision for income taxes, our deferred income tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of approximately $29.9 million as of September 30, 2008, due to uncertainties related to our ability to utilize certain of our deferred income tax assets, primarily consisting of net operating losses carried forward, before they expire. The valuation allowance is based on our estimates of taxable income and the period over which our deferred income tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could impact our results of operations and financial condition.

Recent Accounting Pronouncements

In September 2006, FASB issued SFAS 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a formal framework for measuring fair value and expands disclosure requirements with respect to fair value measurements. SFAS 157 applies prospectively to fair value measurements performed after the required effective dates as follows: on January 1, 2008, the standard applied to the measurements of fair values of financial instruments and recurring fair value measurements of non-financial assets and liabilities; on January 1, 2009, the standard will apply to non-recurring measurements of non-financial assets and liabilities such as our measurement of potential impairments of goodwill, other intangibles and other long-lived assets. On January 1, 2008, we adopted the provisions of SFAS 157 for our measurement of fair value of financial instruments and recurring fair value measurements of non-financial assets and liabilities. These provisions did not have a material impact on our Consolidated Financial Statements. We do not expect the adoption of the remaining provisions of SFAS 157 to have a material impact on our Consolidated Financial Statements.

In February 2007, FASB issued SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 became effective for us on January 1, 2008. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent report date. On January 1, 2008, we adopted SFAS 159. At adoption we did not elect to apply the fair value option to any eligible items and, accordingly, the adoption of the standard did not have an impact on our Consolidated Financial Statements.

In December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 requires that a noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated financial statements. It also calls for consistency in the manner of reporting changes in the parent's ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. SFAS 160 is effective for us beginning in 2009. We are currently evaluating the impact SFAS 160 may have on our Consolidated Financial Statements.

Results of Operations

The following table sets forth, for the periods indicated, certain selected income statement data expressed as a percentage of revenues:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007

Revenues:
Services	66.6	%	66.0	%	66.4	%	66.9	%
Products	33.4		34.0		33.6		33.1
Total revenues	100.0		100.0		100.0		100.0
Cost of revenues:
Cost of services	54.7		53.6		54.3		53.9
Cost of products	21.6		25.1		23.3		23.8
Total cost of revenues	76.3		78.7		77.6		77.7
Gross profit	23.7		21.3		22.4		22.3
Operating expenses:
Administrative	6.0		5.9		5.9		6.1
Salary and payroll taxes	7.3		6.7		7.6		7.1
Total operating expense	13.3		12.6		13.5		13.2
Income from operations	10.4		8.7		8.9		9.1
Other income (expense):
Interest expense	--		(0.1	)	--		(0.1	)
Other income	0.1		0.3		0.1		0.4
Total other income (expense)	0.1		0.2		0.1		0.3
Income before provision for income taxes	10.5		8.9		9.0		9.4
Provision for income taxes	1.0		0.8		0.8		0.8
Net income	9.5	%	8.1	%	8.2	%	8.6	%

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

REVENUES

Revenues of our reportable segments for the three months ended September 30, 2008 and 2007, respectively, were as follows:

		Three Months Ended September 30,					% Change
Revenue:		2008			2007
Spa Operations Segment	$	111,598,000		$	112,408,000		(0.7%)
Products Segment		25,474,000			26,524,000		(4.0%)
Schools Segment		13,684,000			11,751,000		16.4%
Other		(6,073,000	)		(10,252,000	)	N/A
Total	$	144,683,000		$	140,431,000		3.0%

Total revenues increased approximately 3.0%, or $4.3 million, to $144.7 million in the third quarter of 2008 from $140.4 million in the third quarter of 2007. Of this increase, $3.7 million was attributable to an increase in services revenues and $0.6 million was attributable to an increase in products revenues.

