##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

FORM 10-Q



|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30,
2004

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 333-114210

TOWN SPORTS INTERNATIONAL HOLDINGS,
INC.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|New York                                                           |  | 20-0640002                                 
|(State or other Jurisdiction of
    Incorporation or organization) |  | (I.R.S. Employer
    Identification Number)

888 Seventh Avenue

New York, New York 10106


Telephone: (212) 246-6700


(Address, zip code, and telephone number,
including


area code, of registrants principal executive
office.)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 and 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.

o
Yes                              x
No

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).

o
Yes                              x
No

As of August 16, 2004 date there were
1,312,689 shares of Class A Common Stock of the
Company outstanding.



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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES

FORM 10-Q


FOR THE QUARTER ENDED JUNE 30,
2004


INDEX

|                                  |                                                                                                        |                                                                                                            |    |    |   | 
|--------------------------------- | ------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------- | -- | -- | - | 
|                                  |                                                                                                        | Page                                                                                                      
|                                  |                                                                                                        |                                                                                                           
|PART I. FINANCIAL
    INFORMATION |                                                                                                        |                                                                                                            |    |   
|                                  | Item 1. Financial
    Statements (Unaudited)                                                           |                                                                                                            |    |    |  
|                                  |                                                                                                        | a) Condensed
    Consolidated Balance Sheets as of December 31, 2003 and
    June 30, 2004                 |    |    | 2 | 
|                                  |                                                                                                        | b) Condensed
    Consolidated Statements of Operations for the six months ended
    June 30, 2003 and 2004 |    |    | 3 | 
|                                  |                                                                                                        | c) Condensed
    Consolidated Statements of Cash Flows for six months ended
    June 30, 2003 and 2004     |    |    | 4 | 
|                                  |                                                                                                        | d) Notes to Condensed
    Consolidated Financial Statements                                                |    |    | 5 | 
|                                  | Item 2. Managements
    Discussion and Analysis of Financial Conditions and Results of
    Operations |                                                                                                            |    | 10 |  
|                                  | Item 3. Quantitative
    and Qualitative Disclosures About Market Risk                                 |                                                                                                            |    | 19 |  
|                                  | Item 4. Controls
    and Procedures                                                                    |                                                                                                            |    | 19 |  
|PART II. OTHER
    INFORMATION    |                                                                                                        |                                                                                                            |    |   
|                                  | Item 1. Legal
    Proceedings                                                                          |                                                                                                            |    | 20 |  
|                                  | Item 2. Change in
    Securities, Use of Proceeds and Issuer Purchases of Equity
    Securities        |                                                                                                            |    | 20 |  
|                                  | Item 3. Defaults
    upon Senior Securities                                                            |                                                                                                            |    | 20 |  
|                                  | Item 4. Submission
    of Matters to a Vote of Security Holders                                        |                                                                                                            |    | 20 |  
|                                  | Item 5. Other
    Information                                                                          |                                                                                                            |    | 20 |  
|                                  | Item 6. Exhibits
    and Reports on Form-8-K                                                           |                                                                                                            |    | 20 |  
|SIGNATURES                        |                                                                                                        |                                                                                                            | 21 |   
|                                  |                                                                                                        | Section 302
    certification                                                                              |    |    |   | 
|                                  |                                                                                                        | Section 302
    certification                                                                              |    |    |   | 
|                                  |                                                                                                        | Section 302
    certification                                                                              |    |    |   | 
|                                  |                                                                                                        | Section 906
    certification                                                                              |    |    |   | 
|                                  |                                                                                                        | Section 906
    certification                                                                              |    |    |   | 
|CERTIFICATION                    
|CERTIFICATION                    
|CERTIFICATION                    
|CERTIFICATION                    
|CERTIFICATION                    



1



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE
SHEETS

December 31, 2003 and June 30,
2004


(All figures $000, except share and per
share data)


(Unaudited)


|                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             |         |          |         |   |         |          |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------- | ------- | -------- | ------- | - | ------- | -------- | -------- | -
|                                                                                                                                                                                                                         |                                                                                                                                                                                | December 31,                                                                |         | June 30,
|                                                                                                                                                                                                                         |                                                                                                                                                                                | 2003                                                                        |         | 2004    
|                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             |         |         
|Assets                                                                                                                                                                                                                  
|Current assets:                                                                                                                                                                                                          |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|                                                                                                                                                                                                                         | Cash and cash equivalents                                                                                                                                                      |                                                                             | $       | 40,802   |         |   | $       | 57,241   |         
|                                                                                                                                                                                                                         | Accounts receivable, (less allowance for doubtful
    accounts of $822 and $1,056 as of December 31, 2003 and
    June 30, 2004, respectively)                                 |                                                                             |         | 1,469    |         |   |         | 3,406    |         
|                                                                                                                                                                                                                         | Inventory                                                                                                                                                                      |                                                                             |         | 750      |         |   |         | 711      |         
|                                                                                                                                                                                                                         | Prepaid corporate income taxes                                                                                                                                                 |                                                                             |         | 4,062    |         |   |         | 7,218    |         
|                                                                                                                                                                                                                         | Prepaid expenses and other current assets                                                                                                                                      |                                                                             |         | 5,322    |         |   |         | 4,081    |         
|                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|                                                                                                                                                                                                                         |                                                                                                                                                                                | Total current assets                                                        |         |          | 52,405  |   |         |          | 72,657   |  
|Fixed assets, net                                                                                                                                                                                                        |                                                                                                                                                                                |                                                                             | 223,599 |          |         |   | 218,493 |         
|Goodwill                                                                                                                                                                                                                 |                                                                                                                                                                                |                                                                             | 45,864  |          |         |   | 45,062  |         
|Intangible assets, net                                                                                                                                                                                                   |                                                                                                                                                                                |                                                                             | 630     |          |         |   | 535     |         
|Deferred tax asset, net                                                                                                                                                                                                  |                                                                                                                                                                                |                                                                             | 16,771  |          |         |   | 15,749  |         
|Deferred membership costs                                                                                                                                                                                                |                                                                                                                                                                                |                                                                             | 13,038  |          |         |   | 12,325  |         
|Other assets                                                                                                                                                                                                             |                                                                                                                                                                                |                                                                             | 9,892   |          |         |   | 13,626  |         
|                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|                                                                                                                                                                                                                         |                                                                                                                                                                                | Total assets                                                                |         | $        | 362,199 |   |         | $        | 378,447  |  
|                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|Liabilities, Redeemable Preferred Stock and
    Stockholders Deficit                                                                                                                                                   
|Current liabilities:                                                                                                                                                                                                     |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|                                                                                                                                                                                                                         | Current portion of long-term debt and capital
    lease obligations                                                                                                            |                                                                             | $       | 3,486    |         |   | $       | 1,969    |         
|                                                                                                                                                                                                                         | Accounts payable                                                                                                                                                               |                                                                             |         | 5,379    |         |   |         | 3,648    |         
|                                                                                                                                                                                                                         | Accrued expenses                                                                                                                                                               |                                                                             |         | 20,849   |         |   |         | 20,525   |         
|                                                                                                                                                                                                                         | Accrued interest                                                                                                                                                               |                                                                             |         | 5,157    |         |   |         | 5,229    |         
|                                                                                                                                                                                                                         | Deferred revenue                                                                                                                                                               |                                                                             |         | 26,621   |         |   |         | 34,723   |         
|                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|                                                                                                                                                                                                                         |                                                                                                                                                                                | Total current liabilities                                                   |         |          | 61,492  |   |         |          | 66,094   |  
|Long-term debt and capital lease obligations                                                                                                                                                                             |                                                                                                                                                                                |                                                                             | 258,391 |          |         |   | 388,152 |         
|Deferred lease liabilities                                                                                                                                                                                               |                                                                                                                                                                                |                                                                             | 25,856  |          |         |   | 26,692  |         
|Deferred revenue                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             | 3,002   |          |         |   | 2,977   |         
|Other liabilities                                                                                                                                                                                                        |                                                                                                                                                                                |                                                                             | 7,862   |          |         |   | 9,603   |         
|                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|                                                                                                                                                                                                                         |                                                                                                                                                                                | Total liabilities                                                           |         |          | 356,603 |   |         |          | 493,518  |  
|                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|Commitments and contingencies (Note 7)                                                                                                                                                                                   |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|Redeemable preferred stock:                                                                                                                                                                                              |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|Series A redeemable preferred stock,
    $1.00 par value; at liquidation value; authorized
    200,000 shares, 153,637 and no shares issued and
    outstanding at December 31, 2003 and June 30, 2004,
    respectively |                                                                                                                                                                                |                                                                             | 39,890  |          |         |   |        |         
|                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             | 39,890  |          |         |   |        |         
|                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|Stockholders deficit:                                                                                                                                                                                                   |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|                                                                                                                                                                                                                         | Series B preferred stock, $1.00 par
    value; at liquidation value; 109,540 and no shares issued and
    outstanding at December 31, 2003 and June 30, 2004,
    respectively |                                                                             |         | 9,961    |         |   |         |         |         
|                                                                                                                                                                                                                         | Class A voting common stock, $.001 par
    value; issued and outstanding 1,176,043 and
    1,312,689 shares at December 31, 2003 and
    June 30, 2004, respectively           |                                                                             |         | 1        |         |   |         | 1        |         
|                                                                                                                                                                                                                         | Paid-in capital                                                                                                                                                                |                                                                             |         | (45,627  | )       |   |         | (114,080 | )       
|                                                                                                                                                                                                                         | Unearned compensation                                                                                                                                                          |                                                                             |         | (172     | )       |   |         | (152     | )       
|                                                                                                                                                                                                                         | Accumulated other comprehensive income (currency
    translation adjustment)                                                                                                   |                                                                             |         | 596      |         |   |         | 565      |         
|                                                                                                                                                                                                                         | Retained earnings                                                                                                                                                              |                                                                             |         | 947      |         |   |         | (1,405   | )       
|                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|                                                                                                                                                                                                                         |                                                                                                                                                                                | Total stockholders deficit                                                 |         |          | (34,294 | ) |         |          | (115,071 | )
|                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         
|                                                                                                                                                                                                                         |                                                                                                                                                                                | Total liabilities, redeemable preferred stock and
    stockholders deficit |         | $        | 362,199 |   |         | $        | 378,447  |  
|                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                             |         |          |         |   |         |         

See notes to the condensed consolidated financial
statements.

