##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





Form 10-Q


|   |  |                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934. 
|  
|   |  | For the quarterly period ended June 30, 2006                                                 
|  
|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 000-52013


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


12b-2).


o o þ


12b-2). o þ












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##### 










TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


FORM 10-Q


For the Quarter Ended June 30, 2006


INDEX


|                                                                |  |                                                                                                                                                                           |    |      |    | 
|--------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                                |  |                                                                                                                                                                           |    | Page
|                                                                |  |                                                                                                                                                                           |    |     
|PART I. FINANCIAL
    INFORMATION                              
|Item 1.                                                         |  | Financial Statements (Unaudited)                                                                                                                                          |    |      |    | 
|                                                                |  | a) Condensed Consolidated Balance Sheets as
    of December 31, 2005 and June 30, 2006                                                                                    |    |      | 3  | 
|                                                                |  | b) Condensed Consolidated Statements of
    Operations and Statements of Comprehensive
    Income       (Loss) for the three
    and six months ended June, 2005 and 2006 |    |      | 4  | 
|                                                                |  | c) Condensed Consolidated Statements of
    Cash Flows for the six months ended June 30, 2005
    and       2006                                                          |    |      | 5  | 
|                                                                |  | d) Notes to Condensed Consolidated
    Financial Statements                                                                                                               |    |      | 6  | 
|Item 2.                                                         |  | Managements Discussion and Analysis of Financial Condition
    and Results of Operations                                                                                 |    |      | 21 | 
|Item 3.                                                         |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                |    |      | 30 | 
|Item 4.                                                         |  | Controls and Procedures                                                                                                                                                   |    |      | 30 | 
|                                                               
|PART II. OTHER INFORMATION                                     
|Item 1.                                                         |  | Legal Proceedings                                                                                                                                                         |    |      | 30 | 
|Item 1A.                                                        |  | Risk Factors                                                                                                                                                              |    |      | 31 | 
|Item 2.                                                         |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                               |    |      | 31 | 
|Item 3.                                                         |  | Defaults upon Senior Securities                                                                                                                                           |    |      | 31 | 
|Item 4.                                                         |  | Submission of Matters to a Vote of Security Holders                                                                                                                       |    |      | 31 | 
|Item 5.                                                         |  | Other Information                                                                                                                                                         |    |      | 31 | 
|Item 6.                                                         |  | Exhibits                                                                                                                                                                  |    |      | 31 | 
|                                                               
|SIGNATURES                                                      |  |                                                                                                                                                                           |    |      |    | 
|Section 302 certification                                       |  |                                                                                                                                                                           | 34 |     
|Section 302 certification                                       |  |                                                                                                                                                                           | 35 |     
|Section 906 certification                                       |  |                                                                                                                                                                           | 36 |     
|Section 906 certification                                       |  |                                                                                                                                                                           | 37 |     
|EX-3.1: AMENDED AND RESTATED CERTIFICATE OF INCORPORATION      
|EX-3.5: AMENDED AND RESTATED BY-LAWS                           
|EX-10.9.1: AMENDMENT NO. 2 TO THE REGISTRATION RIGHTS AGREEMENT
|EX-10.26: AMENDMENT NO. 1 TO THE 2006 STOCK INCENTIVE PLAN     
|EX-31.1: CERTIFICATION                                         
|EX-31.2: CERTIFICATION                                         
|EX-32.1: CERTIFICATION                                         
|EX-32.2: CERTIFICATION                                         



2



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##### Table of Contents






TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


December 31, 2005 and June 30, 2006


(All figures in $000s, except share data)


(Unaudited)


