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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q




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

For the quarterly period ended September 30, 2005


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)


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

888 Seventh Avenue
(25th Floor)


New York, New York 10106


Telephone: (212) 246-6700


(Address, zip code, and telephone number, including


area code, of registrants principal executive
office.)




þ o




o þ




o o












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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


FORM 10-Q


FOR THE QUARTER ENDED SEPTEMBER 30, 2005


INDEX


|                              |                                                                                                       |                                                                                                                                                                              |  |    |   | 
|----------------------------- | ----------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -- | - | 
|                              |                                                                                                       | Page                                                                                                                                                                         | 
|                              |                                                                                                       |                                                                                                                                                                              | 
|PART I. FINANCIAL INFORMATION |                                                                                                       |                                                                                                                                                                              |  |   
|                              | Item 1. Financial Statements (Unaudited)                                                              |                                                                                                                                                                              |  |    |  
|                              |                                                                                                       | a) Condensed Consolidated Balance
    Sheets as of December 31, 2004 and September 30,
    2005                                                                              |  |    | 2 | 
|                              |                                                                                                       | b) Condensed Consolidated Statements
    of Operations and Statements of Comprehensive Income (Loss) for
    the three and nine months ended September 30, 2004 and
    2005 |  |    | 3 | 
|                              |                                                                                                       | c) Condensed Consolidated Statements
    of Cash Flows for the nine months ended September 30, 2004
    and 2005                                                             |  |    | 4 | 
|                              |                                                                                                       | d) Notes to Condensed Consolidated
    Financial Statements                                                                                                                  |  |    | 5 | 
|                              | Item 2. Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations |                                                                                                                                                                              |  | 19 |  
|                              | Item 3. Quantitative and
    Qualitative Disclosures About Market Risk                                |                                                                                                                                                                              |  | 27 |  
|                              | Item 4. Controls and
    Procedures                                                                   |                                                                                                                                                                              |  | 27 |  
|PART II. OTHER INFORMATION    |                                                                                                       |                                                                                                                                                                              |  |   
|                              | Item 1. Legal Proceedings                                                                             |                                                                                                                                                                              |  | 28 |  
|                              | Item 2. Unregistered Sales of
    Equity Securities and Use of Proceeds                               |                                                                                                                                                                              |  | 28 |  
|                              | Item 3. Defaults upon Senior
    Securities                                                           |                                                                                                                                                                              |  | 28 |  
|                              | Item 4. Submission of Matters to
    a Vote of Security Holders                                       |                                                                                                                                                                              |  | 28 |  
|                              | Item 5. Other Information                                                                             |                                                                                                                                                                              |  | 28 |  
|                              | Item 6. Exhibits                                                                                      |                                                                                                                                                                              |  | 29 |  
|SIGNATURES                    |                                                                                                       |                                                                                                                                                                              |  |   
|                              |                                                                                                       | Section 302 certification                                                                                                                                                    |  |    |   | 
|                              |                                                                                                       | Section 302 certification                                                                                                                                                    |  |    |   | 
|                              |                                                                                                       | Section 302 certification                                                                                                                                                    |  |    |   | 
|                              |                                                                                                       | Section 906 certification                                                                                                                                                    |  |    |   | 
|                              |                                                                                                       | Section 906 certification                                                                                                                                                    |  |    |   | 
|                              |                                                                                                       | Section 906 certification                                                                                                                                                    |  |    |   | 
|EX-31.1: CERTIFICATION       
|EX-31.2: CERTIFICATION       
|EX-31.3: CERTIFICATION       
|EX-32.1: CERTIFICATION       
|EX-32.2: CERTIFICATION       
|EX-32.3: CERTIFICATION       



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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED CONSOLIDATED BALANCE SHEETS


December 31, 2004 and September 30, 2005


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


|                                             |                                                                                                                                                                       |                                             |         |             |               |   |         |          |          |  
|-------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------- | ----------- | ------------- | - | ------- | -------- | -------- | -
|                                             |                                                                                                                                                                       | December 31,                                |         |             | September 30, |  
|                                             |                                                                                                                                                                       | 2004                                        |         |             | 2005          |  
|                                             |                                                                                                                                                                       |                                             |         |             |               |  
|                                             |                                                                                                                                                                       |                                             |         | (Unaudited) |              
|Assets                                      
|Current assets:                              |                                                                                                                                                                       |                                             |         |             |               |   |         |         
|                                             | Cash and cash equivalents                                                                                                                                             |                                             | $       | 57,506      |               |   | $       | 68,866   |         
|                                             | Accounts receivable (less allowance for doubtful accounts of
    $2,647 and $2,689 as of December 31, 2004 and
    September 30, 2005, respectively)                  |                                             |         | 1,955       |               |   |         | 4,864    |         
|                                             | Inventory                                                                                                                                                             |                                             |         | 655         |               |   |         | 550      |         
|                                             | Prepaid corporate income taxes                                                                                                                                        |                                             |         | 5,645       |               |   |         | 1,987    |         
|                                             | Prepaid expenses and other current assets                                                                                                                             |                                             |         | 8,971       |               |   |         | 12,015   |         
|                                             |                                                                                                                                                                       |                                             |         |             |               |  
|                                             |                                                                                                                                                                       | Total current assets                        |         |             | 74,732        |   |         |          | 88,282   |  
|Fixed assets, net                            |                                                                                                                                                                       |                                             | 226,253 |             |               |   | 237,528 |         
|Goodwill                                     |                                                                                                                                                                       |                                             | 47,494  |             |               |   | 49,967  |         
|Intangible assets, net                       |                                                                                                                                                                       |                                             | 931     |             |               |   | 913     |         
|Deferred tax asset, net                      |                                                                                                                                                                       |                                             | 12,735  |             |               |   | 23,035  |         
|Deferred membership costs                    |                                                                                                                                                                       |                                             | 12,017  |             |               |   | 11,714  |         
|Other assets                                 |                                                                                                                                                                       |                                             | 16,794  |             |               |   | 15,706  |         
|                                             |                                                                                                                                                                       |                                             |         |             |               |  
|                                             |                                                                                                                                                                       | Total assets                                |         | $           | 390,956       |   |         | $        | 427,145  |  
|                                             |                                                                                                                                                                       |                                             |         |             |               |  
|                                            
|Liabilities and Stockholders Deficit       
|Current liabilities:                         |                                                                                                                                                                       |                                             |         |             |               |   |         |         
|                                             | Current portion of long-term debt and capital lease obligations                                                                                                       |                                             | $       | 1,225       |               |   | $       | 1,270    |         
|                                             | Accounts payable                                                                                                                                                      |                                             |         | 10,555      |               |   |         | 6,321    |         
|                                             | Accrued expenses                                                                                                                                                      |                                             |         | 22,402      |               |   |         | 29,429   |         
|                                             | Accrued interest                                                                                                                                                      |                                             |         | 5,217       |               |   |         | 11,483   |         
|                                             | Deferred revenue                                                                                                                                                      |                                             |         | 28,294      |               |   |         | 36,363   |         
|                                             |                                                                                                                                                                       |                                             |         |             |               |  
|                                             |                                                                                                                                                                       | Total current liabilities                   |         |             | 67,693        |   |         |          | 84,866   |  
|Long-term debt and capital lease obligations |                                                                                                                                                                       |                                             | 395,236 |             |               |   | 406,067 |         
|Deferred lease liabilities                   |                                                                                                                                                                       |                                             | 36,009  |             |               |   | 43,551  |         
|Deferred revenue                             |                                                                                                                                                                       |                                             | 3,298   |             |               |   | 2,916   |         
|Other liabilities                            |                                                                                                                                                                       |                                             | 5,737   |             |               |   | 6,858   |         
|                                             |                                                                                                                                                                       |                                             |         |             |               |  
|                                             |                                                                                                                                                                       | Total liabilities                           |         |             | 507,973       |   |         |          | 544,258  |  
|                                             |                                                                                                                                                                       |                                             |         |             |               |  
|Commitments and contingencies (Note 7)       |                                                                                                                                                                       |                                             |         |             |               |   |         |         
|Stockholders deficit:                       |                                                                                                                                                                       |                                             |         |             |               |   |         |         
|                                             | Class A voting common stock, $.001 par value; issued
    and outstanding 1,312,289 and 1,309,123 shares at
    December 31, 2004 and September 30, 2005, respectively |                                             |         | 1           |               |   |         | 1        |         
|                                             | Paid-in capital                                                                                                                                                       |                                             |         | (113,900    | )             |   |         | (114,087 | )       
|                                             | Unearned compensation                                                                                                                                                 |                                             |         | (292        | )             |   |         | (254     | )       
|                                             | Accumulated other comprehensive income (currency translation
    adjustment)                                                                                          |                                             |         | 916         |               |   |         | 422      |         
|                                             | Accumulated deficit                                                                                                                                                   |                                             |         | (3,742      | )             |   |         | (3,195   | )       
|                                             |                                                                                                                                                                       |                                             |         |             |               |  
|                                             |                                                                                                                                                                       | Total stockholders deficit                 |         |             | (117,017      | ) |         |          | (117,113 | )
|                                             |                                                                                                                                                                       |                                             |         |             |               |  
|                                             |                                                                                                                                                                       | Total liabilities and stockholders deficit |         | $           | 390,956       |   |         | $        | 427,145  |  
|                                             |                                                                                                                                                                       |                                             |         |             |               |  



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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)


For the three and nine months ended September 30, 2004
and 2005


(All figures $000s)


(Unaudited)