Spa Operations Segment Revenues.Spa Operations segment revenues decreased approximately 0.7%, or $0.8 million, to $111.6 million in the third quarter of 2008 from $112.4 million in the third quarter of 2007. Average weekly revenues for our resorts decreased 2.1% to $25,338 in the third quarter of 2008 from $25,880 in the third quarter of 2007. We had an average of 2,132 shipboard staff members in service in the third quarter of 2008, compared to an average of 2,021 shipboard staff members in service in the third quarter of 2007. Revenues per shipboard staff per day decreased by 3.9% to $484 in the third quarter of 2008 from $503 in the third quarter of 2007. Average weekly revenues for our shipboard spas decreased by 1.0% to $54,822 in the third quarter of 2008 from $55,213 in the third quarter of 2007. The decrease in revenues and the key performance indicators referenced above was primarily attributable to a softening of the economy worldwide, resulting in reduced spending by consumers at our spas.

Products Segment Revenues.Products segment revenues decreased approximately 4.0%, or $1.0 million to $25.5 million in the third quarter of 2008 from $26.5 million in the third quarter of 2007. Excluding intercompany sales, product segment revenues increased approximately 17.0%, from $16.9 million in the third quarter of 2007 to $19.8 million in the third quarter of 2008. This increase was primarily attributable to increased unit sales.

Schools Segment Revenues.Schools segment revenues increased approximately 16.4%, or $1.9 million, to $13.7 million in the third quarter of 2008 from $11.8 million in the third quarter of 2007. The increase in revenues was primarily attributable to increased enrollments, increased student populations and the purchase of CCMT.

COST OF SERVICES

Cost of services increased $3.8 million to $79.1 million in the third quarter of 2008 from $75.3 million in the third quarter of 2007. Cost of services as a percentage of services revenues increased to 82.0% in the third quarter of 2008 from 81.2% in 2007. This increase was primarily attributable to increases in commissions allocable to services on cruise ships covered by agreements that provide for increases in commissions in the third quarter of 2008 compared to the third quarter of 2007.

COST OF PRODUCTS

Cost of products decreased $4.0 million to $31.2 million in the third quarter of 2008 from $35.2 million in the third quarter of 2007. Cost of products as a percentage of products revenue decreased to 64.7% in the third quarter of 2008 from 73.7% in the third quarter of 2007. This decrease was primarily attributable to a $2.6 million foreign exchange gain resulting from the strengthening of the U.S. Dollar against the U.K. Pound Sterling relating to intercompany inventory purchases and an increase in sales of higher margin products.

OPERATING EXPENSES

Operating expenses increased $1.4 million to $19.2 million in the third quarter of 2008 from $17.8 million in the third quarter of 2007. Operating expenses as a percentage of revenues increased to 13.3% in the third quarter of 2008 from 12.6% in the third quarter of 2007. This increase was primarily attributable to a $1.2 million foreign exchange loss resulting from the strengthening of the U.S. Dollar against the U.K. Pound Sterling and the Euro, as well as to annual increases in salary and payroll offset by increased cost controls.

INCOME FROM OPERATIONS

Income from operations of our reportable segments for the three months ended September 30, 2008 and 2007, was as follows:

		For the Three Months Ended September 30,				% Change
Income from Operations:		2008		2007
Spa Operations Segment	$	8,103,000	$	11,084,000		(26.9%)
Products Segment		2,030,000		1,382,000		46.9%
Schools Segment		1,516,000		165,000		818.8%
Other		3,470,000		(438,000	)	N/A
Total	$	15,119,000	$	12,193,000		24.0%

The decrease in operating income in the Spa Operations segment was primarily attributable to more services performed with lower retail revenue attachment. The increase in operating income in the Products segment was primarily attributable to an increase in sales through various parts of our product distribution channels. The increase in the operating income in the Schools segment was attributable to increased enrollments, increased student populations and the purchase of CCMT. The increase in Other is primarily attributable to the gain resulting from the strengthening of the U.S. Dollar against the U.K. Pound Sterling and the Euro.

OTHER INCOME (EXPENSE)

Other income (expense) decreased $0.2 million to $0.1 million in the third quarter of 2008 from $0.3 million in the third quarter of 2007. This decrease was primarily attributable to a reduction in interest income due to lower average cash balances.