|                                       |                                                                                                                                                                                      |                                             |         |          |          |   |         |         |         |  
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------- | ------- | -------- | -------- | - | ------- | ------- | ------- | -
|                                       |                                                                                                                                                                                      | December 31,                                |         |          | June 30, |  
|                                       |                                                                                                                                                                                      | 2005                                        |         |          | 2006     |  
|                                       |                                                                                                                                                                                      |                                             |         |          |          |  
|ASSETS                                
|Current assets:                        |                                                                                                                                                                                      |                                             |         |          |          |   |         |        
|                                       | Cash and cash equivalents                                                                                                                                                            |                                             | $       | 51,304   |          |   | $       | 71,354  |        
|                                       | Accounts receivable (less allowance for doubtful accounts of
    $1,984 and $1,764 as of December 31, 2005 and June 30,
    2006, respectively)                                      |                                             |         | 7,103    |          |   |         | 6,289   |        
|                                       | Inventory                                                                                                                                                                            |                                             |         | 421      |          |   |         | 546     |        
|                                       | Prepaid corporate income taxes                                                                                                                                                       |                                             |         | 4,518    |          |   |         | 1,503   |        
|                                       | Prepaid expenses and other current assets                                                                                                                                            |                                             |         | 13,907   |          |   |         | 12,794  |        
|                                       |                                                                                                                                                                                      |                                             |         |          |          |  
|                                       |                                                                                                                                                                                      | Total current assets                        |         |          | 77,253   |   |         |         | 92,486  |  
|Fixed assets, net                      |                                                                                                                                                                                      |                                             | 253,131 |          |          |   | 256,968 |        
|Goodwill                               |                                                                                                                                                                                      |                                             | 49,974  |          |          |   | 50,024  |        
|Intangible assets, net                 |                                                                                                                                                                                      |                                             | 741     |          |          |   | 420     |        
|Deferred tax asset, net                |                                                                                                                                                                                      |                                             | 24,378  |          |          |   | 28,160  |        
|Deferred membership costs              |                                                                                                                                                                                      |                                             | 11,522  |          |          |   | 14,423  |        
|Other assets                           |                                                                                                                                                                                      |                                             | 16,772  |          |          |   | 13,527  |        
|                                       |                                                                                                                                                                                      |                                             |         |          |          |  
|                                       |                                                                                                                                                                                      | Total assets                                |         | $        | 433,771  |   |         | $       | 456,008 |  
|                                       |                                                                                                                                                                                      |                                             |         |          |          |  
|Liabilities and Stockholders Deficit 
|Current liabilities:                   |                                                                                                                                                                                      |                                             |         |          |          |   |         |        
|                                       | Current portion of long-term debt                                                                                                                                                    |                                             | $       | 1,267    |          |   | $       | 58,857  |        
|                                       | Accounts payable                                                                                                                                                                     |                                             |         | 8,333    |          |   |         | 6,456   |        
|                                       | Accrued expense                                                                                                                                                                      |                                             |         | 31,620   |          |   |         | 33,178  |        
|                                       | Accrued interest                                                                                                                                                                     |                                             |         | 5,267    |          |   |         | 3,525   |        
|                                       | Deferred revenue                                                                                                                                                                     |                                             |         | 33,028   |          |   |         | 37,253  |        
|                                       |                                                                                                                                                                                      |                                             |         |          |          |  
|                                       |                                                                                                                                                                                      | Total current liabilities                   |         |          | 79,515   |   |         |         | 139,269 |  
|Long-term debt                         |                                                                                                                                                                                      |                                             | 409,895 |          |          |   | 274,960 |        
|Deferred lease liabilities             |                                                                                                                                                                                      |                                             | 48,898  |          |          |   | 50,463  |        
|Deferred revenue                       |                                                                                                                                                                                      |                                             | 2,905   |          |          |   | 8,012   |        
|Other liabilities                      |                                                                                                                                                                                      |                                             | 8,241   |          |          |   | 9,583   |        
|                                       |                                                                                                                                                                                      |                                             |         |          |          |  
|                                       |                                                                                                                                                                                      | Total liabilities                           |         |          | 549,454  |   |         |         | 482,287 |  
|Commitments and contingencies (Note 8) |                                                                                                                                                                                      |                                             |         |          |          |   |         |        
|Stockholders deficit:                 |                                                                                                                                                                                      |                                             |         |          |          |   |         |        
|                                       | Class A voting common stock, $.001 par value; issued
    and outstanding 18,327,722 and 25,930,268 shares at
    December 31, 2005 and June 30, 2006, respectively.
    (See Note 2) |                                             |         | 1        |          |   |         | 26      |        
|                                       | Paid-in capital                                                                                                                                                                      |                                             |         | (113,588 | )        |   |         | (22,099 | )      
|                                       | Unearned compensation                                                                                                                                                                |                                             |         | (509     | )        |   |         |        |        
|                                       | Accumulated other comprehensive income (currency translation
    adjustment)                                                                                                         |                                             |         | 386      |          |   |         | 554     |        
|                                       | Accumulated deficit                                                                                                                                                                  |                                             |         | (1,973   | )        |   |         | (4,760  | )      
|                                       |                                                                                                                                                                                      |                                             |         |          |          |  
|                                       |                                                                                                                                                                                      | Total stockholders deficit                 |         |          | (115,683 | ) |         |         | (26,279 | )
|                                       |                                                                                                                                                                                      |                                             |         |          |          |  
|                                       |                                                                                                                                                                                      | Total liabilities and stockholders deficit |         | $        | 433,771  |   |         | $       | 456,008 |  
|                                       |                                                                                                                                                                                      |                                             |         |          |          |  



