##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 WASHINGTON, D.C.
    20549
      Form 10-Q
  þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934.For the quarterly period ended
    March 31, 2006oro

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 333-114210
  TOWN SPORTS INTERNATIONAL
    HOLDINGS, INC.
 (Exact name of Registrant as
    specified in its charter)
  Delaware

20-0640002(State or other Jurisdiction
    of
    Incorporation or Organization)

(I.R.S. Employer
    Identification Number)   888 Seventh Avenue (25th Floor)
 New York, New York 10106
 Telephone:
    (212) 246-6700
 (Address, zip code, and
    telephone number, including
 area code, of registrants
    principal executive office.)
   þ o
  Rule 12b-2).
  o o þ
  Rule 12b-2). o þ




---



##### 



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
  FORM 10-Q
  FOR THE
    QUARTER ENDED March 31, 2006
  INDEX
  PagePART I.
    FINANCIAL INFORMATIONItem 1.  Financial
    Statements (Unaudited)a)  Condensed
    Consolidated Balance Sheets as of December 31, 2005 and
    March 31, 2006


2b)  Condensed
    Consolidated Statements of Operations and Statements of
    Comprehensive Loss for the three months ended March 31,
    2005 and 2006


3c)  Condensed
    Consolidated Statements of Cash Flows for the three months ended
    March 31, 2005 and 2006


4d)  Notes
    to Condensed Consolidated Financial Statements


5Item 2.  Managements
    Discussion and Analysis of Financial Conditions and Results of
    Operations


17Item 3.  Quantitative
    and Qualitative Disclosures About Market Risk


23Item 4.  Controls
    and Procedures


23PART II. OTHER
    INFORMATIONItem 1.  Legal
    Proceedings


23Item 1a.  Risk
    Factors


24Item 2.  Unregistered
    Sales of Equity Securities and Use of Proceeds


24Item 3.  Defaults
    upon Senior Securities


24Item 4.  Submission
    of Matters to a Vote of Security Holders


24Item 5.  Other
    Information


24Item 6.  Exhibits


24SIGNATURESSection 302 certification


24Section 302 certification


24Section 906 certification


24Section 906 certification


24EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATIONEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION   1




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##### Table of Contents



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
  CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
  December 31,


March 31,2005


2006ASSETSCurrent assets:Cash and cash equivalents

$
51,304


$
69,724Accounts receivable (less
    allowance for doubtful accounts of $1,984 and $1,844 as of
    December 31, 2005 and March 31, 2006, respectively)


7,103



7,575Inventory


421



492Prepaid corporate income taxes


4,518



Prepaid expenses and other current
    assets


13,907



12,616Total current assets


77,253



90,407Fixed assets, net


253,131



250,044Goodwill


49,974



49,981Intangible assets, net


741



569Deferred tax asset, net


24,378



26,693Deferred membership costs


11,522



13,743Other assets


16,772



14,561Total assets

$
433,771


$
445,998LIABILITIES AND
    STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt

$
1,267


$
1,189Accounts payable


8,333



5,054Accrued expenses and corporate
    income taxes payable


31,620



29,040Accrued interest


5,267



11,360Deferred revenue


33,028



37,466Total current liabilities


79,515



84,109Long-term debt


409,895



413,788Deferred lease liabilities


48,898



48,906Deferred revenue


2,905



7,955Other liabilities


8,241



7,008Total liabilities


549,454



561,766Commitments and contingencies
    (Note 6)Stockholders deficit:Class A voting common stock,
    $.001 par value; issued and outstanding
    1,309,123 shares at December 31, 2004 and
    March 31, 2006


1



1Paid-in capital


(113,588
)


(114,053
)Unearned compensation


(509
)


Accumulated other comprehensive
    income (currency translation adjustment)


386



392Accumulated deficit


(1,973
)


(2,108
)Total stockholders deficit


(115,683
)


(115,768
)Total liabilities and
    stockholders deficit

$
433,771


$
445,998    2




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##### Table of Contents



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSFor the three months ended March 31, 2005 and 2006
    (All figures $000s)
    (Unaudited) Three Months EndedMarch 31,2005