2



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


For the three and six months ended
June 30, 2003 and 2004


All figures $000


(Unaudited)


|                                               |                                                                       |                    |        |                  |   |      |        |        |  |   |         |         |   |   |         |         |  
|---------------------------------------------- | --------------------------------------------------------------------- | ------------------ | ------ | ---------------- | - | ---- | ------ | ------ |  | - | ------- | ------- | - | - | ------- | ------- | -
|                                               |                                                                       |                    |        |                 
|                                               |                                                                       | Three months ended |        | Six months ended
|                                               |                                                                       | June 30,           |        | June 30,        
|                                               |                                                                       |                    |        |                 
|                                               |                                                                       | 2003               |        | 2004             |   | 2003 |        | 2004  
|                                               |                                                                       |                    |        |                  |   |      |        |       
|Revenues:                                      |                                                                       |                    |        |                  |   |      |        |        |  |   |         |         |   |   |         |        
|                                               | Club operations                                                       |                    | $      | 85,093           |   |      | $      | 87,617 |  |   | $       | 169,783 |   |   | $       | 172,921 |  
|                                               | Fees and other                                                        |                    |        | 964              |   |      |        | 1,236  |  |   |         | 3,177   |   |   |         | 2,397   |  
|                                               |                                                                       |                    |        |                  |   |      |        |        |  |   |         |         |   |   |         |        
|                                               |                                                                       |                    | 86,057 |                  |   |      | 88,853 |        |  |   | 172,960 |         |   |   | 175,318 |        
|                                               |                                                                       |                    |        |                  |   |      |        |        |  |   |         |         |   |   |         |        
|                                              
|Operating Expenses:                            |                                                                       |                    |        |                  |   |      |        |        |  |   |         |         |   |   |         |        
|                                               | Payroll and related                                                   |                    |        | 33,206           |   |      |        | 34,186 |  |   |         | 65,976  |   |   |         | 70,444  |  
|                                               | Club operating                                                        |                    |        | 26,691           |   |      |        | 28,919 |  |   |         | 53,354  |   |   |         | 56,817  |  
|                                               | General and administrative                                            |                    |        | 5,219            |   |      |        | 5,898  |  |   |         | 10,240  |   |   |         | 12,124  |  
|                                               | Depreciation and amortization                                         |                    |        | 8,454            |   |      |        | 9,303  |  |   |         | 16,753  |   |   |         | 18,420  |  
|                                               | Goodwill impairment                                                   |                    |        |                 |   |      |        |       |  |   |         |        |   |   |         | 2,002   |  
|                                               |                                                                       |                    |        |                  |   |      |        |        |  |   |         |         |   |   |         |        
|                                               |                                                                       |                    | 73,570 |                  |   |      | 78,306 |        |  |   | 146,323 |         |   |   | 159,807 |        
|                                               |                                                                       |                    |        |                  |   |      |        |        |  |   |         |         |   |   |         |        
|                                              
|                                               | Operating Income                                                      |                    |        | 12,487           |   |      |        | 10,547 |  |   |         | 26,637  |   |   |         | 15,511  |  
|Loss on extinguishment of debt                 |                                                                       |                    | 7,773  |                  |   |      |       |        |  |   | 7,773   |         |   |   |        |        
|Interest expense                               |                                                                       |                    | 6,114  |                  |   |      | 10,051 |        |  |   | 10,347  |         |   |   | 18,863  |        
|Interest income                                |                                                                       |                    | (195   | )                |   |      | (116   | )      |  |   | (218    | )       |   |   | (289    | )      
|                                               |                                                                       |                    |        |                  |   |      |        |        |  |   |         |         |   |   |         |        
|                                               | Income (loss) before provision (benefit) for
    corporate income tax |                    |        | (1,205           | ) |      |        | 612    |  |   |         | 8,735   |   |   |         | (3,063  | )
|Provision (benefit) for corporate income taxes |                                                                       |                    | (84    | )                |   |      | 122    |        |  |   | 4,015   |         |   |   | (1,495  | )      
|                                               |                                                                       |                    |        |                  |   |      |        |        |  |   |         |         |   |   |         |        
|                                               | Net income (loss)                                                     |                    |        | (1,121           | ) |      |        | 490    |  |   |         | 4,720   |   |   |         | (1,568  | )
|Accreted dividends on preferred stock          |                                                                       |                    | (4,412 | )                |   |      |       |        |  |   | (7,638  | )       |   |   | (783    | )      
|                                               |                                                                       |                    |        |                  |   |      |        |        |  |   |         |         |   |   |         |        
|                                               | Net income (loss) attributable to common
    stockholders             |                    | $      | (5,533           | ) |      | $      | 490    |  |   | $       | (2,918  | ) |   | $       | (2,351  | )
|                                               |                                                                       |                    |        |                  |   |      |        |        |  |   |         |         |   |   |         |        
|Statement of Comprehensive Income
    (loss)  
|Net income (loss)                              |                                                                       | $                  | (1,121 | )                |   | $    | 490    |        |  | $ | 4,720   |         |   | $ | (1,568  | )      
|Foreign currency translation adjustments       |                                                                       |                    |       |                  |   |      | 41     |        |  |   | 45      |         |   |   | (31     | )      
|                                               |                                                                       |                    |        |                  |   |      |        |        |  |   |         |         |   |   |         |        
|Comprehensive income (loss)                    |                                                                       | $                  | (1,121 | )                |   | $    | 531    |        |  | $ | 4,765   |         |   | $ | (1,599  | )      
|                                               |                                                                       |                    |        |                  |   |      |        |        |  |   |         |         |   |   |         |        

See notes to the condensed consolidated financial
statements.

3



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


For the six months ended June 30, 2003
and 2004


All figures $000


(Unaudited)


|                                                                                      |                                                                                             |                                                             |       |          |         |   |        |         |         |  
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ----- | -------- | ------- | - | ------ | ------- | ------- | -
|                                                                                      |                                                                                             |                                                            
|                                                                                      |                                                                                             | Six months ended                                           
|                                                                                      |                                                                                             | June 30,                                                   
|                                                                                      |                                                                                             |                                                            
|                                                                                      |                                                                                             | 2003                                                        |       | 2004    
|                                                                                      |                                                                                             |                                                             |       |         
|Cash flows from operating activities:                                                 |                                                                                             |                                                             |       |          |         |   |        |        
|                                                                                      | Net income                                                                                  |                                                             | $     | 4,720    |         |   | $      | (1,568  | )      
|                                                                                      |                                                                                             |                                                             |       |          |         |   |        |        
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                             |                                                             |       |          |         |   |        |        
|                                                                                      | Depreciation and amortization                                                               |                                                             |       | 16,753   |         |   |        | 18,420  |        
|                                                                                      | Noncash interest expense                                                                    |                                                             |       |         |         |   |        | 5,549   |        
|                                                                                      | Goodwill impairment write-off                                                               |                                                             |       |         |         |   |        | 2,002   |        
|                                                                                      | Compensation expense in connection with stock
    options                                   |                                                             |       | 197      |         |   |        | 20      |        
|                                                                                      | Noncash rental expense, net of noncash rental
    income                                    |                                                             |       | 920      |         |   |        | 480     |        
|                                                                                      | Loss on extinguishment of debt                                                              |                                                             |       | 7,773    |         |   |        |        |        
|                                                                                      | Amortization of debt issuance costs                                                         |                                                             |       | 962      |         |   |        | 775     |        
|                                                                                      | Change in certain operating assets and
    liabilities components                           |                                                             |       | 5,981    |         |   |        | 5,024   |        
|                                                                                      | Decrease in deferred tax asset                                                              |                                                             |       | 2,315    |         |   |        | 1,022   |        
|                                                                                      | Decrease in deferred membership costs                                                       |                                                             |       | 385      |         |   |        | 713     |        
|                                                                                      | Other                                                                                       |                                                             |       | (245     | )       |   |        | (346    | )      
|                                                                                      |                                                                                             |                                                             |       |          |         |   |        |        
|                                                                                      |                                                                                             | Total adjustments                                           |       |          | 35,041  |   |        |         | 33,659  |  
|                                                                                      |                                                                                             |                                                             |       |          |         |   |        |        
|                                                                                      |                                                                                             | Net cash provided by operating activities                   |       |          | 39,761  |   |        |         | 32,091  |  
|                                                                                      |                                                                                             |                                                             |       |          |         |   |        |        
|Cash flows from investing activities:                                                 |                                                                                             |                                                             |       |          |         |   |        |        
|                                                                                      | Capital expenditures                                                                        |                                                             |       | (18,549  | )       |   |        | (15,654 | )      
|                                                                                      | Acquired business                                                                           |                                                             |       |         |         |   |        | (1,311  | )      
|                                                                                      | Landlord contributions                                                                      |                                                             |       | 103      |         |   |        | 1,931   |        
|                                                                                      |                                                                                             |                                                             |       |          |         |   |        |        
|                                                                                      |                                                                                             | Net cash used in investing activities                       |       |          | (18,446 | ) |        |         | (15,034 | )
|                                                                                      |                                                                                             |                                                             |       |          |         |   |        |        
|Cash flows from financing activities:                                                 |                                                                                             |                                                             |       |          |         |   |        |        
|                                                                                      | Proceeds from 9 5/8% Senior Note
    Offering                                               |                                                             |       | 255,000  |         |   |        |        |        
|                                                                                      | Proceeds from 11.0% Senior Discount Notes                                                   |                                                             |       |         |         |   |        | 120,756 |        
|                                                                                      | Proceeds from stock option exercises                                                        |                                                             |       |         |         |   |        | 512     |        
|                                                                                      | Repayment of 9 3/4% Senior Notes                                                            |                                                             |       | (125,000 | )       |   |        |        |        
|                                                                                      | Premium paid on extinguishment of debt and other
    costs                                  |                                                             |       | (4,064   | )       |   |        |        |        
|                                                                                      | Redemption of redeemable senior preferred stock                                             |                                                             |       | (66,977  | )       |   |        |        |        
|                                                                                      | Transaction costs related to
    9 5/8% Senior Notes                                        |                                                             |       | (9,264   | )       |   |        |        |        
|                                                                                      | Net line of credit repayment                                                                |                                                             |       | (14,500  | )       |   |        |        |        
|                                                                                      | Net subordinated credit repayments                                                          |                                                             |       | (9,000   | )       |   |        |        |        
|                                                                                      | Repurchase of preferred stock                                                               |                                                             |       | (583     | )       |   |        |        |        
|                                                                                      | Redemption of preferred stock                                                               |                                                             |       |         |         |   |        | (50,634 | )      
|                                                                                      | Common stock distribution                                                                   |                                                             |       |         |         |   |        | (68,944 | )      
|                                                                                      | Repurchase of common stock                                                                  |                                                             |       |         |         |   |        | (21     | )      
|                                                                                      | Repayments of borrowings                                                                    |                                                             |       | (2,922   | )       |   |        | (2,287  | )      
|                                                                                      |                                                                                             |                                                             |       |          |         |   |        |        
|                                                                                      |                                                                                             | Net cash (used in) provided by financing
    activities     |       |          | 22,690  |   |        |         | (618    | )
|                                                                                      |                                                                                             |                                                             |       |          |         |   |        |        
|                                                                                      |                                                                                             | Net increase in cash and cash equivalents                   |       |          | 44,005  |   |        |         | 16,439  |  
|Cash and cash equivalents at beginning of period                                      |                                                                                             |                                                             | 5,551 |          |         |   | 40,802 |        
|                                                                                      |                                                                                             |                                                             |       |          |         |   |        |        
|                                                                                      |                                                                                             | Cash and cash equivalents at end of period                  |       | $        | 49,556  |   |        | $       | 57,241  |  
|                                                                                      |                                                                                             |                                                             |       |          |         |   |        |        
|Summary of change in certain operating assets and
    liabilities:                    |                                                                                             |                                                             |       |          |         |   |        |        
|                                                                                      | Decrease (increase) in accounts receivable                                                  |                                                             | $     | 628      |         |   | $      | (1,933  | )      
|                                                                                      | Decrease in inventory                                                                       |                                                             |       | 205      |         |   |        | 39      |        
|                                                                                      | Decrease (increase) in prepaid expenses, prepaid
    income taxes, and other current assets |                                                             |       | 1,186    |         |   |        | (1,540  | )      
|                                                                                      | (Decrease) increase in accounts payable, accrued
    expenses and accrued interest          |                                                             |       | (1,306   | )       |   |        | 841     |        
|                                                                                      | Increase in deferred revenue                                                                |                                                             |       | 5,268    |         |   |        | 7,617   |        
|                                                                                      |                                                                                             |                                                             |       |          |         |   |        |        
|                                                                                      |                                                                                             | Net changes in certain operating assets and
    liabilities |       | $        | 5,981   |   |        | $       | 5,024   |  
|                                                                                      |                                                                                             |                                                             |       |          |         |   |        |        
|                                                                                      | Supplemental disclosures of cash flow information:                                          |                                                             |       |          |         |   |        |         |        
|                                                                                      |                                                                                             | Noncash investing and financing activities:                 |       |          |         |   |        |         |         |  