|                                                      |                                                                         |                    |        |        |                   |   |        |        |   |   |         |         |   |   |         |         | 
|----------------------------------------------------- | ----------------------------------------------------------------------- | ------------------ | ------ | ------ | ----------------- | - | ------ | ------ | - | - | ------- | ------- | - | - | ------- | ------- | 
|                                                      |                                                                         | Three months ended |        |        | Nine months ended |  
|                                                      |                                                                         | September 30,      |        |        | September 30,     |  
|                                                      |                                                                         |                    |        |        |                   |  
|                                                      |                                                                         | 2004               |        |        | 2005              |   |        | 2004   |   |   | 2005    |        
|                                                      |                                                                         |                    |        |        |                   |   |        |        |   |   |         |        
|Revenues:                                             |                                                                         |                    |        |        |                   |   |        |        |   |   |         |         |   |   |         |        
|                                                      | Club operations                                                         |                    | $      | 88,205 |                   |   | $      | 97,212 |   |   | $       | 261,126 |   |   | $       | 287,121 | 
|                                                      | Fees and other                                                          |                    |        | 1,471  |                   |   |        | 988    |   |   |         | 3,184   |   |   |         | 2,921   | 
|                                                      |                                                                         |                    |        |        |                   |   |        |        |   |   |         |        
|                                                      |                                                                         |                    | 89,676 |        |                   |   | 98,200 |        |   |   | 264,310 |         |   |   | 290,042 |        
|                                                      |                                                                         |                    |        |        |                   |   |        |        |   |   |         |        
|Operating Expenses:                                   |                                                                         |                    |        |        |                   |   |        |        |   |   |         |         |   |   |         |        
|                                                      | Payroll and related                                                     |                    |        | 33,813 |                   |   |        | 38,388 |   |   |         | 104,256 |   |   |         | 113,952 | 
|                                                      | Club operating                                                          |                    |        | 29,848 |                   |   |        | 34,146 |   |   |         | 86,665  |   |   |         | 97,314  | 
|                                                      | General and administrative                                              |                    |        | 6,104  |                   |   |        | 6,653  |   |   |         | 18,228  |   |   |         | 19,796  | 
|                                                      | Depreciation and amortization                                           |                    |        | 8,851  |                   |   |        | 9,850  |   |   |         | 27,271  |   |   |         | 29,673  | 
|                                                      | Goodwill impairment                                                     |                    |        |       |                   |   |        |       |   |   |         | 2,002   |   |   |         |        | 
|                                                      |                                                                         |                    |        |        |                   |   |        |        |   |   |         |        
|                                                      |                                                                         |                    | 78,616 |        |                   |   | 89,037 |        |   |   | 238,422 |         |   |   | 260,735 |        
|                                                      |                                                                         |                    |        |        |                   |   |        |        |   |   |         |        
|                                                      | Operating Income                                                        |                    |        | 11,060 |                   |   |        | 9,163  |   |   |         | 25,888  |   |   |         | 29,307  | 
|Interest expense                                      |                                                                         |                    | 10,311 |        |                   |   | 10,485 |        |   |   | 29,174  |         |   |   | 31,113  |        
|Interest income                                       |                                                                         |                    | (221   | )      |                   |   | (618   | )      |   |   | (510    | )       |   |   | (1,452  | )      
|Equity in the earnings of investees and rental income |                                                                         |                    | (407   | )      |                   |   | (446   | )      |   |   | (1,090  | )       |   |   | (1,321  | )      
|                                                      |                                                                         |                    |        |        |                   |   |        |        |   |   |         |        
|                                                      | Income (loss) before provision (benefit) for corporate income
    taxes |                    |        | 1,377  |                   |   |        | (258   | ) |   |         | (1,686  | ) |   |         | 967     | 
|Provision (benefit) for corporate income taxes        |                                                                         |                    | 687    |        |                   |   | (135   | )      |   |   | (808    | )       |   |   | 420     |        
|                                                      |                                                                         |                    |        |        |                   |   |        |        |   |   |         |        
|                                                      | Net income (loss)                                                       |                    |        | 690    |                   |   |        | (123   | ) |   |         | (878    | ) |   |         | 547     | 
|Accreted dividends on preferred stock                 |                                                                         |                    |       |        |                   |   |       |        |   |   | (783    | )       |   |   |        |        
|                                                      |                                                                         |                    |        |        |                   |   |        |        |   |   |         |        
|                                                      | Net income (loss) attributable to common stockholders                   |                    | $      | 690    |                   |   | $      | (123   | ) |   | $       | (1,661  | ) |   | $       | 547     | 
|                                                      |                                                                         |                    |        |        |                   |   |        |        |   |   |         |        
|                                                     
|Statements of Comprehensive Income (Loss)            
|Net income (loss)                                     |                                                                         | $                  | 690    |        |                   | $ | (123   | )      |   | $ | (878    | )       |   | $ | 547     |        
|Foreign currency translation adjustments              |                                                                         |                    | 14     |        |                   |   | 21     |        |   |   | (17     | )       |   |   | 494     |        
|                                                      |                                                                         |                    |        |        |                   |   |        |        |   |   |         |        
|Comprehensive income (loss)                           |                                                                         | $                  | 704    |        |                   | $ | (102   | )      |   | $ | (895    | )       |   | $ | 1,041   |        
|                                                      |                                                                         |                    |        |        |                   |   |        |        |   |   |         |        



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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


For the nine months ended September 30, 2004 and 2005


(All figures $000s)


(Unaudited)


|                                                                                                          |                                                                                             |                                                         |        |         |         |   |        |         |         |  
|--------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------ | ------- | ------- | - | ------ | ------- | ------- | -
|                                                                                                          |                                                                                             | Nine months ended                                       |       
|                                                                                                          |                                                                                             | September 30,                                           |       
|                                                                                                          |                                                                                             |                                                         |       
|                                                                                                          |                                                                                             | 2004                                                    |        |         | 2005    |  
|                                                                                                          |                                                                                             |                                                         |        |         |         |  
|Cash flows from operating activities:                                                                     |                                                                                             |                                                         |        |         |         |   |        |        
|                                                                                                          | Net income (loss)                                                                           |                                                         | $      | (878    | )       |   | $      | 547     |        
|                                                                                                          |                                                                                             |                                                         |        |         |         |  
|Adjustments to reconcile net income (loss) to net cash provided
    by operating activities:              |                                                                                             |                                                         |        |         |         |   |        |        
|                                                                                                          | Depreciation and amortization                                                               |                                                         |        | 27,271  |         |   |        | 29,673  |        
|                                                                                                          | Interest expense on Senior Discount Notes                                                   |                                                         |        | 9,146   |         |   |        | 11,495  |        
|                                                                                                          | Goodwill impairment                                                                         |                                                         |        | 2,002   |         |   |        |        |        
|                                                                                                          | Compensation expense incurred in connection with stock options                              |                                                         |        | 29      |         |   |        | 35      |        
|                                                                                                          | Noncash rental expense, net of noncash rental income                                        |                                                         |        | 363     |         |   |        | 1,079   |        
|                                                                                                          | Amortization of debt issuance costs                                                         |                                                         |        | 1,178   |         |   |        | 1,227   |        
|                                                                                                          | Net changes in certain operating assets and liabilities                                     |                                                         |        | 6,617   |         |   |        | 16,391  |        
|                                                                                                          | (Increase) decrease in deferred tax asset                                                   |                                                         |        | 1,839   |         |   |        | (10,300 | )      
|                                                                                                          | Decrease in deferred membership costs                                                       |                                                         |        | 643     |         |   |        | 303     |        
|                                                                                                          | Increase in reserve for self-insured liability claims                                       |                                                         |        | 845     |         |   |        | 1,496   |        
|                                                                                                          | Landlord contributions to tenant improvements                                               |                                                         |        | 2,112   |         |   |        | 6,389   |        
|                                                                                                          | Other                                                                                       |                                                         |        | (661    | )       |   |        | (513    | )      
|                                                                                                          |                                                                                             |                                                         |        |         |         |  
|                                                                                                          |                                                                                             | Total adjustments                                       |        |         | 51,384  |   |        |         | 57,275  |  
|                                                                                                          |                                                                                             |                                                         |        |         |         |  
|                                                                                                          |                                                                                             | Net cash provided by operating activities               |        |         | 50,506  |   |        |         | 57,822  |  
|                                                                                                          |                                                                                             |                                                         |        |         |         |  
|Cash flows from investing activities:                                                                     |                                                                                             |                                                         |        |         |         |   |        |        
|                                                                                                          | Capital expenditures, net of effect of acquired businesses                                  |                                                         |        | (23,754 | )       |   |        | (40,773 | )      
|                                                                                                          | Acquisition of businesses                                                                   |                                                         |        | (3,726  | )       |   |        | (3,861  | )      
|                                                                                                          |                                                                                             |                                                         |        |         |         |  
|                                                                                                          |                                                                                             | Net cash used in investing activities                   |        |         | (27,480 | ) |        |         | (44,634 | )
|                                                                                                          |                                                                                             |                                                         |        |         |         |  
|Cash flows from financing activities:                                                                     |                                                                                             |                                                         |        |         |         |   |        |        
|                                                                                                          | Proceeds from 11.0% Senior Discount Note offering                                           |                                                         |        | 120,729 |         |   |        |        |        
|                                                                                                          | Proceeds from stock option exercises                                                        |                                                         |        | 539     |         |   |        |        |        
|                                                                                                          | Redemption of Series A and Series B preferred stock                                         |                                                         |        | (50,635 | )       |   |        |        |        
|                                                                                                          | Common stock distribution                                                                   |                                                         |        | (68,943 | )       |   |        |        |        
|                                                                                                          | Repurchase of common stock                                                                  |                                                         |        | (53     | )       |   |        | (184    | )      
|                                                                                                          | Repayment of borrowings                                                                     |                                                         |        | (3,055  | )       |   |        | (959    | )      
|                                                                                                          | Costs related to a planned equity offering                                                  |                                                         |        |        |         |   |        | (685    | )      
|                                                                                                          |                                                                                             |                                                         |        |         |         |  
|                                                                                                          |                                                                                             | Net cash used in financing activities                   |        |         | (1,418  | ) |        |         | (1,828  | )
|                                                                                                          |                                                                                             |                                                         |        |         |         |  
|                                                                                                          |                                                                                             | Net increase in cash and cash equivalents               |        |         | 21,608  |   |        |         | 11,360  |  
|Cash and cash equivalents at beginning of period                                                          |                                                                                             |                                                         | 40,802 |         |         |   | 57,506 |        
|                                                                                                          |                                                                                             |                                                         |        |         |         |  
|                                                                                                          |                                                                                             | Cash and cash equivalents at end of period              |        | $       | 62,410  |   |        | $       | 68,866  |  
|                                                                                                          |                                                                                             |                                                         |        |         |         |  
|Summary of change in certain operating assets and liabilities;
    net of effects of acquired businesses: |                                                                                             |                                                         |        |         |         |   |        |        
|                                                                                                          | Increase in accounts receivable                                                             |                                                         | $      | (1,111  | )       |   | $      | (2,803  | )      
|                                                                                                          | Decrease in inventory                                                                       |                                                         |        | 43      |         |   |        | 109     |        
|                                                                                                          | Decrease (increase) in prepaid expenses, prepaid income taxes,
    and other current assets |                                                         |        | (3,590  | )       |   |        | 155     |        
|                                                                                                          | Increase in accounts payable, accrued expenses and accrued
    interest                     |                                                         |        | 8,448   |         |   |        | 11,532  |        
|                                                                                                          | Increase in deferred revenue                                                                |                                                         |        | 2,827   |         |   |        | 7,398   |        
|                                                                                                          |                                                                                             |                                                         |        |         |         |  
|                                                                                                          |                                                                                             | Net changes in certain operating assets and liabilities |        | $       | 6,617   |   |        | $       | 16,391  |  
|                                                                                                          |                                                                                             |                                                         |        |         |         |  



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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




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







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

|                                          |  |              |         |  |               |   |         | 
|----------------------------------------- |  | ------------ | ------- |  | ------------- | - | ------- | 
|                                          |  | December 31, |         |  | September 30, |  
|                                          |  | 2004         |         |  | 2005          |  
|                                          |  | ($000s)     |         |  | ($000s)      |  
|                                          |  |              |         |  |               |  
|Senior
    Notes 95/8%,
    due 2011      |  | $            | 255,000 |  |               | $ | 255,000 | 
|Senior Discount Notes 11.0%, due 2014     |  |              | 137,572 |  |               |   | 149,066 | 
|Notes payable for acquired businesses     |  |              | 3,874   |  |               |   | 3,271   | 
|Capital lease obligations                 |  |              | 15      |  |               |   |        | 
|                                          |  |              |         |  |               |  
|                                          |  |              | 396,461 |  |               |   | 407,337 | 
|Less, current portion due within one year |  |              | 1,225   |  |               |   | 1,270   | 
|                                          |  |              |         |  |               |  
|Long-term portion                         |  | $            | 395,236 |  |               | $ | 406,067 | 
|                                          |  |              |         |  |               |  



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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




5 8






|   |                                                    
|-- | ---------------------------------------------------
|3. | Recent Accounting Pronouncements and Tax Incentives

Share-Based Payments. Accounting for
Stock Based Compensation,










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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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









|                                                  |  |   |        |  
|------------------------------------------------- |  | - | ------ | -
|Balance December 31, 2004                         |  | $ | 47,494 |  
|Change due to currency exchange rate fluctuations |  |   | (100   | )
|Acquired goodwill                                 |  |   | 2,587  |  
|Other                                             |  |   | (14    | )
|                                                  |  |   |       
|Balance September 30, 2005                        |  | $ | 49,967 |  
|                                                  |  |   |       