2006Revenues:Club operations

$
92,830


$
102,923Fees and other


1,016



1,10493,846



104,027Operating expenses:Payroll and related


36,396



40,897Club operating


31,449



34,470General and administrative


6,677



7,861Depreciation and amortization


9,739



10,38684,261



93,614Operating income


9,585



10,413Interest expense


10,119



10,687Interest income


(369
)


(725
)Equity in the earnings of
    investees and rental income


(470
)


(433
)Income before provision for
    corporate income taxes


305



884Provision for corporate income
    taxes


126



1,019Net income (loss)

$
179


$
(135
)STATEMENTS OF COMPREHENSIVE
    LOSSNet income (loss)

$
179


$
(135
)Foreign currency translation
    adjustments


(185
)


6Comprehensive loss

$
(6
)

$
(129
)    3




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##### Table of Contents



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFor the three months ended March 31, 2005 and 2006
    (All figures $000s)
    (Unaudited) Three Months EndedMarch 31,2005


2006Cash flows from operating
    activities:Net income (loss)

$
179


$
(135
)Adjustments to reconcile net
    income (loss) to net cash provided by operating activities:Depreciation and amortization


9,739



10,386Noncash interest expense


3,707



4,126Amortization of debt issuance costs


408



417Noncash rental expense, net of
    noncash rental income


190



(19
)Compensation expense in connection
    with stock options


15



43Net changes in certain operating
    assets and liabilities


13,734



22,331Increase in deferred tax asset


(3,500
)


(2,315
)Increase in deferred membership
    costs


(700
)


(2,221
)Landlord contributions


786



1,610Increase in reserve for
    self-insured liability claims


466



495Other


(173
)


22Total adjustments


24,672



34,875Net cash provided by operating
    activities


24,851



34,740Cash flows from investing
    activities:Capital expenditures


(10,190
)


(15,023
)Net cash used in investing
    activities


(10,190
)


(15,023
)Cash flows from financing
    activities:Change in book overdraft






(986
)Repayments of borrowings


(205
)


(311
)Repurchase of common stock


(184
)


Net cash used in financing
    activities


(389
)


(1,297
)Net increase in cash and cash
    equivalents


14,272



18,420Cash and cash equivalents at
    beginning of period


57,506



51,304Cash and cash equivalents at end
    of period

$
71,778


$
69,724Summary of change in certain
    operating assets and liabilities:Increase in accounts receivable

$
(1,542
)

$
(2,083
)(Increase) decrease in inventory


81



(71
)Decrease in prepaid expenses,
    prepaid income taxes, and other current assets


975



4,887Increase in accounts payable,
    accrued expenses and accrued interest


7,296



10,110Increase in deferred revenue


6,924



9,488Net changes in certain operating
    assets and liabilities

$
13,734


$
22,331    4




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##### Table of Contents



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (All figures $000s)
    (Unaudited)
  1.
    Basis of
    Presentation    Form 10-K.
  2.
    Long-Term
    Debt and Capital Lease Obligations  December 31,


March 31,2005


2006($000s)


($000s)Senior
    Notes 95/8%,
    due 2011

$
255,000


$
255,000Senior Discount Notes 11.0%,
    due 2014


153,077



157,203Notes payable for acquired
    businesses


3,085



2,774411,162



414,977Less, Current portion due within
    one year


1,267



1,189Long-term portion

$
409,895


$
413,788     5 8
 5




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##### Table of Contents



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (All figures $000s)
     3.
    Stock-Based
    Compensation  Share-Based Payment Accounting for Stock-Based
    Compensation Accounting for Stock Issued to
    Employees
     6




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##### Table of Contents



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (All figures $000s)
    Three Months Ended,March 31, 2005($000s)Net loss, as reported

$
179Add: Stock-based compensation
    included in reported net earnings, net of related tax effects


9Less: Stock-based compensation
    expense determined under the
    fair-value-based
    method for all awards, net of related tax effects


(28)Pro forma net earnings

$
160       Weighted-Weighted-


AverageAverage


Remaining


AggregateExercise


Contractual


IntrinsicShares


Price


Term


Value(In thousands)