During the six months ended June 30, 2004,
Notes to acquire a business issued totaled $150,000.

See notes to the condensed consolidated financial
statements.

4



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(In thousands of dollars, except share
data)


(Unaudited)




|   |                      
|-- | ---------------------
|1. | Basis of Presentation

Town Sports International Holdings, Inc.
(TSI Holdings or the Company) was
incorporated in January 2004, principally for the purpose of
issuing debt that is structurally subordinated to the debt of
Town Sports International, Inc. (TSI). In
conjunction with the financing TSI Holdings entered into a
Restructuring Agreement, redeemed Series A and
Series B Preferred Stock, and paid a common stock
distribution (See Note 6).

The condensed consolidated financial statements
included herein have been prepared by Town Sports International
Holdings, Inc. and subsidiaries (TSI Holdings or
the Company) pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC). The
condensed consolidated financial statements should be read in
conjunction with the Town Sports International, Incs.
(TSI) December 31, 2003 consolidated financial
statements and notes thereto, included on Form 10-K. The
year-end condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures
required by accounting principles generally accepted in the
United States of America. Certain information and footnote
disclosures which are normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to SEC rules
and regulations. Certain reclassifications were made to the
reported amounts at December 31, 2003 to conform to the
presentation at June 30, 2004. The Company believes that
the disclosures made are adequate to make the information
presented not misleading. The information reflects all
adjustments which, in the opinion of Management, are necessary
for a fair presentation of the financial position and results of
operations for the interim periods set forth herein. All such
adjustments are of a normal and recurring nature. The results
for the six and three month ended June 30, 2004 are not
necessarily indicative of the results for the entire fiscal year
ending December 31, 2004.



|   |                                                 
|-- | ------------------------------------------------
|2. | Long-Term Debt and Capital Lease
    Obligations

|                                          |  |              |         |          |  |   |         | 
|----------------------------------------- |  | ------------ | ------- | -------- |  | - | ------- | 
|                                          |  | December 31, |         | June 30,
|                                          |  | 2003         |         | 2004    
|                                          |  | (000s)      |         | (000s) 
|                                          |  |              |         |         
|Senior Notes 9 5/8%, due 2011             |  | $            | 255,000 |          |  | $ | 255,000 | 
|Senior Discount Notes 11.0%, due 2014     |  |              |        |          |  |   | 130,356 | 
|Notes payable for acquired businesses     |  |              | 4,358   |          |  |   | 4,011   | 
|Capital lease obligations                 |  |              | 2,519   |          |  |   | 754     | 
|                                          |  |              |         |          |  |   |         | 
|                                          |  |              | 261,877 |          |  |   | 390,121 | 
|Less, Current portion due within one year |  |              | 3,486   |          |  |   | 1,969   | 
|                                          |  |              |         |          |  |   |         | 
|Long-term portion                         |  | $            | 258,391 |          |  | $ | 388,152 | 
|                                          |  |              |         |          |  |   |         | 

On February 4, 2004 TSI Holdings
successfully completed an offering of 11.0% Senior Discount
Notes (the Discount Notes) that will mature in
February 2014. TSI Holding received a total of $124,807 in
connection with this issuance. Fees and expenses related to this
transaction totaled approximately $4,318. No cash interest is
required to be paid prior to February 2009. The accreted value
of each Discount Note will increase from the date of issuance
until February 1, 2009, at a rate of 11.0% per annum
compounded semi-annually such that on February 1, 2009 the
accreted value will equal $213,000, the principal value due at
maturity. Subsequent to February 1, 2009 cash interest on
the Discount Notes will accrue and be payable semi-annually in
arrears February 1 and August 1 of each year, commencing
August 1, 2009. The Discount Notes are structurally
subordinated and effectively, rank junior to all indebtedness of
the Company. TSI

5



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Holdings debt is not collateralized by TSI,
and TSI Holdings relies on the cash flows of TSI, with
restrictions contained in the Senior Note Indenture to
service its debt.

In April 2003 the Company successfully completed
a refinancing of its debt. This refinancing included an offering
of $255,000 of 9 5/8% Senior Notes (Notes)
that will mature April 15, 2011, and the entering into of a
new $50,000 senior secured revolving credit facility (the
Senior Credit Facility) that will expire
April 15, 2008. The transaction fees of $9,572 have been
accounted for as deferred financing costs. The Notes accrue
interest at 9 5/8% per annum and interest is payable
semiannually on April 15 and October 15. In connection
with this refinancing, in April 2003 the Company wrote-off
$3,709 of deferred financing costs related to extinguished debt,
paid a call premium of $3,048 and incurred $1,016 of interest on
the previously outstanding 9 3/4% Notes representing
the interest incurred during the 30 day redemption
notification period.

The Senior Credit Facility contains various
covenants including limits on capital expenditures, the
maintenance of a consolidated interest coverage ratio of not
less than 2.50:1.00 during 2004, and a maximum permitted total
leverage ratio of 4.00:1.00 during 2004. These covenants limit
the Companys ability to incur additional debt, and as of
June 30, 2004 the Companys permitted borrowing
capacity under the line of credit totaled $33,376. Loans under
the Senior Credit Facility will, at the Companys option,
bear interest at either the banks prime rate plus 3.0% or
the Eurodollar rate plus 4.0%, as defined. There were no
borrowings outstanding at June 30, 2004 and outstanding
letters of credit issued totaled $1,749. The Company is required
to pay a commitment fee of 0.75% per annum on the daily
unutilized amount. The unutilized portion of the Senior Credit
Facility as of June 30, 2004 was $48,251.



|   |                          
|-- | -------------------------
|3. | September 11, 2001 Events

The terrorist attacks of September 11, 2001
(the September 11 events), resulted in a
tremendous loss of life and property. Secondarily, those events
interrupted the operations at four clubs located in downtown
Manhattan. Three of the affected four clubs were back in
operation by October 2001, while the fourth club reopened in
September 2002.

The Company carries business interruption
insurance to mitigate certain lost revenue and profits
experienced with the September 11 events. In the first and
third quarters of 2003 the Company received $1,300 and $1,500
respectively from its insurer. In connection with the third
quarter 2003 payment the Company entered into a final settlement
agreement. These payments were classified with fees and other
revenue when received.



|   |                               
|-- | ------------------------------
|4. | Goodwill and Other Intangibles

Goodwill has been allocated to reporting units
that closely reflect the regions served by our four trade names;
New York Sports Club, Boston Sports Club, Washington Sports Club
and Philadelphia Sports Club, with certain more remote clubs
that do not benefit from a regional cluster being considered
single reporting units.

In the quarter ended March 31, 2004 the
Company performed its annual impairment test. Goodwill
impairment testing requires a comparison between the carrying
value and fair value of reportable goodwill. If the carrying
value exceeds the fair value, goodwill is considered impaired.
The amount of the impairment loss is measured as the difference
between the carrying value and the implied fair value of
goodwill, which is determined using discounted cash flows. As a
result of this review, the Company determined that the goodwill
at one of its remote clubs was not recoverable. The goodwill
impairment associated with this underperforming club amounted to
$2,002. A deferred tax benefit of $881 has been recorded in
connection with this impairment. Since this club is remote from
one of the Companys clusters, it does not benefit from the
competitive advantage that our clustered clubs have, and as a
result it is more susceptible to competition. We have reduced
our projections of future cash flows of this club to take into
account the impact of a recent

6



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

opening of a competitor. While this club is
expected to generate cash flow in the future, we no longer
expect it to operate at the levels that were projected at the
time the club was acquired.