7



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                           |  |                         |        |  |                          |   |         |                 |  |   |     | 
|-------------------------- |  | ----------------------- | ------ |  | ------------------------ | - | ------- | --------------- |  | - | --- | 
|                           |  | As of December 31, 2004 |       
|                           |  | ($000s)                |       
|                           |  |                         |       
|Acquired Intangible Assets |  | Cross Carrying Amount   |        |  | Accumulated Amortization |   |         | Net Intangibles | 
|                           |  |                         |        |  |                          |   |         |                 | 
|Membership Lists           |  | $                       | 11,008 |  |                          | $ | (10,372 | )               |  | $ | 636 | 
|Covenants-not-to-compete   |  |                         | 1,150  |  |                          |   | (894    | )               |  |   | 256 | 
|Beneficial Lease           |  |                         | 223    |  |                          |   | (184    | )               |  |   | 39  | 
|                           |  |                         |        |  |                          |   |         |                 | 
|                           |  | $                       | 12,381 |  |                          | $ | (11,450 | )               |  | $ | 931 | 
|                           |  |                         |        |  |                          |   |         |                 | 

|                           |  |                          |        |  |                          |   |         |                 |  |   |     | 
|-------------------------- |  | ------------------------ | ------ |  | ------------------------ | - | ------- | --------------- |  | - | --- | 
|                           |  | As of September 30, 2005 |       
|                           |  | ($000s)                 |       
|                           |  |                          |       
|Acquired Intangible Assets |  | Gross Carrying Amount    |        |  | Accumulated Amortization |   |         | Net Intangibles | 
|                           |  |                          |        |  |                          |   |         |                 | 
|Membership Lists           |  | $                        | 11,450 |  |                          | $ | (10,783 | )               |  | $ | 667 | 
|Covenants-not-to-compete   |  |                          | 1,150  |  |                          |   | (935    | )               |  |   | 215 | 
|Beneficial Lease           |  |                          | 223    |  |                          |   | (192    | )               |  |   | 31  | 
|                           |  |                          |        |  |                          |   |         |                 | 
|                           |  | $                        | 12,823 |  |                          | $ | (11,910 | )               |  | $ | 913 | 
|                           |  |                          |        |  |                          |   |         |                 | 



|                                     |  |   |       |  |  |  |  |  |  |  |  | 
|------------------------------------ |  | - | ----- |  |  |  |  |  |  |  |  | 
|Aggregate Amortization Expense for   |  |   |       |  |  | 
|the Year Ended December 31, ($000s) |  |   |       |  |  | 
|                                     |  |   |       |  |  | 
|2005(a)                              |  | $ | 633   |  |  |  |  |  |  |  |  | 
|2006                                 |  |   | 522   |  |  |  |  |  |  |  |  | 
|2007                                 |  |   | 121   |  |  |  |  |  |  |  |  | 
|2008                                 |  |   | 62    |  |  |  |  |  |  |  |  | 
|2009                                 |  |   | 34    |  |  |  |  |  |  |  |  | 
|                                     |  |   |       |  |  |  |  |  | 
|                                     |  | $ | 1,372 |  |  |  |  |  |  |  |  | 
|                                     |  |   |       |  |  |  |  |  | 








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



8



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Accounting for Stock-Based
Compensation


|                                                                 |                                                                                                                                                          |                     |     |     |                     |   |      |      |   |   |        |     |   |   |     |     |  
|---------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | --- | --- | ------------------- | - | ---- | ---- | - | - | ------ | --- | - | - | --- | --- | -
|                                                                 |                                                                                                                                                          | Three Months        |     |     | Nine Months         |  
|                                                                 |                                                                                                                                                          | Ended September 30, |     |     | Ended September 30, |  
|                                                                 |                                                                                                                                                          | ($000s)            |     |     | ($000s)            |  
|                                                                 |                                                                                                                                                          |                     |     |     |                     |  
|                                                                 |                                                                                                                                                          | 2004                |     |     | 2005                |   |      | 2004 |   |   | 2005   |    
|                                                                 |                                                                                                                                                          |                     |     |     |                     |   |      |      |   |   |        |    
|Net income (loss) attributed to common stockholders, as reported |                                                                                                                                                          | $                   | 690 |     |                     | $ | (123 | )    |   | $ | (1,661 | )   |   | $ | 547 |    
|Add:                                                             |                                                                                                                                                          |                     |     |     |                     |   |      |      |   |   |        |     |   |   |     |    
|                                                                 | Stock-based employee compensation expense included in reported
    net income (loss) attributable to common stockholders, net of
    related tax effects |                     |     | 5   |                     |   |      | 6    |   |   |        | 15  |   |   |     | 21  |  
|Deduct:                                                          |                                                                                                                                                          |                     |     |     |                     |   |      |      |   |   |        |     |   |   |     |    
|                                                                 | Total stock-based employee compensation expense determined under
    fair value based method for all stock option awards net of
    related tax effects  |                     |     | (27 | )                   |   |      | (29  | ) |   |        | (85 | ) |   |     | (86 | )
|                                                                 |                                                                                                                                                          |                     |     |     |                     |   |      |      |   |   |        |    
|Pro forma net income (loss) attributed to common stockholders    |                                                                                                                                                          | $                   | 668 |     |                     | $ | (146 | )    |   | $ | (1,731 | )   |   | $ | 482 |    
|                                                                 |                                                                                                                                                          |                     |     |     |                     |   |      |      |   |   |        |    





|   |                                    
|-- | -----------------------------------
|6. | Investments in Affiliated Companies



|                       |  |                     |     |  |                     |   |     |      |  |   |       |  |  |   |       | 
|---------------------- |  | ------------------- | --- |  | ------------------- | - | --- | ---- |  | - | ----- |  |  | - | ----- | 
|                       |  | Three Months        |     |  | Nine Months         |  
|                       |  | Ended September 30, |     |  | Ended September 30, |  
|                       |  | ($000s)            |     |  | ($000s)            |  
|                       |  |                     |     |  |                     |  
|                       |  | 2004                |     |  | 2005                |   |     | 2004 |  |   | 2005  | 
|                       |  |                     |     |  |                     |   |     |      |  |   |       | 
|Revenue                |  | $                   | 881 |  |                     | $ | 868 |      |  | $ | 2,721 |  |  | $ | 2,630 | 
|Income from operations |  |                     | 379 |  |                     |   | 298 |      |  |   | 1,193 |  |  |   | 1,035 | 
|Net income             |  |                     | 354 |  |                     |   | 267 |      |  |   | 1,112 |  |  |   | 941   | 

9



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

Joseph Anaya
vs. Town Sports International, Inc. et al.






8.     June 30, 2005
Announcements






|   |           
|-- | ----------
|9. | Guarantors

5 8




10



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Balance Sheet


December 31, 2004


(All figures in $000s)


|                                           |                                           |                                             |          |       |          |   |            |            |         |           |              |        |         |              |       |        |              |  |          |        |          |   |          |        |          |  
|------------------------------------------ | ----------------------------------------- | ------------------------------------------- | -------- | ----- | -------- | - | ---------- | ---------- | ------- | --------- | ------------ | ------ | ------- | ------------ | ----- | ------ | ------------ |  | -------- | ------ | -------- | - | -------- | ------ | -------- | -
|                                           |                                           |                                             |          |       |          |   |            | Non-       |         |           |              |        |        
|                                           |                                           | TSI                                         |          |       |          |   | Subsidiary |            |         | Guarantor |              |        |         |              |      
|                                           |                                           | Holdings                                    |          |       | TSI      |   |            | Guarantors |         |           | Subsidiaries |        |         | Eliminations |       |        | Consolidated | 
|                                           |                                           |                                             |          |       |          |   |            |            |         |           |              |        |         |              |       |        |              | 
|ASSETS                                    
|Current assets                             |                                           |                                             |          |       |          |   |            |            |         |           |              |        |         |              |       |        |              |  |          |        |          |   |          |       
|                                           | Cash and cash equivalents                 |                                             | $        | 274   |          |   | $          | 3,425      |         |           | $            | 51,327 |         |              | $     | 2,480  |              |  | $        | 0      |          |   | $        | 57,506 |         
|                                           | Accounts receivable, net                  |                                             |          |      |          |   |            | 3,199      |         |           |              | 1,121  |         |              |       | 114    |              |  |          | (2,479 | )        |   |          | 1,955  |         
|                                           | Inventory                                 |                                             |          |      |          |   |            |           |         |           |              | 623    |         |              |       | 32     |              |  |          |       |          |   |          | 655    |         
|                                           | Prepaid corporate income taxes            |                                             |          |      |          |   |            | 5,645      |         |           |              |       |         |              |       |       |              |  |          |       |          |   |          | 5,645  |         
|                                           | Inter-company receivable (payable)        |                                             |          | 1,075 |          |   |            | 8,636      |         |           |              | (8,083 | )       |              |       | (1,628 | )            |  |          |       |          |   |          |       |         
|                                           | Prepaid expenses and other current assets |                                             |          |      |          |   |            | 9,840      |         |           |              | 2,631  |         |              |       |       |              |  |          | (3,500 | )        |   |          | 8,971  |         
|                                           |                                           |                                             |          |       |          |   |            |            |         |           |              |        |         |              |       |        |              | 
|                                           |                                           | Total current assets                        |          |       | 1,349    |   |            |            | 30,745  |           |              |        | 47,619  |              |       |        | 998          |  |          |        | (5,979   | ) |          |        | 74,732   |  
|Investment in subsidiaries                 |                                           |                                             | 8,862    |       |          |   | 267,350    |            |         |           |             |        |         |              |      |        |              |  | (276,212 | )      |          |   |         |       
|Fixed assets, net                          |                                           |                                             |         |       |          |   | 11,478     |            |         |           | 213,464      |        |         |              | 1,311 |        |              |  |         |        |          |   | 226,253  |       
|Goodwill                                   |                                           |                                             |         |       |          |   |           |            |         |           | 46,619       |        |         |              | 875   |        |              |  |         |        |          |   | 47,494   |       
|Intangible assets, net                     |                                           |                                             |         |       |          |   |           |            |         |           | 931          |        |         |              |      |        |              |  |         |        |          |   | 931      |       
|Deferred tax assets, net                   |                                           |                                             | 6,266    |       |          |   | 7,108      |            |         |           | (491         | )      |         |              | (148  | )      |              |  |         |        |          |   | 12,735   |       
|Deferred membership costs                  |                                           |                                             |         |       |          |   |           |            |         |           | 12,017       |        |         |              |      |        |              |  |         |        |          |   | 12,017   |       
|Other assets                               |                                           |                                             | 4,106    |       |          |   | 11,604     |            |         |           | 1,084        |        |         |              |      |        |              |  |         |        |          |   | 16,794   |       
|                                           |                                           |                                             |          |       |          |   |            |            |         |           |              |        |         |              |       |        |              | 
|                                           |                                           | Total assets                                |          | $     | 20,583   |   |            | $          | 328,285 |           |              | $      | 321,243 |              |       | $      | 3,036        |  |          | $      | (282,191 | ) |          | $      | 390,956  |  
|                                           |                                           |                                             |          |       |          |   |            |            |         |           |              |        |         |              |       |        |              | 
|                                          
|LIABILITIES AND STOCKHOLDERS DEFICIT     
|Current liabilities                        |                                           |                                             |          |       |          |   |            |            |         |           |              |        |         |              |       |        |              |  |          |        |          |   |          |       
|                                           | Current portion of long-term debt and     |                                             | $        |      |          |   | $          | 0          |         |           | $            | 1,225  |         |              | $     | 0      |              |  | $        | 0      |          |   | $        | 1,225  |         
|                                           | Accounts payable                          |                                             |          |      |          |   |            | 3,732      |         |           |              | 6,823  |         |              |       |       |              |  |          |       |          |   |          | 10,555 |         
|                                           | Accrued expense                           |                                             |          | 28    |          |   |            | 5,215      |         |           |              | 2,481  |         |              |       | 512    |              |  |          |       |          |   |          | 5,217  |         
|                                           | Accrued interest                          |                                             |          |      |          |   |            | 8,673      |         |           |              | 13,189 |         |              |       |       |              |  |          | (2,479 | )        |   |          | 22,402 |         
|                                           | Deferred revenue                          |                                             |          |      |          |   |            |           |         |           |              | 28,294 |         |              |       |       |              |  |          |       |          |   |          | 28,294 |         
|                                           |                                           |                                             |          |       |          |   |            |            |         |           |              |        |         |              |       |        |              | 
|                                           |                                           | Total current liabilities                   |          |       | 28       |   |            |            | 17,620  |           |              |        | 52,012  |              |       |        | 512          |  |          |        | (2,479   | ) |          |        | 67,693   |  
|Long-term debt & capital lease obligations |                                           |                                             | 137,572  |       |          |   | 295,865    |            |         |           | (34,701      | )      |         |              |      |        |              |  | (3,500   | )      |          |   | 395,236  |       
|Deferred lease liabilities                 |                                           |                                             |         |       |          |   | 485        |            |         |           | 35,524       |        |         |              |      |        |              |  |         |        |          |   | 36,009   |       
|Deferred revenue                           |                                           |                                             |         |       |          |   | 60         |            |         |           | 3,137        |        |         |              | 101   |        |              |  |         |        |          |   | 3,298    |       
|Other liabilities                          |                                           |                                             |         |       |          |   | 5,393      |            |         |           | 344          |        |         |              |      |        |              |  |         |        |          |   | 5,737    |       
|                                           |                                           |                                             |          |       |          |   |            |            |         |           |              |        |         |              |       |        |              | 
|                                           |                                           | Total liabilities                           |          |       | 137,600  |   |            |            | 319,423 |           |              |        | 56,316  |              |       |        | 613          |  |          |        | (5,979   | ) |          |        | 507,973  |  
|                                           |                                           |                                             |          |       |          |   |            |            |         |           |              |        |         |              |       |        |              | 
|Stockholders deficit                      |                                           |                                             | (117,933 | )     |          |   | 7,946      |            |         |           | 264,919      |        |         |              | 1,515 |        |              |  | (274,380 | )      |          |   | (117,933 | )     
|                                           | Accumulated other comprehensive income    |                                             |          | 916   |          |   |            | 916        |         |           |              | 8      |         |              |       | 908    |              |  |          | (1,832 | )        |   |          | 916    |         
|                                           |                                           |                                             |          |       |          |   |            |            |         |           |              |        |         |              |       |        |              | 
|                                           |                                           | Total stockholders deficit                 |          |       | (117,017 | ) |            |            | 8,862   |           |              |        | 264,927 |              |       |        | 2,423        |  |          |        | (276,212 | ) |          |        | (117,017 | )
|                                           |                                           |                                             |          |       |          |   |            |            |         |           |              |        |         |              |       |        |              | 
|                                           |                                           | Total liabilities and stockholders deficit |          | $     | 20,583   |   |            | $          | 328,285 |           |              | $      | 321,243 |              |       | $      | 3,036        |  |          | $      | (282,191 | ) |          | $      | 390,956  |  
|                                           |                                           |                                             |          |       |          |   |            |            |         |           |              |        |         |              |       |        |              | 