(In years)


($000s)Outstanding at March 31, 2006


88,366


$
86.26



6.5


$
4,913Vested at March 31, 2006


23,268



104.41



5.8



888Exercisable at March 31, 2006


23,268


$
104.41



5.8


$
888   in-the-money
    4.  Corporate
    Income Taxes
    5.
    Goodwill
    and Other Intangibles     7




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##### Table of Contents



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (All figures $000s)
      Balance as of December 31,
    2005

$
49,974Changes due to foreign currency
    exchange rate fluctuations


7Balance as of March 31, 2006

$
49,981   As of December 31,
    2005Gross Carrying


AccumulatedAcquired Intangible
    Assets

Amount


Amortization


Net Intangibles($000s)Membership lists

$
11,450


$
(10,939
)

$
511Covenants-not-to-compete


1,151



(949
)


202Beneficial lease


223



(195
)


28$
12,824


$
(12,083
)

$
741   As of March 31,
    2006Gross Carrying


AccumulatedAmount


Amortization


Net Intangibles($000s)Membership lists

$
11,450


$
(11,095
)

$
355Covenants-not-to-compete


1,151



(963
)


188Beneficial lease


223



(197
)


26$
12,824


$
(12,255
)

$
569     Aggregate Amortization Expenses
    for the year ended December 31, ($000s)2006

$
5212007


1202008


642009


36$
741       6.
    Commitments
    and Contingencies  Sarah Cruz, et
    ano v. Town Sports International, Inc.,
 8




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##### Table of Contents



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (All figures $000s)
    Carlos Urbina et ano v 26
    Court Street Associates, LLC et al. ,
  7.
    Investments
    in Affiliated Companies    Three Months EndedMarch 31,2005


2006($000s)Revenue

$
889


$
906Income from operations


412



367Net income


391



347   8.
    Subsequent
    Events  Form S-1 (File No. 333-126428)
   9




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##### Table of Contents



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (All figures $000s)
     9.
    Guarantors  5 8
  Rule 3-10d Regulation S-X
 10




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##### Table of Contents



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Condensed
    Consolidating Balance Sheet
    December 31, 2005
    (All figures in $000s)
    (Unaudited)
  Non-Subsidiary


GuarantorTSI Holdings


TSI


Guarantors


Subsidiary


Eliminations


ConsolidatedASSETSCurrent assets:Cash and cash equivalents

$
1



1,359


$
48,682


$
1,262


$



$
51,304Accounts receivable, net






3,664



6,144



133



(2,838
)


7,103Inventory










395



26







421Prepaid corporate income taxes






4,550



(32
)










4,518Inter-company receivable (payable)


1,137



(1,137
)














Prepaid expenses and other current
    assets






5,425



10,195



(1,713
)






13,907Total current assets


1,138



13,861



65,384



(292
)


(2,838
)


77,253Investment in subsidiary


18,941



253,702











(272,643
)


Fixed assets, net






10,114



242,149



868







253,131Goodwill










49,215



759







49,974Intangible assets, net










741











741Deferred tax assets, net


13,560



11,354



(492
)


(44
)






24,378Deferred membership costs






94



11,428











11,522Other assets


3,755



11,833



1,184











16,772Total assets

$
37,394


$
300,958


$
369,609


$
1,291


$
(275,481
)

$
433,771LIABILITIES AND
    STOCKHOLDERS DEFICITCurrent liabilitiesCurrent portion of long-term debt
    and capital lease obligations

$



$



$
1,267


$



$




1,267Accounts payable






(82
)


8,415











8,333Accrued expenses






13,364



17,864



392







31,620Accrued interest






5,264



2,841







(2,838
)


5,267Deferred revenue










32,940



88







33,028Total current liabilities






18,546



63,327



480



(2,838
)


79,515Long-term debt and capital lease
    obligations


153,077



255,000



1,818











409,895Deferred lease liabilities






452



48,446











48,898Deferred revenue










2,905











2,905Other liabilities






8,019



222











8,241Total liabilities


153,077



282,017



116,718



480



(2,838
)