The change in the carrying amount of goodwill
from December 31, 2003 through June 30, 2004 is as
follows:

|                          |  |   |        |  
|------------------------- |  | - | ------ | -
|Balance December 31, 2003 |  | $ | 45,864 |  
|Changes due to currency   |  |   | (9     | )
|Acquired Goodwill         |  |   | 1,209  |  
|Goodwill impairment       |  |   | (2,002 | )
|                          |  |   |        |  
|Balance June 30, 2004     |  | $ | 45,062 |  
|                          |  |   |        |  

Below is a summary of the Companys acquired
intangible assets as of December 31, 2003 and June 30,
2004.

|                           |  |                         |        |                          |  |                 |         |   |  |   |     | 
|-------------------------- |  | ----------------------- | ------ | ------------------------ |  | --------------- | ------- | - |  | - | --- | 
|                           |  |                        
|                           |  | As of December 31, 2003
|                           |  | (000s)                
|                           |  |                        
|Acquired Intangible Assets |  | Gross Carrying Amount   |        | Accumulated Amortization |  | Net Intangibles
|                           |  |                         |        |                          |  |                
|Membership Lists           |  | $                       | 10,205 |                          |  | $               | (9,630  | ) |  | $ | 575 | 
|Covenants-not-to-compete   |  |                         | 876    |                          |  |                 | (871    | ) |  |   | 5   | 
|Beneficial Lease           |  |                         | 223    |                          |  |                 | (173    | ) |  |   | 50  | 
|                           |  |                         |        |                          |  |                 |         |   |  |   |     | 
|                           |  | $                       | 11,304 |                          |  | $               | (10,674 | ) |  | $ | 630 | 
|                           |  |                         |        |                          |  |                 |         |   |  |   |     | 

|                         |  |                       |        |                          |  |                 |         |   |  |   |     | 
|------------------------ |  | --------------------- | ------ | ------------------------ |  | --------------- | ------- | - |  | - | --- | 
|                         |  |                      
|                         |  | As of June 30, 2004  
|                         |  | ($000s)            
|                         |  |                      
|                         |  | Gross Carrying Amount |        | Accumulated Amortization |  | Net Intangibles
|                         |  |                       |        |                          |  |                
|Membership Lists         |  | $                     | 10,483 |                          |  | $               | (9,994  | ) |  | $ | 489 | 
|Covenants-not-to-compete |  |                       | 876    |                          |  |                 | (874    | ) |  |   | 2   | 
|Beneficial Lease         |  |                       | 223    |                          |  |                 | (179    | ) |  |   | 44  | 
|                         |  |                       |        |                          |  |                 |         |   |  |   |     | 
|                         |  | $                     | 11,582 |                          |  | $               | (11,047 | ) |  | $ | 535 | 
|                         |  |                       |        |                          |  |                 |         |   |  |   |     | 

The amortization expense of the above acquired
intangible assets for each of the five years ended
December 31, 2008 is as follows:

|                                        |  |   |     |  |  |  |  |  |  |  |  | 
|--------------------------------------- |  | - | --- |  |  |  |  |  |  |  |  | 
|Aggregate Amortization Expense ($000s) |  |   |     |  |  | 
|                                        |  |   |     |  |  | 
|For the year ended 12/31/04(a)          |  | $ | 683 |  |  |  |  |  |  |  |  | 
|For the year ended 12/31/05             |  |   | 150 |  |  |  |  |  |  |  |  | 
|For the year ended 12/31/06             |  |   | 57  |  |  |  |  |  |  |  |  | 
|For the year ended 12/31/07             |  |   | 11  |  |  |  |  |  |  |  |  | 
|For the year ended 12/31/08             |  |   | 7   |  |  |  |  |  |  |  |  | 
|                                        |  |   |     |  |  |  |  |  |  |  |  | 
|                                        |  | $ | 908 |  |  |  |  |  |  |  |  | 
|                                        |  |   |     |  |  |  |  |  |  |  |  | 



---



|    |  |                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------
|(a) |  | Amortization expense for the three and six months
    ended June 30, 2004 amounted to $197 and $373, respectively.



|   |                                  
|-- | ---------------------------------
|5. | Stock-Based Employee Compensation

For financial reporting purposes, the Company
accounts for stock-based compensation in accordance with the
intrinsic value method (APB No. 25). In
accordance with this method, no compensation expense is
recognized in the accompanying financial statements in
connection with the awarding of stock option grants to

7



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

employees provided that, as of the grant date,
all terms associated with the award are fixed and the fair value
of the Companys stock is not greater than the amount an
employee must pay to acquire the stock as defined; however, to
the extent that stock options are granted to employees with
variable terms or if the fair value of the Companys stock
as of the measurement date is greater than the amount an
employee must pay to acquire the stock, then the Company will
recognize compensation expense.

The following table illustrates the effect on net
income (loss) attributed to common stockholders if the Company
had applied the fair value recognition provisions of Financial
Accounting Standards Board issued Statement No. 123,
(SFAS 123) Accounting for Stock-Based
Compensation, to stock-based employee compensation.

|                                                                     |                                                                                                                                                         |                    |        |                  |   |      |     |      |   |   |        |     |   |   |        |     |  
|-------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------ | ---------------- | - | ---- | --- | ---- | - | - | ------ | --- | - | - | ------ | --- | -
|                                                                     |                                                                                                                                                         |                    |        |                 
|                                                                     |                                                                                                                                                         | Three Months Ended |        | Six Months Ended
|                                                                     |                                                                                                                                                         | June 30,           |        | June 30,        
|                                                                     |                                                                                                                                                         | ($000s)          |        | ($000s)       
|                                                                     |                                                                                                                                                         |                    |        |                 
|                                                                     |                                                                                                                                                         | 2003               |        | 2004             |   | 2003 |     | 2004
|                                                                     |                                                                                                                                                         |                    |        |                  |   |      |     |     
|Net income (loss) attributed to common
    stockholders, as reported |                                                                                                                                                         | $                  | (5,533 | )                |   | $    | 490 |      |   | $ | (2,918 | )   |   | $ | (2,351 | )  
|Add:                                                                 |                                                                                                                                                         |                    |        |                  |   |      |     |      |   |   |        |     |   |   |        |    
|                                                                     | Stock-based employee compensation expense
    included in reported net income attributed to common
    stockholders, net of related tax effects         |                    |        | 5                |   |      |     | 6    |   |   |        | 11  |   |   |        | 12  |  
|Deduct:                                                              |                                                                                                                                                         |                    |        |                  |   |      |     |      |   |   |        |     |   |   |        |    
|                                                                     | Total stock-based employee compensation expense
    determined under fair value based method for all stock option
    awards net of related tax effects |                    |        | (10              | ) |      |     | (12  | ) |   |        | (22 | ) |   |        | (24 | )
|                                                                     |                                                                                                                                                         |                    |        |                  |   |      |     |      |   |   |        |     |   |   |        |    
|Pro forma net income attributed to common
    stockholders           |                                                                                                                                                         | $                  | (5,538 | )                |   | $    | 484 |      |   | $ | (2,929 | )   |   | $ | (2,363 | )  
|                                                                     |                                                                                                                                                         |                    |        |                  |   |      |     |      |   |   |        |     |   |   |        |    



|   |                                          
|-- | -----------------------------------------
|6. | Equity Transactions and
    Restructuring

On January 26, 2004 warrants to
purchase 71,631 shares of Class A common stock
were exercised.

On February 4, 2004 TSI and affiliates and
Town Sports International Holdings, Inc. (TSI
Holdings), a newly formed company, entered into a
Restructuring Agreement (Restructuring). In
connection with this Restructuring, the holders of the
TSIs Series A Preferred Stock, Series B
Preferred Stock, and Class A Common stock contributed their
shares of the capital stock to TSI Holdings in exchange for an
equal amount of newly issued shares of the same classes in TSI
Holdings. Immediately following this exchange, TSI Holdings
contributed to TSI the certificates representing all of the
shares of the TSIs capital stock contributed in the
aforementioned exchange. In return, TSI issued 1,000 shares
of common stock to TSI Holdings and cancelled all the
certificates representing the shares of the TSIs capital
stock contributed to it by TSI Holdings. In addition, as part of
the Restructuring, all holders of options to purchase
Class A Common stock of the TSI exchanged their options for
options to purchase an equal number of shares of Class A
Common stock of TSI Holdings at strike prices adjusted to
reflect the Restructuring.

On February 4, 2004, TSI Holdings
successfully completed an offering of 11.0% Senior Discount
Notes (the Discount Notes) that will mature in
February 2014. TSI Holdings received a total of $124,807 in
connection with this issuance. Fees and expenses related to this
transaction totaled $4,318. No cash interest is required to be
paid prior to February 2009. The accreted value of each Discount
Note will increase from the date of issuance until
February 1, 2009, at a rate of 11.0% per annum
compounded semiannually such that on February 1, 2009 the
accreted value will equal $213,000, the principal value due at
maturity. Subsequent to February 1, 2009 cash interest on
the Discount Notes will accrue and be payable semi-annually in
arrears February 1 and August 1 of each year, commencing
August 1, 2009. The Discount Notes are structurally

8



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

subordinated and effectively rank junior to all
indebtedness of the Company. TSI Holdings debt is not
collateralized by TSI, and TSI Holdings relies on the cash flows
of TSI, with restrictions contained in the Senior
Note Indenture to service its debt.

On February 6, 2004, all of TSI
Holdings outstanding Series A and Series B
Preferred stock were redeemed for a total of $50,634.

On March 12, 2004, 65,536 vested common
stock options of TSI Holdings were exercised. TSI Holdings
received $539 in cash related to these exercises.

On March 15, 2004, the Board of Directors of
TSI Holdings approved a common stock distribution of
$52.50 per share to all shareholders of record on
March 15, 2004. This distribution totaled $68,944 and was
paid on March 17, 2004. Also, in lieu of a common stock
distribution, TSI Holdings vested common option holders
were paid a total of $1.1 million recorded as payroll
expense at the TSI level under Generally Accepted Accounting
Principles (GAAP).



|   |                              
|-- | -----------------------------
|7. | Commitments and Contingencies

On February 13, 2003, in an action styled
Joseph Anaya vs Town Sports International, Inc.
et al. an individual filed suit against the Company
in the Supreme Court, New York County, alleging that on
January 14, 2003, he sustained serious bodily injury at one
of our club locations. He filed an amended complaint on
September 17, 2003 seeking two billion dollars in damages
for personal injuries. His cause of action seeking punitive
damages, in the amount of two hundred and fifty million dollars,
was dismissed on January 26, 2004. While the company is
unable to determine the ultimate outcome of the above action it
intends to contest the matter vigorously.

We have in force fifty one million dollars of
insurance to cover claims of this nature. If any such judgement
exceeds the amount we are covered by insurance by $2,500 we
would be in default under the credit agreement governing TSI,
Inc.s senior secured revolving credit facility. Also, if
any uninsured judgement, when aggregated with any other
judgement not covered by insurance equals $5,000 or more, the
judgement would constitute an event of default under the
indenture governing the notes. We anticipate that these matters
will be covered by insurance.