11



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Balance Sheet


September 30, 2005


(All figures in $000s)


(Unaudited)


|                                           |                                           |                                             |         |          |          |   |            |            |         |           |              |         |         |              |     |        |              |  |          |          |          |   |         |          |          |  
|------------------------------------------ | ----------------------------------------- | ------------------------------------------- | ------- | -------- | -------- | - | ---------- | ---------- | ------- | --------- | ------------ | ------- | ------- | ------------ | --- | ------ | ------------ |  | -------- | -------- | -------- | - | ------- | -------- | -------- | -
|                                           |                                           |                                             |         |          |          |   |            | Non-       |         |           |              |         |        
|                                           |                                           | TSI                                         |         |          |          |   | Subsidiary |            |         | Guarantor |              |         |         |              |    
|                                           |                                           | Holdings                                    |         |          | TSI      |   |            | Guarantors |         |           | Subsidiaries |         |         | Eliminations |     |        | Consolidated | 
|                                           |                                           |                                             |         |          |          |   |            |            |         |           |              |         |         |              |     |        |              | 
|ASSETS                                    
|Current assets                             |                                           |                                             |         |          |          |   |            |            |         |           |              |         |         |              |     |        |              |  |          |          |          |   |         |         
|                                           | Cash and cash equivalents                 |                                             | $       | 180      |          |   | $          | 1,194      |         |           | $            | 64,794  |         |              | $   | 2,698  |              |  | $        |         |          |   | $       | 68,866   |         
|                                           | Accounts receivable, net                  |                                             |         |         |          |   |            | 3,697      |         |           |              | 3,755   |         |              |     | 160    |              |  |          | (2,748   | )        |   |         | 4,864    |         
|                                           | Inventory                                 |                                             |         |         |          |   |            |           |         |           |              | 521     |         |              |     | 29     |              |  |          |         |          |   |         | 550      |         
|                                           | Prepaid corporate income taxes            |                                             |         |         |          |   |            | 4,845      |         |           |              | (2,858  | )       |              |     |       |              |  |          |         |          |   |         | 1,987    |         
|                                           | Inter-company receivable (payable)        |                                             |         | 937      |          |   |            | 17,512     |         |           |              | (16,759 | )       |              |     | (1,690 | )            |  |          |         |          |   |         |         |         
|                                           | Prepaid expenses and other current assets |                                             |         | 33       |          |   |            | 7,741      |         |           |              | 7,741   |         |              |     |       |              |  |          | (3,500   | )        |   |         | 12,015   |         
|                                           |                                           |                                             |         |          |          |   |            |            |         |           |              |         |         |              |     |        |              | 
|                                           |                                           | Total current assets                        |         |          | 1,150    |   |            |            | 34,989  |           |              |         | 57,194  |              |     |        | 1,197        |  |          |          | (6,248   | ) |         |          | 88,282   |  
|Investment in subsidiaries                 |                                           |                                             | 16,057  |          |          |   | 283,095    |            |         |           |             |         |         |              |    |        |              |  | (299,152 | )        |          |   |        |         
|Fixed assets, net                          |                                           |                                             |        |          |          |   | 9,971      |            |         |           | 226,579      |         |         |              | 978 |        |              |  |         |          |          |   | 237,528 |         
|Goodwill                                   |                                           |                                             |        |          |          |   |           |            |         |           | 49,193       |         |         |              | 774 |        |              |  |         |          |          |   | 49,967  |         
|Intangible assets, net                     |                                           |                                             |        |          |          |   |           |            |         |           | 913          |         |         |              |    |        |              |  |         |          |          |   | 913     |         
|Deferred tax assets, net                   |                                           |                                             | 10,902  |          |          |   | 12,670     |            |         |           | (491         | )       |         |              | (46 | )      |              |  |         |          |          |   | 23,035  |         
|Deferred membership costs                  |                                           |                                             |        |          |          |   | 63         |            |         |           | 11,651       |         |         |              |    |        |              |  |         |          |          |   | 11,714  |         
|Other assets                               |                                           |                                             | 3,844   |          |          |   | 10,812     |            |         |           | 1,050        |         |         |              |    |        |              |  |         |          |          |   | 15,706  |         
|                                           |                                           |                                             |         |          |          |   |            |            |         |           |              |         |         |              |     |        |              | 
|                                           |                                           | Total assets                                |         | $        | 31,953   |   |            | $          | 351,600 |           |              | $       | 346,089 |              |     | $      | 2,903        |  |          | $        | (305,400 | ) |         | $        | 427,145  |  
|                                           |                                           |                                             |         |          |          |   |            |            |         |           |              |         |         |              |     |        |              | 
|                                          
|LIABILITIES AND STOCKHOLDERS DEFICIT     
|Current liabilities                        |                                           |                                             |         |          |          |   |            |            |         |           |              |         |         |              |     |        |              |  |          |          |          |   |         |         
|                                           | Current portion of long-term debt         |                                             | $       |         |          |   | $          |           |         |           | $            | 1,270   |         |              | $   |       |              |  | $        |         |          |   | $       | 1,270    |         
|                                           | Accounts payable                          |                                             |         |         |          |   |            | (493       | )       |           |              | 6,814   |         |              |     |       |              |  |          |         |          |   |         | 6,321    |         
|                                           | Accrued expenses                          |                                             |         |         |          |   |            | 7,460      |         |           |              | 21,583  |         |              |     | 386    |              |  |          |         |          |   |         | 29,429   |         
|                                           | Accrued interest                          |                                             |         |         |          |   |            | 11,481     |         |           |              | 2,750   |         |              |     |       |              |  |          | (2,748   | )        |   |         | 11,483   |         
|                                           | Deferred revenue                          |                                             |         |         |          |   |            |           |         |           |              | 36,363  |         |              |     |       |              |  |          |         |          |   |         | 36,363   |         
|                                           |                                           |                                             |         |          |          |   |            |            |         |           |              |         |         |              |     |        |              | 
|                                           |                                           | Total current liabilities                   |         |          |         |   |            |            | 18,448  |           |              |         | 68,780  |              |     |        | 386          |  |          |          | (2,748   | ) |         |          | 84,866   |  
|Long-term debt & capital lease obligations |                                           |                                             | 149,066 |          |          |   | 309,487    |            |         |           | (48,986      | )       |         |              |    |        |              |  | (3,500   | )        |          |   | 406,067 |         
|Deferred lease liabilities                 |                                           |                                             |        |          |          |   | 493        |            |         |           | 43,058       |         |         |              |    |        |              |  |         |          |          |   | 43,551  |         
|Deferred revenue                           |                                           |                                             |        |          |          |   | 634        |            |         |           | 2,193        |         |         |              | 89  |        |              |  |         |          |          |   | 2,916   |         
|Other liabilities                          |                                           |                                             |        |          |          |   | 6,481      |            |         |           | 377          |         |         |              |    |        |              |  |         |          |          |   | 6,858   |         
|                                           |                                           |                                             |         |          |          |   |            |            |         |           |              |         |         |              |     |        |              | 
|                                           |                                           | Total liabilities                           |         |          | 149,066  |   |            |            | 335,543 |           |              |         | 65,422  |              |     |        | 475          |  |          |          | (6,248   | ) |         |          | 544,258  |  
|                                           |                                           |                                             |         |          |          |   |            |            |         |           |              |         |         |              |     |        |              | 
|Stockholders deficit                      |                                           |                                             | 0       |          |          |   | 0          |            |         |           | 0            |         |         |              | 0   |        |              |  | 0        |          |          |   |        |         
|                                           | Common Stockholders deficit              |                                             |         | (117,535 | )        |   |            | 15,635     |         |           |              | 280,667 |         |              |     | 2,006  |              |  |          | (289,308 | )        |   |         | (117,535 | )       
|                                           | Accumulated other comprehensive income    |                                             |         | 422      |          |   |            | 422        |         |           |              |        |         |              |     | 422    |              |  |          | (844     | )        |   |         | 422      |         
|                                           |                                           |                                             |         |          |          |   |            |            |         |           |              |         |         |              |     |        |              | 
|                                           |                                           | Total stockholders deficit                 |         |          | (117,113 | ) |            |            | 16,057  |           |              |         | 280,667 |              |     |        | 2,428        |  |          |          | (299,152 | ) |         |          | (117,113 | )
|                                           |                                           |                                             |         |          |          |   |            |            |         |           |              |         |         |              |     |        |              | 
|                                           |                                           | Total liabilities and stockholders deficit |         | $        | 31,953   |   |            | $          | 351,600 |           |              | $       | 346,089 |              |     | $      | 2,903        |  |          | $        | (305,400 | ) |         | $        | 427,145  |  
|                                           |                                           |                                             |         |          |          |   |            |            |         |           |              |         |         |              |     |        |              | 

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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS


(All figures in $000s)