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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


For the six months ended June 30, 2005 and 2006


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


(Unaudited)


|                                                                                     |                                                                         |                             |        |        |                           |   |         |         |            |   |         |         |            |   |         |         |            | 
|------------------------------------------------------------------------------------ | ----------------------------------------------------------------------- | --------------------------- | ------ | ------ | ------------------------- | - | ------- | ------- | ---------- | - | ------- | ------- | ---------- | - | ------- | ------- | ---------- | 
|                                                                                     |                                                                         | Three Months Ended June 30, |        |        | Six Months Ended June 30, |  
|                                                                                     |                                                                         |                             |        |        |                           |  
|                                                                                     |                                                                         | 2005                        |        |        | 2006                      |   |         | 2005    |            |   | 2006    |        
|                                                                                     |                                                                         |                             |        |        |                           |   |         |         |            |   |         |        
|Revenues:                                                                            |                                                                         |                             |        |        |                           |   |         |         |            |   |         |         |            |   |         |        
|                                                                                     | Club Operations                                                         |                             | $      | 97,078 |                           |   | $       | 107,659 |            |   | $       | 189,909 |            |   | $       | 210,582 |           
|                                                                                     | Fees and Other                                                          |                             |        | 918    |                           |   |         | 1,810   |            |   |         | 1,933   |            |   |         | 2,913   |           
|                                                                                     |                                                                         |                             |        |        |                           |   |         |         |            |   |         |        
|                                                                                     |                                                                         |                             | 97,996 |        |                           |   | 109,469 |         |            |   | 191,842 |         |            |   | 213,495 |        
|                                                                                     |                                                                         |                             |        |        |                           |   |         |         |            |   |         |        
|Operating Expenses:                                                                  |                                                                         |                             |        |        |                           |   |         |         |            |   |         |         |            |   |         |        
|                                                                                     | Payroll and related                                                     |                             |        | 39,168 |                           |   |         | 40,591  |            |   |         | 75,564  |            |   |         | 81,487  |           
|                                                                                     | Club operating                                                          |                             |        | 31,717 |                           |   |         | 36,781  |            |   |         | 63,166  |            |   |         | 71,251  |           
|                                                                                     | General and administrative                                              |                             |        | 6,467  |                           |   |         | 8,106   |            |   |         | 13,145  |            |   |         | 15,967  |           
|                                                                                     | Depreciation and amortization                                           |                             |        | 10,084 |                           |   |         | 10,400  |            |   |         | 19,823  |            |   |         | 20,786  |           
|                                                                                     |                                                                         |                             |        |        |                           |   |         |         |            |   |         |        
|                                                                                     |                                                                         |                             | 87,436 |        |                           |   | 95,878  |         |            |   | 171,698 |         |            |   | 189,491 |        
|                                                                                     |                                                                         |                             |        |        |                           |   |         |         |            |   |         |        
|Operating Income                                                                     |                                                                         |                             | 10,560 |        |                           |   | 13,591  |         |            |   | 20,144  |         |            |   | 24,004  |        
|Loss on extinguishment of debt                                                       |                                                                         |                             |       |        |                           |   | 8,667   |         |            |   |        |         |            |   | 8,667   |        
|Interest expense                                                                     |                                                                         |                             | 10,508 |        |                           |   | 10,395  |         |            |   | 20,628  |         |            |   | 21,083  |        
|Interest income                                                                      |                                                                         |                             | (465   | )      |                           |   | (662    | )       |            |   | (834    | )       |            |   | (1,387  | )      
|Equity in the earnings of investees and rental income                                |                                                                         |                             | (404   | )      |                           |   | (475    | )       |            |   | (875    | )       |            |   | (908    | )      
|                                                                                     |                                                                         |                             |        |        |                           |   |         |         |            |   |         |        
|                                                                                     | Income (loss) before provision (benefit) for corporate income
    taxes |                             |        | 921    |                           |   |         | (4,334  | )          |   |         | 1,225   |            |   |         | (3,451  | )         
|Provision (benefit) for corporate income taxes                                       |                                                                         |                             | 430    |        |                           |   | (1,682  | )       |            |   | 555     |         |            |   | (664    | )      
|                                                                                     |                                                                         |                             |        |        |                           |   |         |         |            |   |         |        
|                                                                                     | Net income (loss)                                                       |                             | $      | 491    |                           |   | $       | (2,652  | )          |   | $       | 670     |            |   | $       | (2,787  | )         
|                                                                                     |                                                                         |                             |        |        |                           |   |         |         |            |   |         |        
|Earnings (loss) per share:                                                           |                                                                         |                             |        |        |                           |   |         |         |            |   |         |         |            |   |         |        
|Basic                                                                                |                                                                         | $                           | 0.03   |        |                           | $ | (0.13   | )       |            | $ | 0.04    |         |            | $ | (0.14   | )      
|Diluted                                                                              |                                                                         | $                           | 0.03   |        |                           | $ | (0.13   | )       |            | $ | 0.04    |         |            | $ | (0.14   | )      
|Weighted average number of shares used in calculating earnings
    (loss) per share: |                                                                         |                             |        |        |                           |   |         |         |            |   |         |         |            |   |         |        
|                                                                                     |                                                                         | Basic                       |        |        | 18,327,722                |   |         |         | 20,660,229 |   |         |         | 18,341,428 |   |         |         | 19,500,419 | 
|                                                                                     |                                                                         | Diluted                     |        |        | 18,332,734                |   |         |         | 20,660,229 |   |         |         | 18,343,710 |   |         |         | 19,500,419 | 
|Statements of Comprehensive Income (Loss)                                            |                                                                         |                             |        |        |                           |   |         |         |            |   |         |         |            |   |         |        
|Net income (loss)                                                                    |                                                                         | $                           | 491    |        |                           | $ | (2,652  | )       |            | $ | 670     |         |            | $ | (2,787  | )      
|Foreign currency translation adjustments                                             |                                                                         |                             | (287   | )      |                           |   | 162     |         |            |   | (473    | )       |            |   | 168     |        
|                                                                                     |                                                                         |                             |        |        |                           |   |         |         |            |   |         |        
|Comprehensive income (loss)                                                          |                                                                         | $                           | 204    |        |                           | $ | (2,490  | )       |            | $ | 197     |         |            | $ | (2,619  | )      
|                                                                                     |                                                                         |                             |        |        |                           |   |         |         |            |   |         |        