549,454Stockholders deficit


(116,069
)


18,941



252,881



435



(272,257
)


(116,069
)Accumulated other comprehensive
    income


386







10



376



(386
)


386Total stockholders deficit


(115,683
)


18,941



252,891



811



(272,643
)


(115,683
)Total liabilities, redeemable
    preferred stock and Stockholders deficit:

$
37,394


$
300,958


$
369,609


$
1,291


$
(275,481
)

$
433,771  11




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##### Table of Contents



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Condensed
    Consolidated Balance Sheet
    March 31, 2006
    (All figures in $000s)
    (Unaudited)
  Non-Subsidiary


GuarantorTSI Holdings


TSI


Guarantors


Subsidiary


Eliminations


ConsolidatedASSETSCurrent assetsCash and cash equivalents

$



$
536


$
67,877


$
1,311


$



$
69,724Accounts receivable, net






3,095



4,245



235







7,575Inventory










465



27







492Prepaid corporate income taxes






















Inter-company receivable (payable)


1,129



(1,129
)














Prepaid expenses and other current
    assets






5,984



8,212



(1,580
)






12,616Total current assets


1,129



8,486



80,799



(7
)






90,407Investment in subsidiaries


21,222



265,475











(286,697
)


Fixed assets, net






8,972



240,245



827







250,044Goodwill










49,215



766







49,981Intangible assets, net










569











569Deferred tax assets, net


15,418



11,811



(491
)


(45
)






26,693Deferred membership costs






78



13,665











13,743Other assets


3,666



9,719



1,176











14,561Total assets

$
41,435


$
304,541


$
385,178


$
1,541


$
(286,697
)

$
445,998LIABILITIES AND
    STOCKHOLDERS DEFICITCurrent liabilitiesCurrent portion of long-term debt










1,189











1,189Accounts payable






(1,505
)


6,559











5,054Accrued expenses






11,257



17,489



294







29,040Accrued interest






11,357



3











11,360Deferred revenue










37,378



88







37,466Total current liabilities






21,109



62,618



382







84,109Long-term debt


157,203



255,000



1,585











413,788Deferred lease liabilities






412



48,494











48,906Deferred revenue










7,955











7,955Other liabilities






6,798



210











7,008Total liabilities


157,203



283,319



120,862



382







561,766Stockholders deficitCommon stockholders deficit


(116,160
)


21,222



264,306



1,169



(286,697
)


(116,160
)Accumulated other comprehensive
    income


392







10



(10
)






392Total stockholders deficit


(115,768
)


21,222



264,316



1,159



(286,697
)


(115,768
)Total liabilities, redeemable
    preferred stock and stockholders deficit

$
41,435


$
304,541


$
385,178


$
1,541


$
(286,697
)

$
445,998  12




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##### Table of Contents



Condensed
    Consolidating Statement of Operations
    For three months ended March 31, 2005
    (All figures in $000s)
    (Unaudited)
  Non-Subsidiary


GuarantorTSI Holdings


TSI


Guarantors


Subsidiary


Eliminations


ConsolidatedRevenues:Club operations

$



$
12


$
91,542


$
1,276


$



$
92,830Fees and other






146



2,018







(1,148
)


1,016



158



93,560



1,276



(1,148
)


93,846Operating expenses:Payroll and related






5,442



30,479



475







36,396Club operating






346



31,810



301



(1,008
)


31,449General and administrative


13



431



6,264



109



(140
)


6,677Depreciation and amortization






1,137



8,498



104







9,73913



7,356



77,051



989



(1,148
)


84,261Operating income (loss)


(13
)


(7,198
)


16,509



287







9,585Interest expense


3,787



6,333



89







(90
)


10,119Interest income


(1
)


(457
)


(1
)






90



(369
)Equity in the earnings of
    investees and rental income






(268
)


(202
)










(470
)Income (loss) from operations
    before provisionFor corporate income taxes


(3,799
)


(12,806
)


16,623



287







305Provision for corporate income
    taxes


(1,637
)


(5,224
)


6,906



81







126Equity earnings from subsidiaries


2,341



9,923











(12,264
)