For three months ended September 30, 2004


(Unaudited)


|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              |  |         |         |   |  |        |        | 
|----------------------------------------------------- | ----------------------------------------------------------------------- | -------- | ------ | ------ | --- |  | ---------- | ---------- | - | --------- | ------------ | ------ |  | ------------ | ----- | ----- | ------------ |  | ------- | ------- | - |  | ------ | ------ | 
|                                                      |                                                                         |          |        |        |     |  |            | Non-       |   |           |              |        | 
|                                                      |                                                                         | TSI      |        |        |     |  | Subsidiary |            |   | Guarantor |              |        |  |              |      
|                                                      |                                                                         | Holdings |        |        | TSI |  |            | Guarantors |   |           | Subsidiaries |        |  | Eliminations |       |       | Consolidated | 
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|Revenues:                                             |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              |  |         |         |   |  |        |       
|                                                      | Club operations                                                         |          | $      |       |     |  | $          | 879        |   |           | $            | 86,175 |  |              | $     | 1,151 |              |  | $       |        |   |  | $      | 88,205 | 
|                                                      | Fees and other                                                          |          |        |       |     |  |            | 193        |   |           |              | 2,254  |  |              |       |      |              |  |         | (976    | ) |  |        | 1,471  | 
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|                                                      |                                                                         |          |       |        |     |  | 1,072      |            |   |           | 88,429       |        |  |              | 1,151 |       |              |  | (976    | )       |   |  | 89,676 |       
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|Operating expenses:                                   |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              |  |         |         |   |  |        |       
|                                                      | Payroll and related                                                     |          |        |       |     |  |            | 5,328      |   |           |              | 28,035 |  |              |       | 450   |              |  |         |        |   |  |        | 33,813 | 
|                                                      | Club operating                                                          |          |        |       |     |  |            | 271        |   |           |              | 30,143 |  |              |       | 270   |              |  |         | (836    | ) |  |        | 29,848 | 
|                                                      | General and administrative                                              |          |        | 3      |     |  |            | 46         |   |           |              | 6,098  |  |              |       | 97    |              |  |         | (140    | ) |  |        | 6,104  | 
|                                                      | Depreciation and amortization                                           |          |        |       |     |  |            | 951        |   |           |              | 7,802  |  |              |       | 98    |              |  |         |        |   |  |        | 8,851  | 
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|                                                      |                                                                         |          | 3      |        |     |  | 6,596      |            |   |           | 72,078       |        |  |              | 915   |       |              |  | (976    | )       |   |  | 78,616 |       
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|                                                      | Operating income                                                        |          |        | (3     | )   |  |            | (5,524     | ) |           |              | 16,351 |  |              |       | 236   |              |  |         |        |   |  |        | 11,060 | 
|Interest expense                                      |                                                                         |          | 3,673  |        |     |  | 6,609      |            |   |           | 87           |        |  |              |      |       |              |  | (58     | )       |   |  | 10,311 |       
|Interest income                                       |                                                                         |          | (2     | )      |     |  | (277       | )          |   |           |             |        |  |              |      |       |              |  | 58      |         |   |  | (221   | )     
|Equity in the earnings of investees and rental income |                                                                         |          |       |        |     |  | (223       | )          |   |           | (184         | )      |  |              |      |       |              |  |        |         |   |  | (407   | )     
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|                                                      | Income (loss) before provision (benefit) for corporate income
    taxes |          |        | (3,674 | )   |  |            | (11,633    | ) |           |              | 16,448 |  |              |       | 237   |              |  |         |        |   |  |        | 1,377  | 
|Provision (benefit) for corporate income taxes        |                                                                         |          | (1,617 | )      |     |  | (5,305     | )          |   |           | 7,548        |        |  |              | 61    |       |              |  |        |         |   |  | 687    |       
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|                                                      | Income (loss) before equity earnings                                    |          |        | (2,057 | )   |  |            | (6,328     | ) |           |              | 8,900  |  |              |       | 176   |              |  |         |        |   |  |        | 690    | 
|Equity earnings from subsidiaries                     |                                                                         |          | 2,747  |        |     |  | 9,075      |            |   |           |             |        |  |              |      |       |              |  | (11,822 | )       |   |  |       |       
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|                                                      | Net income                                                              |          | $      | 690    |     |  | $          | 2,747      |   |           | $            | 8,900  |  |              | $     | 176   |              |  | $       | (11,822 | ) |  | $      | 690    | 
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 

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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS


(All figures in $000s)


For three months ended September 30, 2005


(Unaudited)


|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              |  |         |         |   |  |        |        |  
|----------------------------------------------------- | ----------------------------------------------------------------------- | -------- | ------ | ------ | --- |  | ---------- | ---------- | - | --------- | ------------ | ------ |  | ------------ | ----- | ----- | ------------ |  | ------- | ------- | - |  | ------ | ------ | -
|                                                      |                                                                         |          |        |        |     |  |            | Non-       |   |           |              |        | 
|                                                      |                                                                         | TSI      |        |        |     |  | Subsidiary |            |   | Guarantor |              |        |  |              |      
|                                                      |                                                                         | Holdings |        |        | TSI |  |            | Guarantors |   |           | Subsidiaries |        |  | Eliminations |       |       | Consolidated | 
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|Revenues:                                             |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              |  |         |         |   |  |        |       
|                                                      | Club operations                                                         |          | $      |       |     |  | $          | 201        |   |           | $            | 95,959 |  |              | $     | 1,052 |              |  | $       |        |   |  | $      | 97,212 |  
|                                                      | Fees and other                                                          |          |        |       |     |  |            | 182        |   |           |              | 1,903  |  |              |       |      |              |  |         | (1,097  | ) |  |        | 988    |  
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|                                                      |                                                                         |          |       |        |     |  | 383        |            |   |           | 97,862       |        |  |              | 1,052 |       |              |  | (1,097  | )       |   |  | 98,200 |       
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|Operating expenses:                                   |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              |  |         |         |   |  |        |       
|                                                      | Payroll and related                                                     |          |        |       |     |  |            | 5,631      |   |           |              | 32,318 |  |              |       | 439   |              |  |         |        |   |  |        | 38,388 |  
|                                                      | Club operating                                                          |          |        |       |     |  |            | 254        |   |           |              | 34,580 |  |              |       | 269   |              |  |         | (957    | ) |  |        | 34,146 |  
|                                                      | General and administrative                                              |          |        | 1      |     |  |            | 221        |   |           |              | 6,507  |  |              |       | 73    |              |  |         | (140    | ) |  |        | 6,653  |  
|                                                      | Depreciation and amortization                                           |          |        |       |     |  |            | 1,033      |   |           |              | 8,728  |  |              |       | 89    |              |  |         |        |   |  |        | 9,850  |  
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|                                                      |                                                                         |          | 1      |        |     |  | 7,130      |            |   |           | 82,133       |        |  |              | 870   |       |              |  | (1,097  | )       |   |  | 89,037 |       
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|                                                      | Operating Income                                                        |          |        | (1     | )   |  |            | (6,747     | ) |           |              | 15,729 |  |              |       | 182   |              |  |         |        |   |  |        | 9,163  |  
|Interest expense                                      |                                                                         |          | 4,031  |        |     |  | 6,418      |            |   |           | 97           |        |  |              | (1    | )     |              |  | (60     | )       |   |  | 10,485 |       
|Interest income                                       |                                                                         |          | (1     | )      |     |  | (676       | )          |   |           | (1           | )      |  |              |      |       |              |  | 60      |         |   |  | (618   | )     
|Equity in the earnings of investees and rental income |                                                                         |          |       |        |     |  | (267       | )          |   |           | (179         | )      |  |              |      |       |              |  |        |         |   |  | (446   | )     
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|                                                      | Income (loss) before provision (benefit) for corporate income
    taxes |          |        | (4,031 | )   |  |            | (12,222    | ) |           |              | 15,812 |  |              |       | 183   |              |  |         |        |   |  |        | (258   | )
|Provision (benefit) for corporate income taxes        |                                                                         |          | (1,752 | )      |     |  | (6,395     | )          |   |           | 7,968        |        |  |              | 44    |       |              |  |        |         |   |  | (135   | )     
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|                                                      | Income (loss) before equity earnings                                    |          |        | (2,279 | )   |  |            | (5,827     | ) |           |              | 7,844  |  |              |       | 139   |              |  |         |        |   |  |        | (123   | )
|Equity earnings from subsidiaries                     |                                                                         |          | 2,156  |        |     |  | 7,983      |            |   |           |             |        |  |              |      |       |              |  | (10,139 | )       |   |  |       |       
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 
|                                                      | Net income                                                              |          | $      | (123   | )   |  | $          | 2,156      |   |           | $            | 7,844  |  |              | $     | 139   |              |  | $       | (10,139 | ) |  | $      | (123   | )
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |        |  |              |       |       |              | 

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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS


(All figures in $000s)


For nine months ended September 30, 2004


(Unaudited)


|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |         |  |              |       |       |              |  |         |         |   |  |         |         |  
|----------------------------------------------------- | ----------------------------------------------------------------------- | -------- | ------ | ------ | --- |  | ---------- | ---------- | - | --------- | ------------ | ------- |  | ------------ | ----- | ----- | ------------ |  | ------- | ------- | - |  | ------- | ------- | -
|                                                      |                                                                         |          |        |        |     |  |            | Non-       |   |           |              |         | 
|                                                      |                                                                         | TSI      |        |        |     |  | Subsidiary |            |   | Guarantor |              |         |  |              |      
|                                                      |                                                                         | Holdings |        |        | TSI |  |            | Guarantors |   |           | Subsidiaries |         |  | Eliminations |       |       | Consolidated | 
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|Revenues:                                             |                                                                         |          |        |        |     |  |            |            |   |           |              |         |  |              |       |       |              |  |         |         |   |  |         |        
|                                                      | Club operations                                                         |          | $      |       |     |  | $          | 1,285      |   |           | $            | 256,221 |  |              | $     | 3,620 |              |  | $       |        |   |  | $       | 261,126 |  
|                                                      | Fees and other                                                          |          |        |       |     |  |            | 659        |   |           |              | 5,137   |  |              |       |      |              |  |         | (2,612  | ) |  |         | 3,184   |  
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|                                                      |                                                                         |          |       |        |     |  | 1,944      |            |   |           | 261,358      |         |  |              | 3,620 |       |              |  | (2,612  | )       |   |  | 264,310 |        
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|Operating expenses:                                   |                                                                         |          |        |        |     |  |            |            |   |           |              |         |  |              |       |       |              |  |         |         |   |  |         |        
|                                                      | Payroll and related                                                     |          |        |       |     |  |            | 16,768     |   |           |              | 86,124  |  |              |       | 1,364 |              |  |         |        |   |  |         | 104,256 |  
|                                                      | Club operating                                                          |          |        |       |     |  |            | 945        |   |           |              | 87,075  |  |              |       | 837   |              |  |         | (2,192  | ) |  |         | 86,665  |  
|                                                      | General and administrative                                              |          |        | 40     |     |  |            | (122       | ) |           |              | 18,423  |  |              |       | 307   |              |  |         | (420    | ) |  |         | 18,228  |  
|                                                      | Depreciation and amortization                                           |          |        |       |     |  |            | 3,008      |   |           |              | 23,970  |  |              |       | 293   |              |  |         |        |   |  |         | 27,271  |  
|                                                      | Goodwill Impairment                                                     |          |        |       |     |  |            |           |   |           |              | 2,002   |  |              |       |      |              |  |         |        |   |  |         | 2,002   |  
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|                                                      |                                                                         |          | 40     |        |     |  | 20,599     |            |   |           | 217,594      |         |  |              | 2,801 |       |              |  | (2,612  | )       |   |  | 238,422 |        
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|                                                      | Operating income                                                        |          |        | (40    | )   |  |            | (18,655    | ) |           |              | 43,764  |  |              |       | 819   |              |  |         |        |   |  |         | 25,888  |  
|Interest expense                                      |                                                                         |          | 9,341  |        |     |  | 19,865     |            |   |           | 203          |         |  |              | (2    | )     |              |  | (233    | )       |   |  | 29,174  |        
|Interest income                                       |                                                                         |          | (59    | )      |     |  | (684       | )          |   |           |             |         |  |              |      |       |              |  | 233     |         |   |  | (510    | )      
|Equity in the earnings of investees and rental income |                                                                         |          |       |        |     |  | (531       | )          |   |           | (559         | )       |  |              |      |       |              |  |         |         |   |  | (1,090  | )      
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|                                                      | Income (loss) before provision (benefit) for corporate income
    taxes |          |        | (9,322 | )   |  |            | (37,305    | ) |           |              | 44,120  |  |              |       | 821   |              |  |         |        |   |  |         | (1,686  | )
|Provision (benefit) for corporate income taxes        |                                                                         |          | (4,102 | )      |     |  | (15,131    | )          |   |           | 18,225       |         |  |              | 200   |       |              |  |        |         |   |  | (808    | )      
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|                                                      | Income (loss) before equity earnings                                    |          |        | (5,220 | )   |  |            | (22,174    | ) |           |              | 25,895  |  |              |       | 621   |              |  |         |        |   |  |         | (878    | )
|Equity earnings from subsidiaries                     |                                                                         |          | 4,342  |        |     |  | 26,516     |            |   |           |             |         |  |              |      |       |              |  | (30,858 | )       |   |  |        |        
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|                                                      | Net income (loss)                                                       |          | $      | (878   | )   |  | $          | 4,342      |   |           | $            | 25,895  |  |              | $     | 621   |              |  | $       | (30,858 | ) |  | $       | (878    | )
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |              |         |  |              |       |       |              | 