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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


For the six months ended June 30, 2005 and 2006


(All figures in $000s)


(Unaudited)


|                                                                                                          |                                                                                                    |                                                         |        |         |         |   |        |         |         |  
|--------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------ | ------- | ------- | - | ------ | ------- | ------- | -
|                                                                                                          |                                                                                                    | For the Six Months                                      |       
|                                                                                                          |                                                                                                    | Ended June 30,                                          |       
|                                                                                                          |                                                                                                    |                                                         |       
|                                                                                                          |                                                                                                    | 2005                                                    |        |         | 2006    |  
|                                                                                                          |                                                                                                    |                                                         |        |         |         |  
|Cash flows from operating activities:                                                                     |                                                                                                    |                                                         |        |         |         |   |        |        
|                                                                                                          | Net income (loss)                                                                                  |                                                         | $      | 670     |         |   | $      | (2,787  | )      
|                                                                                                          |                                                                                                    |                                                         |        |         |         |  
|Adjustments to reconcile net income (loss) to net cash provided
    by operating activities:              |                                                                                                    |                                                         |        |         |         |   |        |        
|                                                                                                          | Depreciation and amortization                                                                      |                                                         |        | 19,823  |         |   |        | 20,786  |        
|                                                                                                          | Interest expense on Senior Discount Notes                                                          |                                                         |        | 7,545   |         |   |        | 8,398   |        
|                                                                                                          | Compensation expense incurred in connection with stock options                                     |                                                         |        | 25      |         |   |        | 574     |        
|                                                                                                          | Noncash rental expense, net of noncash rental income                                               |                                                         |        | 968     |         |   |        | (42     | )      
|                                                                                                          | Loss on extinguishment of debt                                                                     |                                                         |        |        |         |   |        | 8,667   |        
|                                                                                                          | Amortization of debt issuance costs                                                                |                                                         |        | 817     |         |   |        | 815     |        
|                                                                                                          | Net changes in certain operating assets and liabilities                                            |                                                         |        | 2,512   |         |   |        | 13,771  |        
|                                                                                                          | Increase in deferred tax asset                                                                     |                                                         |        | (6,639  | )       |   |        | (3,782  | )      
|                                                                                                          | (Increase) decrease in deferred membership costs                                                   |                                                         |        | 168     |         |   |        | (2,901  | )      
|                                                                                                          | Increase in reserve for self-insured liability claims                                              |                                                         |        | 1,014   |         |   |        | 1,551   |        
|                                                                                                          | Landlord contributions to tenant improvements                                                      |                                                         |        | 2,988   |         |   |        | 3,271   |        
|                                                                                                          | Other                                                                                              |                                                         |        | (336    | )       |   |        | 86      |        
|                                                                                                          |                                                                                                    |                                                         |        |         |         |  
|                                                                                                          |                                                                                                    | Total adjustments                                       |        |         | 28,885  |   |        |         | 51,194  |  
|                                                                                                          |                                                                                                    |                                                         |        |         |         |  
|                                                                                                          |                                                                                                    | Net cash provided by operating activities               |        |         | 29,555  |   |        |         | 48,407  |  
|                                                                                                          |                                                                                                    |                                                         |        |         |         |  
|Cash flows from investing activities:                                                                     |                                                                                                    |                                                         |        |         |         |   |        |        
|                                                                                                          | Capital expenditures, net of effect of acquired businesses                                         |                                                         |        | (21,830 | )       |   |        | (26,004 | )      