Net income (loss)

$
179


$
2,341


$
9,717


$
206


$
(12,264
)

$
179  13




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##### Table of Contents



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Condensed
    Consolidating Statement of Operations
    For three months ended March 31, 2006
    (All figures in $000s)
    (Unaudited)
  Non-Subsidiary


GuarantorTSI Holdings


TSI


Guarantors


Subsidiary


Eliminations


ConsolidatedRevenues:Club operations

$



$



$
101,673


$
1,250


$



$
102,923Fees and other






261



843











1,104



261



102,516



1,250







104,027Operating expenses:Payroll and related






8,043



32,372



482







40,897Club operating






438



33,724



308







34,470General and administrative






1,420



6,302



139







7,861Depreciation and amortization






1,281



9,010



95







10,386



11,182



81,408



1,024







93,614Operating income (loss)






(10,921
)


21,108



226







10,413Interest expense


4,224



5,267



1,196











10,687Interest income






(725
)














(725
)Equity in the earnings on
    investees and rental income






(261
)


(172
)










(433
)Income (loss) from operations
    before provision for corporate income taxes


(4,224
)


(15,202
)


20,084



226







884Provision (benefit) for corporate
    income taxes


(1,858
)


(4,554
)


7,431











1,019Equity earnings from subsidiaries


2,231



12,879











(15,110
)


Net income (loss)

$
(135
)

$
2,231


$
12,653


$
226


$
(15,110
)

$
(135
)  14




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##### Table of Contents



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Condensed
    Consolidating State of Cash Flows
    For three months ended March 31, 2005
    (All figures in $000s)
    (Unaudited)
  Non-Subsidiary


GuarantorTSI Holdings


TSI


Guarantors


Subsidiary


Eliminations


ConsolidatedCash flows from operating
    activities:Net income (loss)

$
179


$
2,341


$
9,717


$
206


$
(12,264
)

$
179Adjustments to reconcile net
    income to net cash provided by operating activities:Depreciation and amortization






1,137



8,498



104







9,739Compensation expense in connection
    with stock options






15















15Noncash rental expense, net of
    noncash rental income






(40
)


230











190Noncash interest expense


3,707



















3,707Amortization of debt issuance costs


80



328















408Changes in operating assets and
    liabilities


(1,624
)


3,336



8,979



(370
)


(1
)


10,320Other


(2,350
)


(9,465
)


22



(179
)


12,265



293Total adjustments


(187
)


(4,689
)


17,729



(445
)


12,264



24,672Net cash provided by (used in)
    operating activities


(8
)


(2,348
)


27,446



(239
)






24,851Net cash (used in) provided by
    investing activities






(468
)


(9,832
)


110







(10,190
)Net cash provided by (used in)
    financing activities


(27
)


(280
)


(82
)










(389
)Net increase (decrease) in cash
    and cash equivalents


(35
)


(3,096
)


17,532



(129
)






14,272Cash and cash equivalents at
    beginning of period


274



3,425



51,327



2,480







57,506Cash and cash equivalents at end
    of period

$
239


$
329


$
68,859


$
2,351


$



$
71,778  15




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##### Table of Contents



TOWN
    SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Condensed
    Consolidating Statement of Cash Flows
    For three months ended March 31, 2006
    (All figures in $000s)
    (Unaudited)
  Non-Subsidiary


GuarantorTSI Holdings


TSI


Guarantors


Subsidiary


Eliminations


ConsolidatedCash flows from operating
    activities:Net income (loss)

$
(135
)

$
2,231


$
12,653


$
226


$
(15,110
)

$
(135
)Adjustments to reconcile net income
    to net cash provided by operating activities:Depreciation and amortization






1,281



9,010



95







10,386Goodwill impairment write-off and
    club closure costs






















Compensation expense in connection
    with stock options






43















43Noncash rental expense, net of
    noncash rental income






(40
)


21











(19
)Noncash interest expense


4,126



















4,126Amortization of debt issuance costs


89



328















417Increase in Insurance Reserve






495















495Landlord Contributions






(5
)