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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS


(All figures in $000s)


For nine months ended September 30, 2005


(Unaudited)


|                                                      |                                                                         |          |        |         |     |  |            |            |   |           |              |         |  |              |       |       |              |  |         |         |   |  |         |         | 
|----------------------------------------------------- | ----------------------------------------------------------------------- | -------- | ------ | ------- | --- |  | ---------- | ---------- | - | --------- | ------------ | ------- |  | ------------ | ----- | ----- | ------------ |  | ------- | ------- | - |  | ------- | ------- | 
|                                                      |                                                                         |          |        |         |     |  |            | Non-       |   |           |              |         | 
|                                                      |                                                                         | TSI      |        |         |     |  | Subsidiary |            |   | Guarantor |              |         |  |              |      
|                                                      |                                                                         | Holdings |        |         | TSI |  |            | Guarantors |   |           | Subsidiaries |         |  | Eliminations |       |       | Consolidated | 
|                                                      |                                                                         |          |        |         |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|Revenues:                                             |                                                                         |          |        |         |     |  |            |            |   |           |              |         |  |              |       |       |              |  |         |         |   |  |         |        
|                                                      | Club operations                                                         |          | $      |        |     |  | $          | 237        |   |           | $            | 283,400 |  |              | $     | 3,484 |              |  | $       |        |   |  | $       | 287,121 | 
|                                                      | Fees and other                                                          |          |        |        |     |  |            | 470        |   |           |              | 5,717   |  |              |       |      |              |  |         | (3,266  | ) |  |         | 2,921   | 
|                                                      |                                                                         |          |        |         |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|                                                      |                                                                         |          |       |         |     |  | 707        |            |   |           | 289,117      |         |  |              | 3,484 |       |              |  | (3,266  | )       |   |  | 290,042 |        
|                                                      |                                                                         |          |        |         |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|Operating expenses:                                   |                                                                         |          |        |         |     |  |            |            |   |           |              |         |  |              |       |       |              |  |         |         |   |  |         |        
|                                                      | Payroll and related                                                     |          |        |        |     |  |            | 16,899     |   |           |              | 95,693  |  |              |       | 1,360 |              |  |         |        |   |  |         | 113,952 | 
|                                                      | Club operating                                                          |          |        |        |     |  |            | 1,472      |   |           |              | 97,777  |  |              |       | 911   |              |  |         | (2,846  | ) |  |         | 97,314  | 
|                                                      | General and administrative                                              |          |        | 19      |     |  |            | 826        |   |           |              | 19,113  |  |              |       | 258   |              |  |         | (420    | ) |  |         | 19,796  | 
|                                                      | Depreciation and amortization                                           |          |        |        |     |  |            | 3,198      |   |           |              | 26,191  |  |              |       | 284   |              |  |         |        |   |  |         | 29,673  | 
|                                                      |                                                                         |          |        |         |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|                                                      |                                                                         |          | 19     |         |     |  | 22,395     |            |   |           | 238,774      |         |  |              | 2,813 |       |              |  | (3,266  | )       |   |  | 260,735 |        
|                                                      |                                                                         |          |        |         |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|                                                      | Operating income (loss)                                                 |          |        | (19     | )   |  |            | (21,388    | ) |           |              | 50,343  |  |              |       | 671   |              |  |         | 13      |   |  |         | 29,307  | 
|Interest expense                                      |                                                                         |          | 11,737 |         |     |  | 19,338     |            |   |           | 281          |         |  |              | (4    | )     |              |  | (239    | )       |   |  | 31,113  |        
|Interest income                                       |                                                                         |          | (3     | )       |     |  | (1,683     | )          |   |           | (5           | )       |  |              |      |       |              |  | 239     |         |   |  | (1,452  | )      
|Equity in the earnings of investees and rental income |                                                                         |          |       |         |     |  | (802       | )          |   |           | (519         | )       |  |              |      |       |              |  |        |         |   |  | (1,321  | )      
|                                                      |                                                                         |          |        |         |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|                                                      | Income (loss) before provision (benefit) for corporate income
    taxes |          |        | (11,753 | )   |  |            | (38,541    | ) |           |              | 50,586  |  |              |       | 675   |              |  |         | 13      |   |  |         | 967     | 
|Provision (benefit) for corporate income taxes        |                                                                         |          | (5,172 | )       |     |  | (17,846    | )          |   |           | 23,252       |         |  |              | 186   |       |              |  |        |         |   |  | 420     |        
|                                                      |                                                                         |          |        |         |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|                                                      | Income (loss) before equity earnings                                    |          |        | (6,581  | )   |  |            | (20,695    | ) |           |              | 27,334  |  |              |       | 489   |              |  |         |        |   |  |         | 547     | 
|Equity earnings from subsidiaries                     |                                                                         |          | 7,128  |         |     |  | 27,823     |            |   |           |             |         |  |              |      |       |              |  | (34,951 | )       |   |  |        |        
|                                                      |                                                                         |          |        |         |     |  |            |            |   |           |              |         |  |              |       |       |              | 
|                                                      | Net income                                                              |          | $      | 547     |     |  | $          | 7,128      |   |           | $            | 27,334  |  |              | $     | 489   |              |  | $       | (34,951 | ) |  | $       | 547     | 
|                                                      |                                                                         |          |        |         |     |  |            |            |   |           |              |         |  |              |       |       |              | 

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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS


(All figures in $000s)


For nine months ended September 30, 2004


(Unaudited)


|                                                                                      |                                                       |                                           |   |        |        |   |            |            |         |           |              |        |         |              |       |       |              |   |   |         |        |  |        |        |         |  
|------------------------------------------------------------------------------------- | ----------------------------------------------------- | ----------------------------------------- | - | ------ | ------ | - | ---------- | ---------- | ------- | --------- | ------------ | ------ | ------- | ------------ | ----- | ----- | ------------ | - | - | ------- | ------ |  | ------ | ------ | ------- | -
|                                                                                      |                                                       |                                           |   |        |        |   |            | Non-       |         |           |              |        |        
|                                                                                      |                                                       | TSI                                       |   |        |        |   | Subsidiary |            |         | Guarantor |              |        |         |              |      
|                                                                                      |                                                       | Holdings                                  |   |        | TSI    |   |            | Guarantors |         |           | Subsidiaries |        |         | Eliminations |       |       | Consolidated |  
|                                                                                      |                                                       |                                           |   |        |        |   |            |            |         |           |              |        |         |              |       |       |              |  
|Cash flows from operating activities:                                                 |                                                       |                                           |   |        |        |   |            |            |         |           |              |        |         |              |       |       |              |   |   |         |        |  |        |       
|                                                                                      | Net income                                            |                                           | $ | (878   | )      |   | $          | 4,342      |         |           | $            | 25,895 |         |              | $     | 621   |              |   | $ | (30,858 | )      |  | $      | (878   | )      
|                                                                                      |                                                       |                                           |   |        |        |   |            |            |         |           |              |        |         |              |       |       |              |  
|Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                       |                                           |   |        |        |   |            |            |         |           |              |        |         |              |       |       |              |   |   |         |        |  |        |       
|                                                                                      | Depreciation and amortization                         |                                           |   |       |        |   |            | 3,008      |         |           |              | 23,970 |         |              |       | 293   |              |   |   |        |        |  |        | 27,271 |        
|                                                                                      | Goodwill impairment and club closure costs            |                                           |   |       |        |   |            |           |         |           |              | 2,002  |         |              |       |      |              |   |   |        |        |  |        | 2,002  |        
|                                                                                      | Compensation expense in connection with stock options |                                           |   |       |        |   |            | 29         |         |           |              |       |         |              |       |      |              |   |   |        |        |  |        | 29     |        
|                                                                                      | Noncash rental expense, net of noncash rental income  |                                           |   |       |        |   |            | (67        | )       |           |              | 430    |         |              |       |      |              |   |   |        |        |  |        | 363    |        
|                                                                                      | Noncash interest expense                              |                                           |   | 9,146  |        |   |            |           |         |           |              |       |         |              |       |      |              |   |   |        |        |  |        | 9,146  |        
|                                                                                      | Amortization of debt issuance costs                   |                                           |   | 194    |        |   |            | 984        |         |           |              |       |         |              |       |      |              |   |   |        |        |  |        | 1,178  |        
|                                                                                      | Changes in operating assets and liabilities           |                                           |   | (5,306 | )      |   |            | 809        |         |           |              | 15,681 |         |              |       | 27    |              |   |   |        |        |  |        | 11,211 |        
|                                                                                      | Other                                                 |                                           |   | (4,345 | )      |   |            | (26,246    | )       |           |              | (98    | )       |              |       | 15    |              |   |   | 30,858  |        |  |        | 184    |        
|                                                                                      |                                                       |                                           |   |        |        |   |            |            |         |           |              |        |         |              |       |       |              |  
|                                                                                      |                                                       | Total adjustments                         |   |        | (311   | ) |            |            | (21,483 | )         |              |        | 41,985  |              |       |       | 335          |   |   |         | 30,858 |  |        |        | 51,384  |  
|                                                                                      |                                                       |                                           |   |        |        |   |            |            |         |           |              |        |         |              |       |       |              |  
|                                                                                      |                                                       | Net cash provided by operating activities |   |        | (1,189 | ) |            |            | (17,141 | )         |              |        | 67,880  |              |       |       | 956          |   |   |         |       |  |        |        | 50,506  |  
|                                                                                      |                                                       |                                           |   |        |        |   |            |            |         |           |              |        |         |              |       |       |              |  
|                                                                                      |                                                       | Net cash used in investing activities     |   |        |       |   |            |            | (1,702  | )         |              |        | (25,363 | )            |       |       | (142         | ) |   |         |       |  |        |        | (27,480 | )
|                                                                                      |                                                       |                                           |   |        |        |   |            |            |         |           |              |        |         |              |       |       |              |  
|                                                                                      |                                                       | Net cash used in financing activities     |   |        | 1,637  |   |            |            | 19,164  |           |              |        | (22,219 | )            |       |       |             |   |   |         |       |  |        |        | (1,418  | )
|                                                                                      |                                                       |                                           |   |        |        |   |            |            |         |           |              |        |         |              |       |       |              |  
|                                                                                      |                                                       | Net decrease in cash and cash equivalents |   |        | 448    |   |            |            | 321     |           |              |        | 20,025  |              |       |       | 814          |   |   |         |       |  |        |        | 21,608  |  
|Cash and cash equivalents at beginning of period                                      |                                                       |                                           |  |        |        |   | 420        |            |         |           | 39,006       |        |         |              | 1,376 |       |              |   |  |         |        |  | 40,802 |       
|                                                                                      |                                                       |                                           |   |        |        |   |            |            |         |           |              |        |         |              |       |       |              |  
|                                                                                      | Cash and cash equivalents at end of period            |                                           | $ | 448    |        |   | $          | 741        |         |           | $            | 59,031 |         |              | $     | 2,190 |              |   | $ |        |        |  | $      | 62,410 |        
|                                                                                      |                                                       |                                           |   |        |        |   |            |            |         |           |              |        |         |              |       |       |              |  