The Company does not believe this matter will
have a material effect on its consolidated financial position,
results of operation or cash flows.

The Company is a party to various other lawsuits
arising in the normal course of business. Management believes
that the ultimate outcome of these matters will not have a
material effect on the Companys consolidated financial
position, results of operations or cash flows.

9



---



##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Introduction

We are one of the two leading owners and
operators of fitness clubs in the Northeast and Mid-Atlantic
regions of the United States. As of June 30, 2004, we
operated 134 clubs that collectively served approximately
370,000 members, excluding 12,000 summer seasonal or pool
members. We develop clusters of clubs to serve densely populated
major metropolitan regions in which a high percentage of the
population commutes to work. We service such populations by
clustering clubs near the highest concentrations of our target
customers areas of both employment and residence. Our
target customer is college-educated, typically between the ages
of 21 and 50 and earns an annual income of between $50,000 and
$150,000.

Each club facility is subject to a long-term
facility lease with a third party landlord, with the exception
of our East 86th Street, New York City, where we own the
underlying real estate. Our principal capital investment is thus
in the facility improvements and equipment and furnishings of
each facility. Our clubs are located for maximum convenience to
our members in urban or suburban areas, close to transportation
hubs, or office or retail centers.

Our goal is to develop the premier health club
network in each of the major metropolitan regions we enter. We
believe that clustering clubs allows us to achieve strategic
operating advantages that enhance our ability to achieve this
goal. In entering new regions, we develop these clusters by
initially opening or acquiring clubs located in the more central
urban markets of the region and then branching out from these
urban centers to suburban commuter communities. Capitalizing on
this clustering of clubs, as of June 30, 2004,
approximately 52% of our members participated in a membership
plan that allows unlimited access to all of our clubs for a
higher membership fee.

Clustering of clubs also affords us significant
additional benefits, including:

1. Providing our members access to an
extensive network of locations;

2. Lower capital investment overall, by
locating special programs, such as pools, racquet sports, etc.
at selected clubs only;

3. More cost effective regional management
and control;

4. Allocating certain costs such as
advertising in a focused region over multiple locations;

5. Strengthening brand awareness.

We have executed this strategy successfully in
the New York region through the network of clubs we operate
under our New York Sports Club (NYSC) brand name. We
are the largest fitness club operator in Manhattan with 36
locations and operate a total of 90 clubs under the NYSC name
within a 50 mile radius of New York City. We operate 19
clubs in the Boston region and 16 clubs in the Washington, DC
region under our Boston Sports Club (BSC) and
Washington Sports Club (WSC) brand names,
respectively and have begun establishing a similar cluster in
the Philadelphia region with six clubs under our Philadelphia
Sports Club (PSC) brand name. In addition, we
operate three clubs in Switzerland. We employ localized brand
names for our clubs to create an image and atmosphere consistent
with the local community, and to foster the recognition as a
local network of quality fitness clubs rather than a national
chain.

We consider that we have three principal sources
of revenue:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Our largest sources of revenue are dues
    and initiation fees paid by our members. This comprises 84.1% of
    our total revenue for the six months ended June 30, 2004.
    We recognize revenue from membership dues in the month when the
    services are rendered. Over 90% of our members pay their monthly
    dues by Electronic Funds Transfer, while the balance pay
    annually in advance. We recognize revenue from initiation fees
    over the expected average life of the membership, which is
    24 months. It is important therefore to operate facilities
    that are convenient, offer good price/value relationship and
    have a wide variety of fitness service offerings in order to
    attract and retain members at each facility. Our initiation fees
    recognized per new member sale have been depressed by our
    efforts to combat discounting

10



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##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | by competitors in certain of our markets, as well
    as our offering of term commitment memberships at a discounted
    initial fee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | 2. We generated approximately 14.6% of our
    revenue for the six months ended June 30, 2004, referred to
    as Other Club revenue, at our facilities from fees for personal
    training, programming for children, group fitness training and
    other member activities, as well as sales of miscellaneous
    sports products. This revenue stream has increased as a
    percentage of Total Revenue more recently as we have focused on
    increasing revenue per member from our maturing club base.                                                                                                                                                                                                                       
|
| | 3. The balance of our revenue (approximately
    1.3% for the six months ended June 30, 2004) principally
    relates to rental of space in our facilities to operators who
    offer wellness-related offerings such as physical therapy. In
    addition, we generate management fees for income from
    investments in club facilities that we do not wholly own.
    Revenue from sales of in-club advertising and sponsorships is
    also included. We refer to this as Fees and Other revenue.
    Settlements from our business interruption insurance claim
    associated with the September 11 Events and totaled
    $1.3 million for the six months added June 30, 2003,
    while no such revenue was received in 2004.

Revenue (in $000s) is accordingly
made up as follows:

|                   |  |                    |        |                  |  |      |        |      |  |   |         |  |  |   |         | 
|------------------ |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------- |  |  | - | ------- | 
|                   |  |                    |        |                 
|                   |  | Three Months Ended |        | Six Months Ended
|                   |  | June, 30           |        | June 30,        
|                   |  |                    |        |                 
|                   |  | 2003               |        | 2004             |  | 2003 |        | 2004
|                   |  |                    |        |                  |  |      |        |     
|Membership dues    |  | $                  | 69,450 |                  |  | $    | 71,648 |      |  | $ | 138,540 |  |  | $ | 141,145 | 
|Initiation fees    |  |                    | 3,486  |                  |  |      | 3,027  |      |  |   | 7,005   |  |  |   | 6,231   | 
|Other Club revenue |  |                    | 12,157 |                  |  |      | 12,942 |      |  |   | 24,238  |  |  |   | 25,545  | 
|Fees and Other     |  |                    | 964    |                  |  |      | 1,236  |      |  |   | 3,177   |  |  |   | 2,397   | 
|                   |  |                    |        |                  |  |      |        |      |  |   |         |  |  |   |         | 
|Total revenue      |  | $                  | 86,057 |                  |  | $    | 88,853 |      |  | $ | 172,960 |  |  | $ | 175,318 | 
|                   |  |                    |        |                  |  |      |        |      |  |   |         |  |  |   |         | 

Our operating and selling expenses are comprised
of both fixed and variable costs. Fixed costs include club and
supervisory salary and related expenses, occupancy costs
including certain elements of rent, housekeeping, contracted
maintenance expenses as well as depreciation. General and
administrative expenses include costs relating to our
centralized support functions, such as accounting, information
systems, purchasing and member relations, consulting fees, as
well as real estate development expenses.

Variable costs are primarily related to ancillary
club revenue related payroll, membership sales compensation,
advertising, utilities, insurance and club supplies.

As clubs mature and increase their membership
base, fixed costs are typically spread over an increasing
revenue base and operating margins tend to improve.

Our primary capital expenditures relate to the
construction of new club facilities and upgrading and expanding
our existing clubs. The construction and equipment costs for a
new center approximate $3.0 million, on average, which
could vary based on the costs of construction labor, as well the
planned service offerings and size and configuration of the
facility. We perform routine improvements at our clubs and
replacement of the fitness equipment each year for which we
budget approximately 3.75% of each clubs annual revenue.
Expansions of certain facilities are also performed from time to
time, when incremental space becomes available on economic
terms, and utilization and demand for the facility dictates. In
this connection, facility remodeling is also considered where
appropriate.

11



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##### Table of Contents



Historical Club Growth

The following table sets for our club growth
during each of the quarters in 2003 and the first two quarters
of 2004.

|                                                                      |  |      |     |      |  |    |     |    |  |       |     |    |  |    |     |  |  |  |     |   |  |  |     |  |  |  |     | 
|--------------------------------------------------------------------- |  | ---- | --- | ---- |  | -- | --- | -- |  | ----- | --- | -- |  | -- | --- |  |  |  | --- | - |  |  | --- |  |  |  | --- | 
|                                                                      |  |      |     |     
|                                                                      |  | 2003 |     | 2004
|                                                                      |  |      |     |     
|                                                                      |  | Q1   |     | Q2   |  | Q3 |     | Q4 |  | Total |     | Q1 |  | Q2
|                                                                      |  |      |     |      |  |    |     |    |  |       |     |    |  |   
|Clubs at beginning of period                                          |  |      | 129 |      |  |    | 129 |    |  |       | 129 |    |  |    | 129 |  |  |  | 129 |   |  |  | 129 |  |  |  | 132 | 
|Greenfield clubs(a)                                                   |  |      |    |      |  |    |    |    |  |       | 3   |    |  |    |    |  |  |  | 3   |   |  |  | 3   |  |  |  | 1   | 
|Acquired clubs                                                        |  |      |    |      |  |    |    |    |  |       |    |    |  |    |    |  |  |  |    |   |  |  |    |  |  |  | 1   | 
|Relocated or closed clubs                                             |  |      |    |      |  |    |    |    |  |       | (3  | )  |  |    |    |  |  |  | (3  | ) |  |  |    |  |  |  |    | 
|                                                                      |  |      |     |      |  |    |     |    |  |       |     |    |  |    |     |  |  |  |     |   |  |  |     |  |  |  |     | 
|Clubs at end of period                                                |  |      | 129 |      |  |    | 129 |    |  |       | 129 |    |  |    | 129 |  |  |  | 129 |   |  |  | 132 |  |  |  | 134 | 
|                                                                      |  |      |     |      |  |    |     |    |  |       |     |    |  |    |     |  |  |  |     |   |  |  |     |  |  |  |     | 
|Number of partly-owned clubs included at the end
    of the period(b) |  |      | 2   |      |  |    | 2   |    |  |       | 2   |    |  |    | 2   |  |  |  | 2   |   |  |  | 2   |  |  |  | 2   | 



---



|    |  |                                                                                                                                                                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | A Greenfield club is a new location
    constructed by us.                                                                                                                                                                                           
|   
|(b) |  | We include in the club count wholly and
    partly-owned clubs. In addition to the above count, as of
    December 31, 2003 and June 30, 2004 we managed two and
    three additional clubs respectively, in which we did not have an
    equity stake.