PROVISION FOR INCOME TAXES

Provision for income taxes increased $0.3 million to $1.4 million in the third quarter of 2008 from $1.1 million in the third quarter of 2007. Provision for income taxes increased to an overall effective rate of 9.2% in the third quarter of 2008 from 8.7% in the third quarter of 2007. The increase was primarily due to the income earned in jurisdictions that tax our income representing a higher percentage of the total income earned in the third quarter of 2008 than such income represented in the third quarter of 2007.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

REVENUES

Revenues of our reportable segments for the nine months ended September 30, 2008 and 2007, respectively, were as follows:

		Nine Months Ended September 30,					% Change
Revenue:		2008			2007
Spa Operations Segment	$	324,478,000		$	313,852,000		3.4%
Products Segment		74,323,000			69,111,000		7.5%
Schools Segment		36,504,000			34,908,000		4.6%
Other		(18,233,000	)		(23,864,000	)	N/A
Total	$	417,072,000		$	394,007,000		5.9%

Total revenues increased approximately 5.9%, or $23.1 million, to $417.1 million in the nine months ended September 30, 2008 from $394.0 million in the nine months ended September 30, 2007. Of this increase, $13.4 million was attributable to an increase in services revenues and $9.7 million was attributable to an increase in products revenues.

Spa Operations Segment Revenues.Spa Operations segment revenues increased approximately 3.4%, or $10.6 million, to $324.5 million in the nine months ended September 30, 2008 from $313.9 million in the nine months ended September 30, 2007. The increase in revenues was primarily attributable to an average of two additional large spa ships in service in the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 which was partially offset by a softening of the economy worldwide resulting in reduced spending by consumers at our spas. Average weekly revenues for our resorts increased 5.2% to $27,553 in the nine months ended September 30, 2008 from $26,191 in the nine months ended September 30, 2007 due to increased staff productivity. We had an average of 2,057 shipboard staff members in service in the nine months ended September 30, 2008 compared to an average of 1,976 shipboard staff members in service in the nine months ended September 30, 2007. Revenues per shipboard staff per day decreased by 1.0% to $474 in the nine months ended September 30, 2008 from $477 in the nine months ended September 30, 2007, primarily due to additional non-revenue producing staff on ships with large spas. Average weekly revenues for our shipboard spas increased by 2.4% to $53,320 in the nine months ended September 30, 2008 from $52,058 in the nine months ended September 30, 2007, primarily due to increased staff productivity.

Products Segment Revenues.Products segment revenues increased approximately 7.5%, or $5.2 million to $74.3 million in the nine months ended September 30, 2008 from $69.1 million in the nine months ended September 30, 2007. The 2008 amount includes $5.2 million related to travel kits sold to British Airways to further market and brand our products. These sales result in no gross profit to us. Excluding the sales to British Airways and intercompany sales product segment revenues increased approximately 12.6% from $46.1 million in the third quarter of 2007 to $51.9 million in the third quarter of 2008. This increase was primarily attributable to increased unit sales.

Schools Segment Revenues.Schools segment revenues increased approximately 4.6%, or $1.6 million to $36.5 million in the nine months ended September 30, 2008 from $34.9 million in the nine months ended September 30, 2007. The increase in revenues was primarily attributable to increased enrollments, increased student populations and the purchase of CCMT.

COST OF SERVICES

Cost of services increased $14.2 million to $226.5 million in the nine months ended September 30, 2008 from $212.3 million in the nine months ended September 30, 2007. Cost of services as a percentage of services revenues increased to 81.8% in the nine months ended September 30, 2008 from 80.6% in 2007. This increase was primarily attributable to increases in commissions allocable to services on cruise ships covered by agreements that provide for increases in commissions in the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007.

COST OF PRODUCTS

Cost of products increased $3.3 million to $97.2 million in the nine months ended September 30, 2008 from $93.9 million in the nine months ended September 30, 2007. Cost of products as a percentage of products revenue decreased to 69.3% in the nine months ended September 30, 2008 from 71.9% in the nine months ended September 30, 2007. This decrease was primarily attributable to a $2.6 million foreign exchange gain resulting from the strengthening of the U.S. Dollar against the U.K. Pound Sterling relating to intercompany inventory purchases and an increase in sales of higher margin products.