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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS


(All figures in $000s)


For nine months ended September 30, 2005


(Unaudited)


|                                                                                      |                                                       |                                           |     |        |      |   |            |            |         |           |              |        |         |              |       |       |              |   |   |         |        |  |        |        |         |  
|------------------------------------------------------------------------------------- | ----------------------------------------------------- | ----------------------------------------- | --- | ------ | ---- | - | ---------- | ---------- | ------- | --------- | ------------ | ------ | ------- | ------------ | ----- | ----- | ------------ | - | - | ------- | ------ |  | ------ | ------ | ------- | -
|                                                                                      |                                                       |                                           |     |        |      |   |            | Non-       |         |           |              |        |        
|                                                                                      |                                                       | TSI                                       |     |        |      |   | Subsidiary |            |         | Guarantor |              |        |         |              |      
|                                                                                      |                                                       | Holdings                                  |     |        | TSI  |   |            | Guarantors |         |           | Subsidiaries |        |         | Eliminations |       |       | Consolidated |  
|                                                                                      |                                                       |                                           |     |        |      |   |            |            |         |           |              |        |         |              |       |       |              |  
|Cash flows from operating activities:                                                 |                                                       |                                           |     |        |      |   |            |            |         |           |              |        |         |              |       |       |              |   |   |         |        |  |        |       
|                                                                                      | Net income                                            |                                           | $   | 547    |      |   | $          | 7,128      |         |           | $            | 27,334 |         |              | $     | 489   |              |   | $ | (34,951 | )      |  | $      | 547    |        
|                                                                                      |                                                       |                                           |     |        |      |   |            |            |         |           |              |        |         |              |       |       |              |  
|Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                       |                                           |     |        |      |   |            |            |         |           |              |        |         |              |       |       |              |   |   |         |        |  |        |       
|                                                                                      | Depreciation and amortization                         |                                           |     |       |      |   |            | 3,198      |         |           |              | 26,191 |         |              |       | 284   |              |   |   |        |        |  |        | 29,673 |        
|                                                                                      | Compensation expense in connection with stock options |                                           |     |       |      |   |            | 35         |         |           |              |       |         |              |       |      |              |   |   |        |        |  |        | 35     |        
|                                                                                      | Noncash rental expense, net of noncash rental income  |                                           |     |       |      |   |            | 8          |         |           |              | 1,071  |         |              |       |      |              |   |   |        |        |  |        | 1,079  |        
|                                                                                      | Noncash interest expense                              |                                           |     | 11,495 |      |   |            |           |         |           |              |       |         |              |       |      |              |   |   |        |        |  |        | 11,495 |        
|                                                                                      | Amortization of debt issuance costs                   |                                           |     | 243    |      |   |            | 984        |         |           |              |       |         |              |       |      |              |   |   |        |        |  |        | 1,227  |        
|                                                                                      | Changes in operating assets and liabilities           |                                           |     | (5,232 | )    |   |            | 1,315      |         |           |              | 18,257 |         |              |       | (281  | )            |   |   |        |        |  |        | 14,059 |        
|                                                                                      | Other                                                 |                                           |     | (7,111 | )    |   |            | (26,926    | )       |           |              | (683   | )       |              |       | (524  | )            |   |   | 34,951  |        |  |        | (293   | )      
|                                                                                      |                                                       |                                           |     |        |      |   |            |            |         |           |              |        |         |              |       |       |              |  
|                                                                                      |                                                       | Total adjustments                         |     |        | (605 | ) |            |            | (21,386 | )         |              |        | (44,836 | )            |       |       | (521         | ) |   |         | 34,951 |  |        |        | 57,275  |  
|                                                                                      |                                                       |                                           |     |        |      |   |            |            |         |           |              |        |         |              |       |       |              |  
|                                                                                      |                                                       | Net cash provided by operating activities |     |        | (58  | ) |            |            | (14,258 | )         |              |        | 72,170  |              |       |       | (32          | ) |   |         |       |  |        |        | 57,822  |  
|                                                                                      |                                                       |                                           |     |        |      |   |            |            |         |           |              |        |         |              |       |       |              |  
|                                                                                      |                                                       | Net cash used in investing activities     |     |        |     |   |            |            | (208    | )         |              |        | (44,614 | )            |       |       | 188          |   |   |         |       |  |        |        | (44,634 | )
|                                                                                      |                                                       |                                           |     |        |      |   |            |            |         |           |              |        |         |              |       |       |              |  
|                                                                                      |                                                       | Net cash used in financing activities     |     |        | (36  | ) |            |            | 12,235  |           |              |        | (14,089 | )            |       |       | 62           |   |   |         |       |  |        |        | (1,828  | )
|                                                                                      |                                                       |                                           |     |        |      |   |            |            |         |           |              |        |         |              |       |       |              |  
|                                                                                      |                                                       | Net decrease in cash and cash equivalents |     |        | (94  | ) |            |            | (2,231  | )         |              |        | 13,467  |              |       |       | 218          |   |   |         |       |  |        |        | 11,360  |  
|Cash and cash equivalents at beginning of period                                      |                                                       |                                           | 274 |        |      |   | 3,425      |            |         |           | 51,327       |        |         |              | 2,480 |       |              |   |  |         |        |  | 57,506 |       
|                                                                                      |                                                       |                                           |     |        |      |   |            |            |         |           |              |        |         |              |       |       |              |  
|                                                                                      | Cash and cash equivalents at end of period            |                                           | $   | 180    |      |   | $          | 1,194      |         |           | $            | 64,794 |         |              | $     | 2,698 |              |   | $ |        |        |  | $      | 68,866 |        
|                                                                                      |                                                       |                                           |     |        |      |   |            |            |         |           |              |        |         |              |       |       |              |  

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

Introduction












| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | 1. Providing our members access to an extensive network of
    locations;                                                               
|
| | 2. Lower capital investment overall, by locating special
    facilities, 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; and                                  
|
| | 5. Strengthening brand awareness.                                                                                                       







| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Our largest sources of revenue are membership dues and
    initiation fees paid by our members. This comprises 82.5% of our
    total revenue for the nine months ended September 30, 2005.
    We recognize revenue from membership dues in the month when the
    services are rendered. Approximately 90% of our members pay
    their monthly dues by electronic funds transfer, while the
    balance is paid annually in advance. We recognize revenue from
    initiation fees over the expected average life of the
    membership, which is approximately 24 months.

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| |                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. For the nine months ended September 30, 2005, 16.5%
    of our revenue was generated from ancillary club revenue.
    Ancillary club revenue consists of personal training,
    programming for children, group fitness training and other
    member activities, as well as sales of sports products.





|                             |  |               |        |  |               |   |        |      |  |   |         |  |  |   |         | 
|---------------------------- |  | ------------- | ------ |  | ------------- | - | ------ | ---- |  | - | ------- |  |  | - | ------- | 
|                             |  | Three Months  |        |  | Nine Months   |  
|                             |  | Ended         |        |  | Ended         |  
|                             |  | September 30, |        |  | September 30, |  
|                             |  |               |        |  |               |  
|                             |  | 2004          |        |  | 2005          |   |        | 2004 |  |   | 2005    | 
|                             |  |               |        |  |               |   |        |      |  |   |         | 
|Membership dues              |  | $             | 70,965 |  |               | $ | 78,133 |      |  | $ | 210,890 |  |  | $ | 230,203 | 
|Initiation fees              |  |               | 3,169  |  |               |   | 2,896  |      |  |   | 9,497   |  |  |   | 9,018   | 
|                             |  |               |        |  |               |   |        |      |  |   |         | 
|Membership revenue           |  |               | 74,134 |  |               |   | 81,029 |      |  |   | 220,387 |  |  |   | 239,221 | 
|Personal training revenue    |  |               | 8,320  |  |               |   | 10,003 |      |  |   | 26,171  |  |  |   | 31,976  | 
|Other ancillary club revenue |  |               | 5,751  |  |               |   | 6,180  |      |  |   | 14,568  |  |  |   | 15,924  | 
|                             |  |               |        |  |               |   |        |      |  |   |         | 
|Ancillary club revenue       |  |               | 14,071 |  |               |   | 16,183 |      |  |   | 40,739  |  |  |   | 47,900  | 
|Fees and other revenue       |  |               | 1,471  |  |               |   | 988    |      |  |   | 3,184   |  |  |   | 2,921   | 
|                             |  |               |        |  |               |   |        |      |  |   |         | 
|Total revenue                |  | $             | 89,676 |  |               | $ | 98,200 |      |  | $ | 264,310 |  |  | $ | 290,042 | 
|                             |  |               |        |  |               |   |        |      |  |   |         | 









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Historical Club Growth




|                                                              |  |      |     |  |      |  |     |    |  |  |     |  |  |       |     |  |    |  |     |    |  |  |     |  |  |  |     |   |  |  |     |  
|------------------------------------------------------------- |  | ---- | --- |  | ---- |  | --- | -- |  |  | --- |  |  | ----- | --- |  | -- |  | --- | -- |  |  | --- |  |  |  | --- | - |  |  | --- | -
|                                                              |  | 2004 |     |  | 2005 | 
|                                                              |  |      |     |  |      | 
|                                                              |  | Q1   |     |  | Q2   |  |     | Q3 |  |  | Q4  |  |  | Total |     |  | Q1 |  |     | Q2 |  |  | Q3  | 
|                                                              |  |      |     |  |      |  |     |    |  |  |     |  |  |       |     |  |    |  |     |    |  |  |     | 
|Clubs at beginning of period                                  |  |      | 129 |  |      |  | 132 |    |  |  | 134 |  |  |       | 136 |  |    |  | 129 |    |  |  | 137 |  |  |  | 140 |   |  |  | 140 |  
|Greenfield clubs(a)                                           |  |      | 3   |  |      |  | 1   |    |  |  |    |  |  |       | 1   |  |    |  | 5   |    |  |  | 3   |  |  |  |    |   |  |  | 1   |  
|Acquired clubs                                                |  |      |    |  |      |  | 1   |    |  |  | 2   |  |  |       |    |  |    |  | 3   |    |  |  |    |  |  |  | 1   |   |  |  | 1   |  
|Existing clubs closed and merged into new clubs               |  |      |    |  |      |  |    |    |  |  |    |  |  |       |    |  |    |  |    |    |  |  |    |  |  |  | (1  | ) |  |  | (1  | )
|Club closed for renovation                                    |  |      |    |  |      |  |    |    |  |  |    |  |  |       |    |  |    |  |    |    |  |  |    |  |  |  |    |   |  |  | (1  | )
|                                                              |  |      |     |  |      |  |     |    |  |  |     |  |  |       |     |  |    |  |     |    |  |  |     | 
|Clubs at end of period                                        |  |      | 132 |  |      |  | 134 |    |  |  | 136 |  |  |       | 137 |  |    |  | 137 |    |  |  | 140 |  |  |  | 140 |   |  |  | 140 |  
|                                                              |  |      |     |  |      |  |     |    |  |  |     |  |  |       |     |  |    |  |     |    |  |  |     | 
|Number of partly-owned clubs included at the end of period(b) |  |      | 2   |  |      |  | 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, 2004 and
    September 30, 2005 we managed four university-owned clubs,
    respectively, in which we did not have an equity interest.