Results of Operations

The following table sets forth certain operating
data as a percentage of revenue for the periods indicated:

|                                               |                                                                         |                |       |                |    |      |       |      |   |  |       |      |    |  |       |      |   
|---------------------------------------------- | ----------------------------------------------------------------------- | -------------- | ----- | -------------- | -- | ---- | ----- | ---- | - |  | ----- | ---- | -- |  | ----- | ---- | --
|                                               |                                                                         |                |       |               
|                                               |                                                                         | Three Months   |       | Six Months    
|                                               |                                                                         | Ended June 30, |       | Ended June 30,
|                                               |                                                                         |                |       |               
|                                               |                                                                         | 2003           |       | 2004           |    | 2003 |       | 2004
|                                               |                                                                         |                |       |                |    |      |       |     
|Revenue                                        |                                                                         |                | 100.0 | %              |    |      | 100.0 | %    |   |  | 100.0 | %    |    |  | 100.0 | %   
|                                               |                                                                         |                |       |                |    |      |       |      |   |  |       |      |    |  |       |     
|Operating expenses                             |                                                                         |                |       |                |    |      |       |      |   |  |       |      |    |  |       |     
|                                               | Payroll and related                                                     |                |       | 38.6           |    |      |       | 38.5 |   |  |       | 38.1 |    |  |       | 40.2 |   
|                                               | Club operating                                                          |                |       | 31.0           |    |      |       | 32.5 |   |  |       | 30.8 |    |  |       | 32.4 |   
|                                               | General and administrative                                              |                |       | 6.1            |    |      |       | 6.6  |   |  |       | 5.9  |    |  |       | 6.9  |   
|                                               | Depreciation and amortization                                           |                |       | 9.8            |    |      |       | 10.5 |   |  |       | 9.7  |    |  |       | 10.5 |   
|                                               | Goodwill Impairment                                                     |                |       |               |    |      |       |     |   |  |       |     |    |  |       | 1.1  |   
|                                               |                                                                         |                |       |                |    |      |       |      |   |  |       |      |    |  |       |     
|                                               | Operating income                                                        |                |       | 14.5           |    |      |       | 11.9 |   |  |       | 15.5 |    |  |       | 8.9  |   
|Loss on extinguishment of debt                 |                                                                         |                | 9.0   |                |    |      |      |      |   |  | 4.5   |      |    |  |      |     
|Interest expense                               |                                                                         |                | 7.1   |                |    |      | 11.3  |      |   |  | 6.0   |      |    |  | 10.8  |     
|Interest income                                |                                                                         |                | (0.2  | )              |    |      | (0.1  | )    |   |  | (0.1  | )    |    |  | (0.2  | )   
|                                               |                                                                         |                |       |                |    |      |       |      |   |  |       |      |    |  |       |     
|                                               | Income (loss) before provision (benefit) for
    corporate income taxes |                |       | (1.4           | )  |      |       | 0.7  |   |  |       | 5.1  |    |  |       | (1.7 | ) 
|Provision (benefit) for corporate income taxes |                                                                         |                | (0.1  | )              |    |      | (0.1  | )    |   |  | 2.3   |      |    |  | (0.8  | )   
|                                               |                                                                         |                |       |                |    |      |       |      |   |  |       |      |    |  |       |     
|                                               | Net income (loss)                                                       |                |       | (1.3           | )  |      |       | 0.6  |   |  |       | 2.8  |    |  |       | (0.9 | ) 
|Accreted dividend on preferred stock           |                                                                         |                | (5.1  | )              |    |      |      |      |   |  | (4.5  | )    |    |  | (0.4  | )   
|                                               |                                                                         |                |       |                |    |      |       |      |   |  |       |      |    |  |       |     
|                                               | Net income (loss) attributable to common
    stockholders               |                |       | (6.4           | )% |      |       | 0.6  | % |  |       | (1.7 | )% |  |       | (1.3 | )%
|                                               |                                                                         |                |       |                |    |      |       |      |   |  |       |      |    |  |       |     

Three Months
Ended June 30, 2004 Compared to Three Months Ended
June 30, 2003

Revenues.Revenues
increased $2.8 million or 3.2%, to $88.9 million
during the quarter ended June 30, 2004 from
$86.1 million in the quarter ended June 30, 2003.
Revenues increased during the quarter by $819,000 or 1% at the
Companys mature clubs (clubs owned and operated for at
least 24 months). The eleven clubs opened or acquired after
June 2002 increased revenue by $2.6 million during the
quarter. Fees and Other revenues increased $272,000 during the
quarter principally due to increase in promotion and marketing

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##### Table of Contents



revenue. These revenue increases were offset by a
decrease of $916,000 related to the closure and relocation of
three clubs in 2003.


The 1.0% increase in mature club revenue is due
to a 1.9% increase in membership and a 0.6% increase in
ancillary revenue offset by a 1.5% decrease in price

Operating Expenses.Operating expenses increased $4.7 million, or 6.4%, to
$78.3 million in the quarter ended June 30, 2004, from
$73.6 million in the quarter ended June 30, 2003. The
increase was due to the following factors: Payroll and related
expenses increased by $1.0 million, or 3.0% to
$34.2 million in the quarter ended June 30, 2004, from
$33.2 million in the quarter ended June 30, 2003. This
increase was principally attributable to the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In an effort to increase membership satisfaction
    and improve our membership retention rates we have increased the
    level of in-house training and club support personnel; and we
    have moved from contracted housekeeping and equipment
    maintenance services to internally sourced employees. These
    customer service efforts resulted in a $756,000 increase.
|
| |  | Health and unemployment insurance rates have
    increased payroll expenses by $400,000, or 11.3%.                                                                                                                                                                                                                                                                             
|
| |  | These increases were partly offset by decreases
    in a variety of other payroll categories, including performance
    bonuses.                                                                                                                                                                                                                                               

Club operating expenses increased by
$2.2 million or 8.3% to $28.9 million in the quarter
ended June 30, 2004, from $26.7 million in the quarter
ended June 30, 2003. This increase was principally
attributable to the following:



| |   |                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A $1.2 million increase in rent expense
    resulting from increases related to clubs that have opened since
    March 2003, amounting to $348,000 and increases related to club
    expansions of $389,000. The remainder of the increase relates to
    rent and occupancy increases at our mature clubs averaging
    3.9% per club.
|
| |  | Increased advertising efforts resulted in an
    increase in advertising expense of $660,000 or 38.2% over prior
    period.                                                                                                                                                                                                           
|
| |  | Facility repairs and maintenance costs increased
    $296,000 or 16.6% due to a 3.5% increase in club square
    footage, as well as increased costs to serve our initiatives to
    increase member satisfaction and improve member retention rates.                                                                                  

General and administrative expenses increased by
$679,000 or 13.0% to $5.9 million in the quarter ended
June 30, 2004 from $5.2 million in the quarter ended
June 30, 2003. This increase was principally attributable
to the following:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | Legal fees principally related to new club leases
    and expansion projects increased expenses by $267,000 over the
    prior year.
|
| |  | An increase in data communication line costs
    related to a $189,000 correction of our service providers
    billing errors.     
|
| |  | An increase in-house training and staff
    development of $109,000.                                                                

Depreciation and amortization increased by
$849,000, or 10% to $9.3 million in the quarter ended
June 30, 2004, from $8.5 million in the quarter ended
June 30, 2003, attributable to the following:



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increases in depreciation related to new clubs as
    well as expanded and remodeled clubs amounting to $404,000 and
    $282,000 respectively.           
|
| |  | Increases in amortization of software and
    hardware costs principally related to our recently rolled-out
    Club Networks system amounting to $95,000.

Interest Expense.Interest expense increased $4.0 million to
$10.1 million during the quarter ended June 30, 2004,
from $6.1 million in the quarter ended June 30, 2003.
This increase is due to the issuance of

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##### Table of Contents



11% Senior Discount Notes in February of
2004 and $255 million of 9 5/8% Senior Notes,
which refinanced $125 million of 9 3/4% Senior
Notes in April 2003.


Interest Income.Interest income decreased $79,000 to $116,000 in the quarter
ended June 30, 2004 from $195,000 in the quarter ended
June 30, 2003.

Provision for Income
Tax.We have recorded a net income tax
provision of $122,000 in the quarter ended June 30, 2004
compared to a tax benefit of $84,000 in the quarter ended
June 30, 2003.

Accreted Dividends on Preferred
Stock.Prior to the second quarter of
2004 all previously outstanding preferred stock were redeemed.
These redemptions were made in connection with the redemption of
the redeemable senior preferred stock in April 2003 and the
Restructuring of the Series A and Series B preferred
stock in February 2004. Therefore, no preferred stock dividends
were recorded in this second quarter of 2004 while in the second
quarter of 2003 we recorded $4.4 million of accreted
dividends.

Six Months Ended
June 30, 2004, Compared to Six Months Ended June 30,
2003.

Revenues.Revenues
increased approximately $2.3 million, or 1.4% to
$175.3 million for six months ended June 30, 2004,
from $173.0 million for the six months ended June 30,
2003. Mature clubs (clubs open over 24 months) increased by
$390,000 or 0.2%. Revenue from the eleven clubs open or acquired
since June 2002 increased by $4.6 million. These club
revenue increases were offset by decreases of $1.9 million
related to the closure and relocation of three club in 2003.
Fees and Other revenues decreased $780,000 due to a
$1.3 million on-account business interruption insurance
payment received in January 2003 while no payments were received
in 2004 since the matter was settled and paid in 2003. The
decrease in fees and other revenues related to this insurance
claim was partially offset by a $325,000 increase in promotion
and marketing revenue.

Operating Expenses.Operating expenses increased $13.4 million, or 9.2% to
$159.7 million for the six months ended June 30, 2004,
from $146.3 million for the six months ended June 30,
2003. The increase was due to the following factors:

Payroll and related expenses increased by
$4.4 million, or 6.8% to $70.4 million for the six
months ended June 30, 2004 from $66.0 million for the
six months ended June 30, 2003. This increase was
attributable to the following factors:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In connection with Restructuring and distribution
    to common stockholders of Town Sports International Holdings,
    Inc., vested option holders, who did not exercise their options,
    were paid a one-time bonus recorded as payroll expense in TSI
    under GAAP. This one-time payment totaled $1.1 million.                                                                                                                                                                                                                      
|
| |  | Our initiation fees received were lower during
    the first quarter of 2004, while our variable costs of sale rose
    slightly, due to increased commission rates paid. When the
    initial fees do not exceed the related costs of sale, GAAP
    requires that we must recognize the net loss immediately. This
    immediate loss effect, together with increased costs of
    membership sales accounted for an $853,000 increase over the six
    months ended June 30, 2004 when compared to the same period
    of the prior year.
|
| |  | In an effort to increase membership satisfaction
    and improve our membership retention rates we have increased the
    level of in-house training and club support personnel; and we
    have moved from contracted housekeeping and equipment
    maintenance services to internally sourced employees. These
    customer service efforts resulted in $1.3 million increase.                                                                                                                                                           
|
| |  | Lastly, health and unemployment insurance rates
    have increased $853,000, or 11.0%.                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Club operating expenses increased by
$3.5 million or 6.5% to $56.8 million for the six
months ended June 30, 2004, from $53.3 million for the
six months ended June 30, 2003. This increase is
principally attributable to the following:



| |   |                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A $1.9 million increase in rent expense
    resulting from increases related to clubs that have opened since
    January 2003, amounting to $705,000 and increases related to
    club expansions amounting to $463,000. The remainder of the
    increase relates to rent and occupancy increases at our mature
    clubs averaging 3% per club.