OPERATING EXPENSES

Operating expenses increased $4.2 million to $56.1 million in the nine months ended September 30, 2008 from $51.9 million in the nine months ended September 30, 2007. Operating expenses as a percentage of revenues increased to 13.5% in the nine months ended September 30, 2008 from 13.2% in the nine months ended September 30, 2007. This increase was primarily attributable to annual increases in salary and payroll, a $1.2 million foreign exchange loss resulting from the strengthening of the U.S. Dollar against the U.K. Pound Sterling and the Euro offset by increased cost controls.

OPERATING INCOME

Operating income of our reportable segments for the nine months ended September 30, 2008 and 2007, was as follows:

		For the Nine Months Ended September 30,				% Change
Operating income:		2008		2007
Spa Operations Segment	$	27,382,000	$	30,574,000		(10.4%)
Products Segment		3,984,000		4,642,000		(14.2%)
Schools Segment		2,543,000		1,761,000		44.4%
Other		3,366,000		(1,057,000	)	N/A
Total	$	37,275,000	$	35,920,000		3.8%

The decrease in operating income in the Spa Operations segment was primarily attributable to more services performed with lower retail revenue attachment. The decrease in operating income in the Products segment was primarily attributable to an increase in costs incurred in connection with our retail sales activities expansion. The increase in the operating income in the Schools segment was attributable to increased enrollments, increased student populations and the purchase of CCMT. The increase in Other is primarily attributable to the gain resulting from the strengthening of the U.S. Dollar against the U.K. Pound Sterling and the Euro.

OTHER INCOME (EXPENSE)

Other income (expense) decreased $1.0 million to income of $0.1 million in the nine months ended September 30, 2008 from income of $1.1 million in the nine months ended September 30, 2007. This decrease was primarily attributable to a reduction in interest income due to lower average cash balances.

PROVISION FOR INCOME TAXES

Provision for income taxes was $3.3 million in the nine months ended September 30, 2008 and 2007, respectively. Provision for income taxes overall effective rate was 8.9% in both the nine months ended September 30, 2008 and September 30, 2007, respectively.

Liquidity and Capital Resources

Sources and Uses of Cash

During the nine months ended September 30, 2008, net cash provided by operating activities was approximately $55.4 million compared with $42.4 million for the nine months ended September 30, 2007. This increase was attributable to changes in working capital items.

During the nine months ended September 30, 2008, cash used in investing activities was $8.0 million compared with $14.7 million for the nine months ended September 30, 2007. The decrease was primarily attributable to our incurring less capital expenditures to build out resort spa facilities during the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. The decrease was partially offset by the expenditures incurred in connection with the acquisition of CCMT.

During the nine months ended September 30, 2008, cash used in financing activities was $50.5 million compared with $44.6 million for the nine months ended September 30, 2007. This increase in cash used in financing activities was primarily attributable to increased payments on our revolving line of credit offset by a $3.8 million reduction in the purchase of treasury shares during the nine months ended September 30, 2008.

We had working capital of approximately $38.8 million at September 30, 2008, compared to working capital of approximately $40.3 million at December 31, 2007.

In the fourth quarter of 2002, we decided to dispose of, or otherwise close, 17 of the 18 day spas we then operated due to their underperformance. The remaining day spa from that group is located at a hotel and now operates as part of our resort spa operations. As of April 15, 2003, all of those 17 day spas had been closed or otherwise disposed of pursuant to agreements with landlords and/or, in some cases, agreements with third party acquirers of the spas' assets, including the leases. Some of these transactions involved our paying to those landlords amounts representing various portions of the remaining terms of the leases involved. In the transactions involving transfers of spa assets and assignments of the leases, we typically were required to make payments to those acquirers in consideration of their assuming both the lease in question and certain gift certificate liabilities related to the spas in question. The lease assignments to third parties generally do not include a release from the landlords of the spas in question and, accordingly, to the extent that these third parties fail to pay rent under the leases, we remain liable for that rent. We would, in those instances, have a cause of action for such rental amounts against those third parties. We remain liable for approximately $0.8 million as of September 30, 2008 under these assigned leases to the extent the assignees fail to make their rental payments.