1,615











1,610Changes in operating assets and
    liabilities


8



22,323















22,331Other


(4,089
)


(11,159
)


(4,104
)


(272
)


15,110



(4,514
)Total adjustments


134



13,266



6,542



(177
)


15,110



34,875Net cash provided by operating
    activities


(1
)


15,497



19,195



49







34,740Net cash used in investing
    activities






(15,023
)














(15,023
)Net cash provided by financing
    activities






(1,297
)














(1,297
)Net increase (decrease) in cash and
    cash equivalents


(1
)


(823
)


19,195



49







18,420Cash and cash equivalents at
    beginning of period


1



1,359



48,682



1,262







51,304Cash and cash equivalents at end of
    period

$



$
536


$
67,877


$
1,311


$



$
69,724  16




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Introduction
          
    Providing our members access to an extensive network of
    locations;
    Lower capital investment overall, by locating special
    facilities, such as pools, racquet sports, etc. at selected
    clubs only;
    More cost-effective regional management and control;
    Allocating certain costs, such as advertising, in a focused
    region over multiple locations; and
    Strengthening brand awareness.      
    Our largest sources of revenue are dues and initiation fees paid
    by our members. This comprises 81.7% of our total revenue for
    the three months ended March 31, 2006. We recognize revenue
    from membership dues in the month when the services are
    rendered. Approximately 93% of our members pay their monthly
    dues by Electronic Funds Transfer, while the balance is paid
    annually in advance. We recognize revenue from initiation fees
    over the expected average life of the membership. Prior to
    January 1, 2006 the expected average life of a membership
    was 24 months. Effective January 1, 2006 we have
    revised this estimate to 30 months based on more favorable
    membership attrition trends.
    For the three months ended March 31, 2006, we generated
    11.8% of our revenue from personal training and 5.4% of our
    revenue from other ancillary programs and services consisting of
    programming for children, group fitness training and other
    member activities, as well as sales of miscellaneous sports
    products. 17




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##### Table of Contents



Three MonthsEndedMarch 31,2005


2006Membership dues

$
74,577


$
83,139Initiation fees


3,078



1,932Personal training revenue


10,380



12,267Other ancillary club revenue


4,795



5,585Total club revenue


92,830



102,923Fees and other


1,016



1,104Total revenue

$
93,846


$
104,027           Historical
    Club Growth
    2005


2006Q1


Q2


Q3


Q4


Total


Q1Clubs at beginning of period


137



140



140



140



137



141New clubs opened


3







1



1



5



5Acquired clubs






1



1







2



Clubs closed and merged into new
    clubs






(1
)


(1
)






(2
)


(1
)Club closed for renovation and
    expansion










(1
)






(1
)


140



140



140



141



141



145Number of partly-owned clubs
    included at the end of
    the period(a)


2



2



2



2



2



2     (a)
    
    We include in the club count wholly and partly-owned clubs. In
    addition to the above count, as of December 31, 2005 and
    March 31, 2006 we managed five university-owned clubs in
    which we did not have an equity interest. 18




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##### Table of Contents



Results
    of Operations
    Three MonthsEndedMarch 31,2005


2006Revenue


100.0
%


100.0
%Operating expensesPayroll and related


38.8



39.3Club operating


33.5



33.1General and administrative


7.1



7.6Depreciation and amortization


10.4



10.0Operating income


10.2



10.0Interest expense


10.8



10.3Interest income


(0.4
)


(0.7
)Equity in the earnings of
    investees and rental income


(0.5
)


(0.4
)Income before provision for
    corporate income taxes


0.3



0.8Provision for corporate income
    taxes


0.1



0.9Net income (loss)


0.2



(0.1
)   Three
    Months Ended March 31, 2006 Compared to Three Months Ended
    March 31, 2005
  Revenues.
    Operating Expenses.
    