14



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##### Table of Contents





| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Facility repairs and maintenance costs increased
    $756,000 or 22.8% due to a 3.5% increase in club square footage,
    as well as increased costs to serve our initiative to increase
    member satisfaction and improve member retention.
|
| |  | Increased advertising efforts in the second
    quarter of 2004 resulted in a $522,000 increase in advertising
    expense for the six months ended June 30, 2004, compared to
    the same period of the prior year.                         
|
| |  | In addition we experienced a $506,000 increase in
    utilities due to increases in utility rates, and a 3.5% increase
    in square footage in operation.                                                                                    

General and administrative increased by
$1.9 million, or 18.4% to $12.1 million for the six
months ended June 30, 2004 from $10.2 million for the
six months ended June 30, 2003. This increase was
principally attributable to the following:



| |   |                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Liability insurance expense increased by
    $648,000. Premiums increased $285,000 coupled with a favorable
    adjustment of $363,000 recorded in the first quarter of 2003,
    where we had adjusted our reserves related to prior period
    premium audits.
|
| |  | We also experienced an increase of $505,000 in
    data communication line costs. This principally relates to the
    correction of our service providers billing errors.                                                                                      
|
| |  | Legal fees increased by $251,000 principally due
    to a new club leases and expansion projects.                                                                                                                                                               
|
| |  | In an effort to increase member satisfaction and
    improve member retention rates we have increased in-house
    training and staff development. These customer service efforts
    resulted in an increase of $140,000 over the prior year.                  

Depreciation and amortization increased by
$1.6 million or 9.9% to $18.4 million for the six
months ended June 30, 2004, from $16.8 million for the
six months ended June 30, 2003, attributable to:



| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increases in depreciation related to new clubs
    and expanded and remodeled clubs amounting to $686,000 and
    $604,000 respectively.                   
|
| |  | Increases in amortization of software and
    hardware costs principally related to our recently rolled-out
    Club Networks system amounting to $296,000.

Goodwill Impairment.In the quarter ended March 31, 2004 the Company performed
its annual impairment test and determined that the goodwill at
one of its remote clubs was not recoverable. The goodwill
impairment amounted to $2.0 million. A deferred tax benefit
of $881,000 has been recorded in connection with this
impairment. Since this club is remote from one of the
companys clusters, it does not benefit from the
competitive advantage that our clustered clubs have, and as a
result it is more susceptible to competition. We have reduced
our projections for future cash flows of this club to take into
account the impact of a recent opening of a competitor. While
this club is expected to generate cash flow in the future, we no
longer expect it to operate at the levels that were projected at
the time the club was acquired. There was no goodwill impairment
from the annual impairment testing in 2003.

Interest Expense.Interest expense increased $8.5 million to
$18.8 million during the six months ended June 30,
2004, from $10.3 million for the six months ended
June 30, 2003. This increase is due to the issuance of
11% Senior Discount Notes in February of 2004 and
$255 million of 9 5/8% Senior Notes, which
refinanced $125 million of 9 3/4% Senior Notes in
April 2003.

Provision for Income
Tax.We have recorded a net income tax
benefits of $1.5 million for the six months ended
June 30, 2004 compared to a tax provision of
$4.0 million ended June 30, 2003.

Accreted Dividends on Preferred
Stock.Accreted dividends on preferred
stock decreased $6.9 million to $783,000 during the six
months ended June 30, 2004, from $7.6 million for the
six months ended June 30, 2003. This decrease is due to the
redemption of the redeemable senior preferred stock in April
2003 and the Restructuring of the Series A and
Series B preferred stock in February 2004.

15



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##### Table of Contents



Liquidity and Capital Resources

Historically, we have satisfied our liquidity
needs through cash from operations and various borrowing
arrangements. Principal liquidity needs have included the
acquisition and development of new clubs, debt service
requirements and other capital expenditures necessary to
upgrade, expand and renovate existing clubs.

Operating
Activities.Net cash provided by
operating activities for the six months ended June 30, 2004
was $33.2 million compared to $39.8 million during the
six months ended June 30, 2003. Net cash flows from
operations have decreased due to the decrease in operating
income excluding the effects of depreciation and amortization
and goodwill impairment.

We normally operate with a working capital
deficit because we receive dues and program and services fees
either (i) during the month services are rendered, or
(ii) when paid-in-full, in advance. As a result, we
typically do not have significant accounts receivable. We do
record deferred liabilities for revenue received in advance in
connection with dues and services paid-in-full and for
initiation fees paid at the time of enrollment. Initiation fees
received are deferred and amortized over a 24 month period,
which represents the average life of a member. We do not believe
we will have to meet this working capital deficit in the
foreseeable future, because as we increase the number of clubs
open, we expect we will continue to have deferred revenue
balances that reflect services and dues that are paid-in-full in
advance at levels similar to or greater than those currently
maintained. The deferred revenue balances that give rise to this
working capital deficit represent cash received in advance of
services performed, and do not represent liabilities that must
be funded with cash.

Investing
Activities.We invested
$15.0 million and $18.4 million in capital
expenditures during the six months ended June 30, 2004 and
2003, respectively. Our capital expenditures are net of landlord
contributions of $1.9 million and $103,000 for the six
months ended June 30, 2004. We estimate that for the year
ended December 31, 2004, we will invest an additional
$31.8 million in capital expenditures, which includes
$5.1 million that management intends to invest to expand
and renovate certain existing clubs, $13.1 million to
continue to upgrade existing clubs and $1.8 million to
enhance our management information systems. The remainder of our
2004 capital expenditures will be committed to build or acquire
clubs. Forecast capital expenditures for the year ended
December 31, 2004 totals $48.7 million. We expect that
these expenditures will be funded by cash flow provided by
operations and available cash on hand.

Financing
Activities.Net cash used in financing
activities was $618,000 for the six months ended June 30,
2004 compared to net cash provided by financing activities of
$22.7 million for the same period in 2003.

On February 4, 2004 TSI Holdings
successfully completed an offering of 11.0% Senior Discount
Notes (the Discount Notes) that will mature if
February 2014. TSI Holdings received a total of
$124.8 million in connection with this issuance. Fees and
expenses related to this transaction totaled approximately
$4.3 million. No cash interest is required to be paid prior
to February 2009. The accreted value of each Discount Note will
increase from the date of issuance until February 1, 2009,
at a rate of 11.0% per annum compounded semi-annually such
that on February 1, 2009 the accreted value will equal
$213.0 million, the principal value due at maturity.
Subsequent to February 1, 2009 cash interest on the
Discount Notes will accrue and be payable semi-annually in
arrears February 1 and August 1 of each year,
commencing August 1, 2009. The Discount Notes are
structurally subordinated and effectively rank junior to all
indebtedness of the Company. TSI Holdings debt is not
collateralized by TSI, and TSI Holdings relies on the cash flows
of TSI, with restrictions contained in the Senior
Note Indenture to service its debt.

On February 6, 2004, all of TSI
Holdings outstanding Series A stock and Series B
stock were redeemed for a total of $50.6 million.

On March 12, 2004, 65,536 vested common
stock options of TSI Holdings were exercised. TSI Holdings were
exercised. TSI Holdings received $539,000 in cash related to
these exercises.

On March 15, 2004, the Board of Directors of
TSI Holdings approved a common stock distributions of
$52.50 per share to all shareholders of record on
March 15, 2004. This distribution totaled $68,944 and was

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##### Table of Contents



paid on March 17, 2004. Also, in lieu of a
common stock distribution, vested common option holders were
paid a total of $1.1 million recorded as payroll expense at
the TSI level under GAAP.


As of June 30, 2004, our total consolidated
debt was $390.1 million. This substantial amount of debt
could have significant consequences, including:



| |   |                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Making it more difficult to satisfy our
    obligations;                                                                                                                                                                                                                               
|
| |  | Increasing our vulnerability to general adverse
    economic and industry 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.                                                                                                                                                        

These limitations and consequences may place us
at a competitive disadvantage to other less-leveraged
competitors.

As of June 30, 2004, we had
$255.0 million of Senior Notes outstanding. The Senior
Notes bear interest at a rate of 9 5/8% and mature in 2011.
Under the provisions of the Senior Note Indenture, we may
not issue additional Senior Notes without modification of the
indenture with the bondholders consent. Our line of credit
with our principal bank provides for direct borrowings and
letters of credit of up to $50.0 million. The line of
credit carries interest at our option based upon the Eurodollar
borrowing rate plus 4.0% or the banks prime rate plus 3.0%
as defined, and we are required to pay a commitment fee of
0.75% per annum on the daily unutilized amount. As of
June 30, 2004, no borrowings were outstanding under this
line. As of June 30, 2004 outstanding letters of credit
totaled $1.7 million. As of June 30, 2004, we had
approximately $48.3 million unutilized under the line of
credit, which matures in April 2008, and has no scheduled
amortization requirements. As of June 30, 2004 we also had
$56.7 million of cash on hand.

The credit agreement governing the line of credit
contains restrictive covenants including a leverage ratio and
interest coverage ratio and dividend payment restrictions and is
collateralized by all the assets of the Company. As of
June 30, 2004 our Net Leverage Ratio, and Net Interest
Coverage Ratio, as defined by the terms of the credit agreement
are 3.5 and 3.0 to 1.0, respectively. Our ability to incur
additional debt is limited by the terms of the credit agreement
in that the Net Leverage Ratio, as defined, cannot exceed 4.0 to
1.0 and the Net Interest Coverage Ratio must be greater than 2.5
to 1.0, accordingly the availability under this facility was
restricted to $33.4 million as of June 30, 2004.

Our common stock is not publicly traded and
therefore our ability to raise equity financing is not as
readily available as it is for companies that have publicly
traded common stock.