In July 2007, our board of directors approved the purchase of an additional 1,500,000 shares in the open market or other transactions under our previously approved share repurchase plan. In February 2008, our Board of Directors approved a new share repurchase plan under which up to $100.0 million of commons shares can be purchased and terminated the prior plan. During the nine months ended September 30, 2008, we purchased approximately 1,250,000 shares for approximately $44.7 million. During the nine months ended September 30, 2007, we purchased approximately 1,115,000 shares for approximately $48.5 million. We cannot provide assurance as to the number of additional shares, if any, that will be purchased under our share repurchase plan in the future.

On August 4, 2008, we completed the acquisition of the assets of CCMT, which operated a post-secondary massage therapy school with three campuses located in Connecticut. Those schools offer similar massage programs to those offered by the massage and beauty schools we currently operate. The purchase price for the assets of CCMT was $4.3 million. While the acquisition transaction for those schools has been closed, post closing review by the DOE (the CCMT schools, like the schools we currently operate are eligible to receive Title IV student loan funding) and other educational agencies remains pending. We funded this acquisition with our cash on hand and working capital.

Financing Activities

In July 2001, we entered into a credit agreement with a syndicate of banks that provided for a term loan of $45 million and a revolving credit facility of up to $10 million. We repaid all outstanding amounts due under our former term loan and the revolving credit facility in 2004. On June 30, 2005, we entered into an amended and restated credit agreement with one of the banks in the original syndicate. The terms and conditions of the new agreement are substantially the same as the former agreement, except that there is no term loan component and the aggregate amount available for borrowing under the revolving line of credit was increased from $10 million to $20 million and the maturity date of the revolving facility was extended two years to July 2, 2007. In 2006, the revolving line of credit was increased to $30 million. Effective June 28, 2007, we entered into a second amended agreement which extended the maturity date of the revolving facility by three years to July 2, 2010. Borrowings under the credit agreement bear interest primarily at London Interbank Offered Rate ("LIBOR")-based rates plus a spread that is dependent upon our financial performance. During the three months ended March 31, 2008, we borrowed $15.0 million under the revolving facility to purchase treasury shares and repay prior borrowings. The $15.0 million was repaid during the three months ended June 30, 2008. As of September 30, 2008 there was $30.0 million available under the revolving facility.

The credit agreement contains customary affirmative, negative and financial covenants, including limitations on dividends, capital expenditures and funded debt, and requirements to maintain prescribed interest expense and fixed charge coverage ratios. As of September 30, 2008, we were in compliance with these covenants. Other limitations on capital expenditures, or on other operational matters, could apply in the future under the credit agreement. As of September 30, 2008, the interest rate was 4.1%.

We believe that our working capital and cash generated from our operations is sufficient to satisfy the cash required to operate our current business for at least the next 12 months.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Inflation and Economic Conditions

We do not believe that inflation has had a material adverse effect on our revenues or results of operations. However, public demand for activities, including cruises, is influenced by general economic conditions, including inflation. The current economic weakness in North America, where a substantial number of cruise passengers reside, could have a material adverse effect on the cruise industry upon which we are dependent. Similarly, the current economic weakness in the United Kingdom, where a significant amount of our product sales take place, has had an adverse effect on our product sales in that country. Periods of high inflation also could adversely affect consumer spending on our services and products, particularly in North America and the United Kingdom.

Cautionary Statement Regarding Forward-Looking Statements

From time to time, including in this report, we may issue "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements reflect our current views about future events and are subject to known and unknown risks, uncertainties and other factors which may cause our actual results to differ materially from those expressed or implied by such forward-looking statements.