    During the first quarter of 2006 our Chairman and certain
    executives agreed to severance packages totaling an estimated
    $1.6 million. The total cost of these severance packages
    was recorded in the quarter ended March 31, 2006 while no
    such costs were incurred in the same period of the prior year. 19




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##### Table of Contents




    Payroll costs directly related to our personal training, Group
    Exclusive, and Sports Club for Kids programs increased
    $1.3 million or 18.5%, due to an increase in demand for
    these programs.
    Offsetting these aforementioned increases in the quarter ended
    March 31, 2006 was a decrease in amortization of deferred
    sales related payroll costs. The increase in the estimated
    average-life of our memberships form 24 months to
    30 months resulted in a $1.0 million reduction in
    amortization of deferred sales related payroll costs in the
    first quarter of 2006 compared to the first quarter of 2005.    
    Rent and occupancy expenses increased $2.3 million. Rent
    and occupancy costs at clubs that have opened since
    January 1, 2005, or that are currently under construction,
    increased $1.6 million. Also, during the quarter ended
    March 31, 2006 we closed a club, and merged the membership base
    at this club into one of our newly opened clubs that opened
    nearby. This resulted in a $225,000 lease termination expense.
    The remaining $378,000 increase in rent and occupancy expenses
    relates to the clubs that were open prior to January 1,
    2005.
    Utility costs increased $1.5 million. We saw a $350,000
    increase at our clubs that we opened or acquired in 2005 and
    2006. The balance of the increase is due to an increase in
    utility rates throughout the remainder of our club base.
    These increases in club operating expenses were partially offset
    by a $590,000 decrease in marketing and advertising costs. We
    ran a marketing campaign in the first quarter of 2005 and did
    not schedule a similar program in this first quarter of 2006.      Interest Expense.
  Interest Income.
  Provision for Income Tax.
  Liquidity
    and Capital Resources
    Operating Activities.
 20




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##### Table of Contents



paid-in-full, paid-in-full 30-month paid-in-full
  Investing Activities.
  Financing Activities.
    
    Making it more difficult to satisfy our obligations;
    Increasing our vulnerability to general adverse economic
    conditions;
    Limiting our ability to obtain additional financing to fund
    future working capital, capital expenditures, acquisitions of
    new clubs and other general corporate requirements;
    Requiring cash flow from operations for the annual payment of
    $24.5 million interest on our Senior Notes and reducing our
    ability to use our cash flow to fund working capital, capital
    expenditures, acquisitions of new clubs and general corporate
    requirements; and
    Limiting our flexibility in planning for, or reacting to,
    changes in our business and the industry in which we operate.    5 8
   21




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##### Table of Contents



Payments Due by Period (in
    $000)Less Than








AfterContractual
    Obligations

Total


1 Year


2-3 Years


4-5 Years


5 YearsLong-Term Debt(1)

$
1,126,844


$
25,732


$
50,673


$
95,948


$
954,491Operating Lease Obligations(2)


730,374



62,315



126,524



118,895



422,640Total Contractual Cash Obligations

$
1,857,218


$
88,047


$
177,197


$
214,843


$
1,377,131       (1)
    
    The long-term debt contractual cash obligations include
    principal and interest payment requirements. Interest on our
    95/8% Senior
    Notes amounts to $24.5 million annually.(2)
    
    Operating lease obligations include base rent only. Certain
    leases provide for additional rent based on real estate taxes,
    common area maintenance and defined amounts based on the
    operating results of the lessee.  Subsequent
    Events
  Form S-1 No. 333-126428)
     22




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##### Table of Contents



Forward-Looking
    Statements
  Form 10-Q
  Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk    Form 10-K.
  Item 4.
    Controls
    and Procedures.  Rule 13a-15.
   PART II.  OTHER
    INFORMATION  Item 1.
    Legal
    Proceedings.  Sarah Cruz, et
    ano v. Town Sports International, Inc.
 23




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##### Table of Contents



Carlos Urbina et ano v 26
    Court Street Associates, LLC et al.,
  Item 1a.
    Item 2.
    Unregistered
    Sales of Equity Securities and Use of Proceeds    Item 3.
    Defaults
    Upon Senior Securities.    Item 4.
    Submission
    of Matters to a Vote of Security Holders.    Item 5.
    Other
    Information.    Item 6.
    Exhibits.           24




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##### Table of Contents



SIGNATURES    
     
     By:
    /s/  Robert Giardina   
   25