|                                                                                                          | Acquisition of businesses                                                                          |                                                         |        | (2,801  | )       |   |        |        |        
|                                                                                                          |                                                                                                    |                                                         |        |         |         |  
|                                                                                                          |                                                                                                    | Net cash used in investing activities                   |        |         | (24,631 | ) |        |         | (26,004 | )
|                                                                                                          |                                                                                                    |                                                         |        |         |         |  
|Cash flows from financing activities:                                                                     |                                                                                                    |                                                         |        |         |         |   |        |        
|                                                                                                          | Proceeds from initial public equity offering, net of
    underwriting discounts and offering costs |                                                         |        |        |         |   | $      | 91,796  |        
|                                                                                                          | Repayment of Senior Notes                                                                          |                                                         |        |        |         |   |        | (85,001 | )      
|                                                                                                          | Proceeds from exercise of stock options                                                            |                                                         |        |        |         |   |        | 85      |        
|                                                                                                          | Repurchase of common stock                                                                         |                                                         |        | (184    | )       |   |        | (433    | )      
|                                                                                                          | Change in book overdraft                                                                           |                                                         |        |        |         |   |        | (986    | )      
|                                                                                                          | Repayment of long term borrowings                                                                  |                                                         |        | (499    | )       |   |        | (742    | )      
|                                                                                                          | Premium paid on extinguishment of debt and related costs                                           |                                                         |        |        |         |   |        | (7,072  | )      
|                                                                                                          |                                                                                                    |                                                         |        |         |         |  
|                                                                                                          |                                                                                                    | Net cash used in financing activities                   |        |         | (683    | ) |        |         | (2,353  | )
|                                                                                                          |                                                                                                    |                                                         |        |         |         |  
|                                                                                                          |                                                                                                    | Net increase in cash and cash equivalents               |        |         | 4,241   |   |        |         | 20,050  |  
|Cash and cash equivalents at beginning of period                                                          |                                                                                                    |                                                         | 57,506 |         |         |   | 51,304 |        
|                                                                                                          |                                                                                                    |                                                         |        |         |         |  
|                                                                                                          |                                                                                                    | Cash and cash equivalents at end of period              |        | $       | 61,747  |   |        | $       | 71,354  |  
|                                                                                                          |                                                                                                    |                                                         |        |         |         |  
|Summary of change in certain operating assets and liabilities;
    net of effects of acquired businesses: |                                                                                                    |                                                         |        |         |         |   |        |        
|                                                                                                          | Increase in accounts receivable                                                                    |                                                         | $      | (1,386  | )       |   | $      | (877    | )      
|                                                                                                          | Increase in inventory                                                                              |                                                         |        | (185    | )       |   |        | (123    | )      
|                                                                                                          | Decrease, (increase) in prepaid expenses, prepaid income taxes,
    and other current assets       |                                                         |        | (186    | )       |   |        | 3,665   |        
|                                                                                                          | Increase (decrease) in accounts payable, accrued expenses and
    accrued interest                 |                                                         |        | (2,889  | )       |   |        | 1,779   |        
|                                                                                                          | Increase in deferred revenue                                                                       |                                                         |        | 7,158   |         |   |        | 9,327   |        
|                                                                                                          |                                                                                                    |                                                         |        |         |         |  
|                                                                                                          |                                                                                                    | Net changes in certain operating assets and liabilities |        | $       | 2,512   |   |        | $       | 13,771  |  
|                                                                                                          |                                                                                                    |                                                         |        |         |         |  