Such forward-looking statements include, but are not limited to, statements regarding:

our future financial results;
our proposed activities pursuant to agreements with cruise lines or resort spa operators;
our ability to secure renewals of agreements with cruise lines upon their expiration;
scheduled introductions of new ships by cruise lines;
our future resort spa activities, including scheduled openings of additional resort spas;
our ability to generate sufficient cash flow from operations;
the extent of the taxability of our income;
the effects of acquisitions and new projects;
our market sensitive financial instruments;
our ability to increase sales of our products and to increase the retail distribution of our products; and
the profitability of one or more of our business segments.

Factors that could cause actual results to differ materially from those expressed or implied by our forward-looking statements include, but are not limited to, the following:

the current economic weakness in North America and elsewhere that has effected the number of customers on cruise ships and at resorts and that could otherwise reduce consumer demand for our products and services;

our dependence on cruise line concession agreements of specified terms that are, in some cases, terminable by cruise lines with limited or no advance notice under certain circumstances;

our dependence on the cruise industry and the resort industry and our being subject to the risks of those industries, including operation of facilities in regions with histories of economic and/or political instability, or which are susceptible to significant adverse weather conditions, including the regions affected by the December 2004 tsunami in Asia and the 2005 hurricanes in the southern United States, and the risk of maritime accidents or disasters, passenger disappearances and piracy or terrorist attacks at sea or elsewhere and the adverse publicity associated with the foregoing;

increasing numbers of days during cruises when ships are in port, which results in lower revenues to us;

reductions in revenues during periods of cruise ship dry-dockings and major renovations or closures of resorts where we operate spas;

the continuing effect on the travel and leisure segment of the international political climate, terrorist attacks and armed hostilities in various regions in recent years and the threat of future terrorist attacks and armed hostilities;

increased fuel costs contributing to the current economic weakness and increasing our costs of product delivery and employee travel expenses;

our dependence on a limited number of companies in the cruise industry and further consolidation of companies in the cruise industry;

our obligation to make minimum payments to certain cruise lines and owners of the locations of our resort spas, irrespective of the revenues received by us from customers;

increases in our payment obligations in connection with renewals of expiring cruise line agreements and resort spa agreements, or the securing of new agreements;

our dependence on the continued viability of the cruise lines we serve and the resorts where we operate our spas;

delays in new ship introductions, a reduction in new, large spa ship introductions and unscheduled withdrawals from service of ships we serve;

the effects of outbreaks of illnesses or the perceived risk of such outbreaks on our resort spa operations in Asia and in other locations, on our cruise ship operations and on travel generally;

the ability of the resort operators under certain of our resort spa agreements to terminate those agreements under certain circumstances, such as occurred effective October 1, 2006, when the operator of the One&Only Palmilla resort in Los Cabos, Mexico exercised its option to buy out the remaining term of our agreement at this resort;

our dependence, with respect to our resort spas, on airline service to our venue locations, which is beyond our control and subject to change;

our dependence for success on our ability to recruit and retain qualified personnel;

our dependence on a single product manufacturer;

changes in the taxation of our Bahamas subsidiaries and increased amounts of our income being subject to taxation;

competitive conditions in each of our business segments, including competition from cruise lines and resorts that may desire to provide spa services themselves and competition from third party providers of shipboard and land-based spa services;

our need to expand our services to keep up with consumer demands and to grow our business and the risk of increased expenses and liabilities potentially associated with such expansion;

our need to find additional sources of revenues;

risks relating to our non-U.S. operations;

possible labor unrest or changes in economics based on collective bargaining activities;

uncertainties beyond our control that could affect our ability to timely and cost-effectively construct and open resort spa facilities;

major renovations or changes in room rates, guest demographics or guest occupancy at the resorts we serve that could adversely affect the volume of our business at resort spas;

insufficiency of resources precluding our taking advantage of new spa or other opportunities;

our potential need to seek additional financing and the risk that such financing may not be available on satisfactory terms or at all;

risks relating to the performance of our massage and beauty schools which are, among other things, subject to significant government regulation and the need to assure that our programs keep pace with industry demands;

obligations under, and possible changes in, laws and government regulations applicable to us and the industries we serve;

product liability or other claims against us by customers of our products or services;

restrictions imposed on us as a result of our credit facility;

foreign currency exchange rate risk;

the risk that we will be unable to successfully integrate operations that we may acquire in the future with our then existing businesses;

the risk that announced retail rollouts of our product sales at specified venues will not occur;

risks relating to the growth of our business through acquisitions; and

risks relating to unauthorized access to our computer networks.