We believe that we have or, will be able to
obtain, or generate sufficient funds to finance our current
operating and growth plans through the end of 2008. Any material
acceleration or expansion of that plan through additional
greenfields or acquisitions (to the extent such acquisitions
include cash payments) may require us to pursue additional
sources of financing prior to the end of 2008. There can be no
assurance that such financing will be available, or that it will
be available on acceptable terms. The line of credit accrues
interest at variable rates based on market conditions,
accordingly, future increases in interest rates could have a
negative impact on net income should borrowings be required.

Notes payable were incurred upon the acquisition
of various clubs and are subject to the right of offset for
possible post acquisition adjustments arising out of operations
of the acquired clubs. These notes bear interest at rates
between 5% an 9%, and are non-collateralized. The notes are due
on various dates through 2012.

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##### Table of Contents



The aggregate long-term debt, capital lease, and
operating lease obligations as of June 30, 2004 were as
follows:

|                                   |  |                                   |           |           |  |           |        |           |  |         |         |  |  |   |        |  |  |   |         | 
|---------------------------------- |  | --------------------------------- | --------- | --------- |  | --------- | ------ | --------- |  | ------- | ------- |  |  | - | ------ |  |  | - | ------- | 
|                                   |  |                                  
|                                   |  | Payments Due by Period (in $000)
|                                   |  |                                  
|                                   |  |                                   |           | Less than |  |           |        | After    
|Contractual Obligations            |  | Total                             |           | 1 year    |  | 1-3 years |        | 4-5 years |  | 5 years
|                                   |  |                                   |           |           |  |           |        |           |  |        
|Long-Term Debt(1)                  |  | $                                 | 389,367   |           |  | $         | 1,215  |           |  | $       | 1,433   |  |  | $ | 637    |  |  | $ | 386,082 | 
|Capital Lease Obligations(2)       |  |                                   | 754       |           |  |           | 754    |           |  |         |        |  |  |   |       |  |  |   |        | 
|Operating Lease Obligations(3)     |  |                                   | 634,158   |           |  |           | 51,523 |           |  |         | 104,142 |  |  |   | 98,498 |  |  |   | 379,995 | 
|                                   |  |                                   |           |           |  |           |        |           |  |         |         |  |  |   |        |  |  |   |         | 
|Total Contractual Cash Obligations |  | $                                 | 1,024,279 |           |  | $         | 53,492 |           |  | $       | 105,575 |  |  | $ | 99,135 |  |  | $ | 766,077 | 
|                                   |  |                                   |           |           |  |           |        |           |  |         |         |  |  |   |        |  |  |   |         | 



---

Notes:




|    |                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The long-term debt contractual cash obligations
    include principal payment requirements only. Interest on our
    9 5/8% Senior Notes amounts to $24.5 million
    annually.                                                          
|   
|(2) | Capital lease obligations represent principal and
    interest payments.                                                                                                                                                                 
|   
|(3) | Operating lease obligations include base rent
    only. Certain leases provide for additional rent based on
    increases in real estate tax indexation, utilities, and defined
    amounts based on the operating results of the lessee.

Equity Transactions and
Restructuring

On January 26, 2004 warrants to
purchase 71,631 shares of Class A common stock
were exercised.

On February 4, 2004 TSI and its shareholders
and Town Sports International Holdings, Inc., (TSI
Holdings) a newly formed company, entered into a
Restructuring Agreement (Restructuring). In
connection with this Restructuring, the holders of TSIs
Series A Preferred Stock, Series B Preferred Stock,
and Class A Common stock contributed their shares of the
TSIs capital stock to TSI Holdings in exchange for an
equal amount of newly issued shares of the same form in TSI
Holdings. Immediately following this exchange TSI Holdings
contributed to TSI the certificates representing all of
TSIs shares contributed in the aforementioned exchange. In
return TSI issued 1,000 shares of common stock to TSI
Holdings, and cancelled the certificate representing TSI Shares
contributed to it by TSI Holdings. In addition as part of the
Restructuring, all holders of options to purchase Class A
Common stock of TSI exchanged their options for options to
purchase an equal number of shares of Class A Common stock
of TSI Holdings at strike prices adjusted to reflect the
Restructuring.

On February 4, 2004 TSI Holdings
successfully completed an offering of 11.0% Senior Discount
Notes (the Discount Notes) that will mature in
February 2014. TSI Holdings received a total of
$124.8 million in connection with this issuance. Fees and
expenses related to this transaction totaled approximately
$4.3 million. No cash interest is required to be paid prior
to February 2009. The accreted value of each Discount Note will
increase from the date of issuance until February 1, 2009,
at a rate of 11.0% per annum compounded semi-annually such
that on February 1, 2009 the accreted value will equal
$213.0 million, the principal value due at maturity.
Subsequent to February 1, 2009 cash interest on the
Discount Notes will accrue and be payable semi-annually in
arrears February 1 and August 1 of each year, commencing
August 1, 2009. The Discount Notes are structurally
subordinated and effectively rank junior to all indebtedness of
the Company.

On February 6, 2004, all of TSI
Holdings outstanding Series A and Series B
Preferred stock were redeemed for a total of $50.6 million.

On March 12, 2004, 65,536 vested common
stock options of TSI Holdings were exercised. TSI Holdings
received $539,000 in cash related to these exercises.

On March 15, 2004, the Board of Directors of
TSI Holdings approved a common stock distribution of
$52.50 per share to all shareholders of record on
March 15, 2004. This distribution totaled $68,944 and was
paid on March 17, 2004. Also, in lieu of a common stock
distribution, vested common option holders were paid a total of
$1.1 million recorded as payroll expense at the TSI level
under GAAP.

18



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##### Table of Contents



Forward-Looking Statements

Certain statements in this report on
Form 10-Q of the Company for the three and six month
periods ended June 30, 2004 are forward-looking statements,
including, without limitation, statements regarding future
financial results and performance, capital expenditures, and
potential sales revenue. These statements are subject to various
risks and uncertainties, many of which are outside the control
of the Company, including the level of market demand for the
Companys services, competitive pressures, the ability to
achieve reductions in operating costs and to continue to
integrate acquisitions, the application of Federal and state tax
laws and regulations, and other specific factors discussed
herein and in other Securities and Exchange Commission filings
by the Company. The information contained herein represents
managements best judgement as of the date hereof based on
information currently available; however, the Company does not
intend to update this information, except as required by law to
reflect development or information obtained after the date
hereof and disclaims any legal obligation to the contrary.






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

We do not believe that we have any significant
risk related to interest rate fluctuations since we currently
only carry fixed-rate debt. We invest our excess cash in highly
liquid short-term investments. These investments are not held
for trading or other speculative purposes. Changes in interest
rates affect the investment income we earn on our cash
equivalents and, therefore impact our cash flows and results of
operations. If short-term interest rates were to have increased
by 100 basis points during 2003, our interest income from
cash equivalents would have increased by approximately $500,000.
These amounts are determined by considering the impact of the
hypothetical interest rates on our cash equivalents balance
during 2003.






|        |                         
|------- | ------------------------
|Item 4. | Controls and Procedures.

(a) The Company carried out an evaluation,
under the supervision and with the participation of the
Companys management, including the Chairman, Chief
Executive Officer along with the Chief Financial Officer, of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15. Based upon that evaluation, the Companys
disclosure controls and procedures (1) were effective in
timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be
included in the Companys periodic SEC filings and
(2) were adequate to ensure that information required to be
disclosed by the Company in the reports filed or submitted by
the Company under the Exchange Act is recorded, processed and
summarized and reported within the time period specified in the
SECs rules and forms.

(b) There have been no changes in the
Companys internal controls or in other factors which could
significantly affect internal controls subsequent to the date
the Company carried out its evaluation.

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##### Table of Contents






PART II.     OTHER
INFORMATION






|        |                   
|------- | ------------------
|Item 1. | Legal Proceedings.

On February 13, 2003, in an action styled
Joseph Anaya vs Town Sports International, Inc.
et al. an individual filed suit against the Company in
the Supreme Court, New York County, alleging that on
January 14, 2003, he sustained serious bodily injury at one
of our club locations. He filed an amended complaint on
September 17, 2003 seeking two billion dollars in damages
for personal injuries. His cause of action seeking punitive
damages, in the amount of two hundred and fifty million dollars,
was dismissed on January 26, 2004. While the company is
unable to determine the ultimate outcome of the above action it
intends to contest the matter vigorously.

We have in force fifty one million dollars of
insurance to cover claims of this nature. If any such judgement
exceeds the amount we are covered by insurance by
$2.5 million we would be in default under the credit
agreement governing TSI, Inc.s senior secured revolving
credit facility. Also, if any uninsured judgement, when
aggregated with any other judgement not covered by insurance
equals $5.0 million or more, the judgement would constitute
an event of default under the indenture governing the notes. We
anticipate that these matters will be covered by insurance.

The Company does not believe this matter will
have a material effect on its consolidated Financial position,
results of operation or cash flow.

The Company is a party to various other lawsuits
arising in the normal course of business. Management believes
that the ultimate outcome of these matters will not have a
material effect on the Companys consolidated financial
position, results of operations or cash flows.






|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 2. | Changes in Securities, Use of Proceeds and
    Issuer Purchases of Equity Securities.

Not applicable.






|        |                                     
|------- | ------------------------------------
|Item 3. | Defaults Upon Senior
    Securities.

Not applicable.






|        |                                                         
|------- | --------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders.

Not applicable.






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

Not applicable.






|        |                                      
|------- | -------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K.



| |     |         
| | --- | --------
| | (a) | Exhibits



| |              |                                                                                                
| | ------------ | -----------------------------------------------------------------------------------------------
| | Exhibit 31.1 | Certification by Robert Giardina pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.
|
| | Exhibit 31.2 | Certification by Richard Pyle pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.   
|
| | Exhibit 31.3 | Certification by Mark Smith pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.     
|
| | Exhibit 32.1 | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                   
|
| | Exhibit 32.2 | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                   

(b) Reports

None.

20



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##### Table of Contents






SIGNATURES

Pursuant to 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.

|                      |  |                                                                                                                                                  
|--------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|                      |  | TOWN SPORTS INTERNATIONAL
    HOLDINGS, INC.
    (Registrant)                                                                                    
|                     
|DATE: August 16, 2004 |  | By: /s/ RICHARD PYLE    Richard
    Pyle    Chief Financial Officer, Office
    of the President    (principal
    financial, accounting officer)
|                     
|DATE: August 16, 2004 |  | By: /s/ ROBERT GIARDINA    Robert
    Giardina    Chief Executive
    Officer    (principal executive officer)                                   

21