Results of Operations




|                                                      |                                                                         |               |       |      |               |  |       |      |   |  |       |      |   |  |       |      | 
|----------------------------------------------------- | ----------------------------------------------------------------------- | ------------- | ----- | ---- | ------------- |  | ----- | ---- | - |  | ----- | ---- | - |  | ----- | ---- | 
|                                                      |                                                                         | Three Months  |       |      | Nine Months   | 
|                                                      |                                                                         | Ended         |       |      | Ended         | 
|                                                      |                                                                         | September 30, |       |      | September 30, | 
|                                                      |                                                                         |               |       |      |               | 
|                                                      |                                                                         | 2004          |       |      | 2005          |  |       | 2004 |   |  | 2005  |     
|                                                      |                                                                         |               |       |      |               |  |       |      |   |  |       |     
|Revenue                                               |                                                                         |               | 100.0 | %    |               |  | 100.0 | %    |   |  | 100.0 | %    |   |  | 100.0 | %   
|                                                      |                                                                         |               |       |      |               |  |       |      |   |  |       |     
|Operating expenses:                                   |                                                                         |               |       |      |               |  |       |      |   |  |       |      |   |  |       |     
|                                                      | Payroll and related                                                     |               |       | 37.7 |               |  |       | 39.1 |   |  |       | 39.4 |   |  |       | 39.3 | 
|                                                      | Club operating                                                          |               |       | 33.3 |               |  |       | 34.8 |   |  |       | 32.8 |   |  |       | 33.6 | 
|                                                      | General and administrative                                              |               |       | 6.8  |               |  |       | 6.8  |   |  |       | 6.9  |   |  |       | 6.8  | 
|                                                      | Depreciation and amortization                                           |               |       | 9.9  |               |  |       | 10.0 |   |  |       | 10.3 |   |  |       | 10.2 | 
|                                                      | Goodwill impairment                                                     |               |       |     |               |  |       |     |   |  |       | 0.8  |   |  |       |     | 
|                                                      |                                                                         |               |       |      |               |  |       |      |   |  |       |     
|                                                      |                                                                         |               | 87.7  |      |               |  | 90.7  |      |   |  | 90.2  |      |   |  | 89.9  |     
|                                                      |                                                                         |               |       |      |               |  |       |      |   |  |       |     
|                                                      | Operating income                                                        |               |       | 12.3 |               |  |       | 9.3  |   |  |       | 9.8  |   |  |       | 10.1 | 
|Interest expense                                      |                                                                         |               | 11.5  |      |               |  | 10.7  |      |   |  | 11.0  |      |   |  | 10.7  |     
|Interest income                                       |                                                                         |               | (0.2  | )    |               |  | (0.6  | )    |   |  | (0.2  | )    |   |  | (0.5  | )   
|Equity in the earnings of investees and rental income |                                                                         |               | (0.5  | )    |               |  | (0.5  | )    |   |  | (0.4  | )    |   |  | (0.5  | )   
|                                                      |                                                                         |               |       |      |               |  |       |      |   |  |       |     
|                                                      | Income (loss) before provision (benefit) for corporate income
    taxes |               |       | 1.5  |               |  |       | (0.3 | ) |  |       | (0.6 | ) |  |       | 0.4  | 
|Provision (benefit) for corporate income taxes        |                                                                         |               | 0.8   |      |               |  | (0.1  | )    |   |  | (0.3  | )    |   |  | 0.1   |     
|                                                      |                                                                         |               |       |      |               |  |       |      |   |  |       |     
|                                                      | Net income (loss)                                                       |               |       | 0.7  |               |  |       | (0.2 | ) |  |       | (0.3 | ) |  |       | 0.3  | 
|                                                      |                                                                         |               |       |      |               |  |       |      |   |  |       |     



| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Three Months Ended September 30, 2005 Compared to Three
    Months Ended September 30, 2004.

Revenues.


21



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##### Table of Contents





Operating Expenses.




| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Payroll and related expenses increased by $4.6 million, or
    13.5%, to $38.4 million in the quarter ended
    September 30, 2005, from $33.8 million in the quarter
    ended September 30, 2004. This increase was attributable to
    a 4.5% increase in the total months of club operations from 396
    to 414, as well as the following:



| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Payroll costs directly related to personal training, Group
    Exclusives and programming for children increased
    $1.4 million, or 23.1%, due to an increase in demand for
    these programs.



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Club operating expenses increased by $4.3 million, or
    14.4%, to $34.1 million in the quarter ended
    September 30, 2005, from $29.8 million in the quarter
    ended September 30, 2004. This increase was principally
    attributable to the following:



| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Rent and occupancy expenses increased $1.7 million. Clubs
    that have opened or expanded since September 30, 2003 or
    that are currently under construction contributed
    $1.3 million of the increase and $378,000 relates to our
    125 mature clubs.
|
| |  | Utility costs increased $1.1 million.                                                                                                                                                                                                                          
|
| |  | Advertising expense increased $1.0 million. This increase
    was attributable to a new advertising campaign that ran during
    the third quarter of 2005.                                                                                                    



| |                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | General and administrative expenses increased $549,000 or 9.0%
    to $6.7 million in the quarter ended September 30,
    2005 from $6.1 million in the quarter ended
    September 30, 2004. This increase was principally
    attributable to the following:



| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Legal and related costs increased $543,000 due to an increase
    relating to new club leases, as well as increased litigation for
    both new and existing matters in the normal course of business.



Interest Expense.


Interest Income.


Provision for Corporate Income Taxes.




| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | Nine months ended September 30, 2005 compared to nine
    months ended September 30, 2004.

Revenues.


22



---



##### Table of Contents



Operating Expenses.




| |                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Payroll and related expenses increased by $9.7 million or
    9.3% to $114.0 million in the nine months ended
    September 30, 2005, from $104.3 million in the nine
    months ended September 30, 2004. This increase was
    principally attributable to a 5.4% increase in the total months
    of club operations from 1,176 to 1,240, as well as the following:



| |   |                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Payroll costs directly related to personal training, Group
    Exclusives and programming for children increased
    $4.5 million, or 25.6%, due to an increase in demand for
    these programs.                                                     
|
| |  | An offset to the increases in payroll relate to a
    $1.1 million one-time bonus received by vested option
    holders in the first quarter of 2004 in connection with a common
    stock distribution, while no such bonus payment was made in 2005.



| |                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Club operating expenses increased by $10.6 million, or
    12.3%, to $97.3 million in the nine months ended
    September 30, 2005, from $86.7 million in the nine
    months ended September 30, 2004. This increase was
    principally attributable to the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A $5.9 million increase in rent and occupancy expenses.
    Clubs that have opened, expanded since September 30, 2003
    or are under construction contributed $4.2 million of the
    increase and $1.7 million relates to our 125 mature clubs.                                                                                                                        
|
| |  | Utility costs increased $1.3 million.                                                                                                                                                                                                                                                                                                                                     
|
| |  | Advertising expense increased $1.4 million. This increase
    is principally attributable to a new advertising campaign that
    ran during the third quarter of 2005. Advertising expense, as a
    percent of revenue, increase to 2.8% of total revenue for the
    nine months ended September 30, 2005 to 2.6% of total
    revenue during the same period last year.



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | General and administrative expenses increased $1.6 million
    or 8.6% to $19.8 million in the nine months ended
    September 30, 2005 from $18.2 million during the same
    period in 2004. This increase was principally attributable to
    the following:



| |   |                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Accounting and consulting fees and expenses increased by
    $708,000 principally due to increases in audit and consulting
    fees with respect to the Sarbanes- Oxley Act 
    Section 404 preparedness.            
|
| |  | Legal and related costs increased $1.1 million due to an
    increase relating to new club leases, as well as increased
    litigation for both new and existing matters incurred in the
    normal course of business.



Goodwill Impairment:


Interest Expense.


23



---



##### Table of Contents



Interest Income.


Provision for Corporate Income Taxes.


Accreted Dividends on Preferred Stock.


Liquidity and Capital Resources




Operating Activities.




Investing Activities.


Financing Activities.






24



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##### Table of Contents















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



5 8




25



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##### Table of Contents















|                                   |  |                                     |           |           |        |   |        |           |  |   |           |  |  |               |         |  |  |   |           | 
|---------------------------------- |  | ----------------------------------- | --------- | --------- | ------ | - | ------ | --------- |  | - | --------- |  |  | ------------- | ------- |  |  | - | --------- | 
|                                   |  | Payments Due by Period (in $000s) |          
|                                   |  |                                     |          
|                                   |  |                                     |           | Less than |        |   |       
|Contracted Obligations             |  | Total                               |           |           | 1 year |   |        | 1-3 years |  |   | 4-5 years |  |  | After 5 years |        
|                                   |  |                                     |           |           |        |   |        |           |  |   |           |  |  |               |        
|Long-Term Debt(1)                  |  | $                                   | 1,123,666 |           |        | $ | 25,814 |           |  | $ | 50,603    |  |  | $             | 82,767  |  |  | $ | 964,482   | 
|Operating Lease Obligations(2)     |  |                                     | 704,934   |           |        |   | 55,352 |           |  |   | 120,687   |  |  |               | 113,059 |  |  |   | 415,836   | 
|                                   |  |                                     |           |           |        |   |        |           |  |   |           |  |  |               |        
|Total Contractual Cash Obligations |  | $                                   | 1,828,600 |           |        | $ | 81,166 |           |  | $ | 171,290   |  |  | $             | 195,826 |  |  | $ | 1,380,318 | 
|                                   |  |                                     |           |           |        |   |        |           |  |   |           |  |  |               |        








|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The long-term debt contractual cash obligations include
    principal payment requirements and interest on our
    95/8% Senior
    Notes amounting to $24.5 million annually. The obligations
    related to our 11.0% Discount Notes include $63.9 million
    of additional accretion from September 30, 2005 through
    February 1, 2009. Thereafter $23.4 million of annual
    interest on the Discount Notes has been included in these
    contractual obligations,
|   
|(2) | Operating lease obligations include base rent only. Certain
    leases provide for additional rent based on increases in real
    estate taxes, common area maintenance and, in certain cases,
    defined amounts based on the operating results of the lessee.                                                                                                                                                                                                            

Forward-Looking Statements




26



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##### Table of Contents








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










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





27



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##### Table of Contents






PART II. OTHER INFORMATION







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

Joseph Anaya
vs. Town Sports International, Inc. et al.











|        |                                                                
|------- | ---------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity Securities and Use of
    Proceeds










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








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








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



28



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##### Table of Contents








|        |          
|------- | ---------
|Item 6. | Exhibits.



| |     |         
| | --- | --------
| | (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 by Robert Giardina pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.
|            
|Exhibit 32.2 |  | Certification by Richard Pyle pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.   
|            
|Exhibit 32.3 |  | Certification by Mark Smith pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.     

29



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##### Table of Contents






SIGNATURES




|                        |  |                                                                                                                                                  
|----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|                        |  | TOWN SPORTS INTERNATIONAL HOLDINGS, INC.                                                                                                         
|                       
|DATE: November 11, 2005 |  | By: /s/ Richard
    PyleRichard
    Pyle    Chief Financial Officer, Office
    of the President    (principal
    financial, accounting officer)
|                       
|DATE: November 11, 2005 |  | By: /s/ Robert
    GiardinaRobert
    Giardina    Chief Executive Officer,
    Office of the President    (principal
    executive officer)      

30