These risks and other risks are detailed in our Annual Report on Form 10-K for 2007, filed with the Securities and Exchange Commission. That report contains important cautionary statements and a discussion of many of the factors that could materially affect the accuracy of our forward-looking statements and/or adversely affect our business, results of operations and financial condition.

Forward-looking statements should not be relied upon as predictions of actual results. Subject to any continuing obligations under applicable law, we expressly disclaim any obligation to disseminate, after the date of this report, any updates or revisions to any such forward-looking statements to reflect any change in expectations or events, conditions or circumstances on which any such statements are based.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of September 30, 2008, we had a revolving line of credit in place, though we had no outstanding borrowings under that credit facility or otherwise. Our major market risk exposure is changing interest rates. Our policy is to manage interest rate risk through the use of a combination of fixed and floating rate debt and interest rate derivatives based upon market conditions. Our objective in managing the exposure to interest rate changes is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we have used interest rate swaps to manage net exposure to interest rate changes to our borrowings. These swaps are typically entered into with a group of financial institutions with investment grade credit ratings, thereby reducing the risk of credit loss.

While our revenues and expenses are primarily represented by U.S. Dollars, they also are represented by various other currencies, primarily the U.K. Pound Sterling. Accordingly, we face the risk of fluctuations in non-U.S. currencies compared to U.S. Dollars. We manage this currency risk by monitoring fluctuations in foreign currencies and, when exchange rates are appropriate, purchasing amounts of those foreign currencies. A hypothetical 10% change in the exchange rate of the U.K. Pound Sterling to the U.S. Dollar as of September 30, 2008 would change the Company's results of operations by approximately $1.8 million.

Item 4. Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2008.

There has been no change over internal control over financial reporting during the three months ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. - OTHER INFORMATION

Item 1A.

Risk Factors

There were no material changes during the first, second and third quarters of 2008 in the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about purchases by Steiner Leisure of our common shares during the three month period ended September 30, 2008:

	Total Number of Shares Purchased(1)		Average Price Paid per Share(2)	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)
July 1, 2008 through July 31, 2008	--	$	--	--	$	85,114,250
August 1, 2008 through August 31, 2008	449,175		36.70	448,293		68,663,947
September 1, 2008 through September 30, 2008	154,555		36.88	154,555		62,963,205
Total	603,730	$	36.74	602,848	$	62,963,205

(1) As of February 27, 2008, the existing repurchase plan, which authorized the repurchase of a specified number of shares, was replaced with a plan that authorizes the purchase of up to $100 million of the Company's common shares in the open market or other transactions.

During the three months ended September 30, 2008, in connection with employee-related transactions outside of our share repurchase program, 882 shares were surrendered by our employees in connection with the vesting of restricted shares. We used those surrendered shares to satisfy payment of employee federal income tax withholding obligations upon the vesting of such restricted shares.

(2) Includes commissions paid.

Item 6.	Exhibits

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Section 1350 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Section 1350 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.

Dated: November 7, 2008

	STEINER LEISURE LIMITED
	(Registrant)


	/s/ Clive E. Warshaw
	Clive E. Warshaw Chairman of the Board


	/s/ Leonard I. Fluxman
	Leonard I. Fluxman President and Chief Executive Officer (principal executive officer)


	/s/ Robert H. Lazar
	Robert H. Lazar Chief Accounting Officer (principal accounting officer)

Exhibit Index

Exhibit Number		Description

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Section 1350 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Section 1350 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Good

Steiner Leisure (STNR) 10-Q2008 Q3 Quarterly report

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