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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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


(Unaudited)




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









|   |                        
|-- | -----------------------
|2. | Initial Public Offering

5 8


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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|   |                          
|-- | -------------------------
|3. | Recent Accounting Changes

Accounting for Income Taxes




|   |               
|-- | --------------
|4. | Long-Term Debt

|                                                 |  |              |         |  |          |   |         | 
|------------------------------------------------ |  | ------------ | ------- |  | -------- | - | ------- | 
|                                                 |  | December 31, |         |  | June 30, |  
|                                                 |  | 2005         |         |  | 2006     |  
|                                                 |  | ($000s)     |         |  | ($000s) |  
|                                                 |  |              |         |  |          |  
|Senior
    Notes 95/8%, due 2011                 |  | $            | 255,000 |  |          | $ | 169,999 | 
|Senior Discount Notes 11.0%, due 2014            |  |              | 153,077 |  |          |   | 161,474 | 
|Notes payable for acquired businesses            |  |              | 3,085   |  |          |   | 2,344   | 
|                                                 |  |              |         |  |          |  
|                                                 |  |              | 411,162 |  |          |   | 333,817 | 
|Less, current portion to be paid within one year |  |              | 1,267   |  |          |   | 58,857  | 
|                                                 |  |              |         |  |          |  
|Long-term portion                                |  | $            | 409,895 |  |          | $ | 274,960 | 
|                                                 |  |              |         |  |          |  





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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


5 8 5 8


5 8






|   |                          
|-- | -------------------------
|5. | Earnings (Loss) Per Share





|                                                                   |  |                      |            |  |                           |  |            |      |  |  |            |  |  |  |            | 
|------------------------------------------------------------------ |  | -------------------- | ---------- |  | ------------------------- |  | ---------- | ---- |  |  | ---------- |  |  |  | ---------- | 
|                                                                   |  | Three Months Ended   |            |  | Six Months Ended June 30, | 
|                                                                   |  | June 30, (Unaudited) |            |  | (Unaudited)               | 
|                                                                   |  |                      |            |  |                           | 
|                                                                   |  | 2005                 |            |  | 2006                      |  |            | 2005 |  |  | 2006       | 
|                                                                   |  |                      |            |  |                           |  |            |      |  |  |            | 
|Weighted average number of common share outstanding 
    basic    |  |                      | 18,327,722 |  |                           |  | 20,660,229 |      |  |  | 18,341,428 |  |  |  | 19,500,419 | 
|Effective of diluted stock options                                 |  |                      | 5,012      |  |                           |  |           |      |  |  | 2,282      |  |  |  |           | 
|                                                                   |  |                      |            |  |                           |  |            |      |  |  |            | 
|Weighted average number of common shares outstanding 
    diluted |  |                      | 18,332,734 |  |                           |  | 20,660,229 |      |  |  | 18,343,710 |  |  |  | 19,500,419 | 
|                                                                   |  |                      |            |  |                           |  |            |      |  |  |            | 





|   |                         
|-- | ------------------------
|6. | Stock-Based Compensation

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


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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Accounting
for Stock Issued to Employees






|                                                                                                                                       |             |                     |     |            |               |   |     |      | 
|-------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------- | --- | ---------- | ------------- | - | --- | ---- | 
|                                                                                                                                       |             |                     |     | Six Months |              
|                                                                                                                                       |             | Three Months Ended, |     |            | Ended,        |  
|                                                                                                                                       |             | June 30, 2005       |     |            | June 30, 2005 |  
|                                                                                                                                       |             |                     |     |            |               |  
|                                                                                                                                       |             | ($000s)            |     |            | ($000s)      |  
|Net Income, as reported                                                                                                                |             | $                   | 491 |            |               | $ | 670 |     
|Add: Stock-based compensation included in reported net earnings,
    net of related tax effects                                        |             |                     | 6   |            |               |   | 15  |     
|Less: Stock-based compensation expense determined under the
    fair-value-based method for all awards, net of related tax
    effects |             |                     | (29 | )          |               |   | (57 | )   
|                                                                                                                                       |             |                     |     |            |               |  
|Pro forma net earnings                                                                                                                 |             | $                   | 468 |            |               | $ | 628 |     
|                                                                                                                                       |             |                     |     |            |               |  
|Basic earnings (loss) per share:                                                                                                       |             |                     |     |            |               |   |     |     
|                                                                                                                                       | As reported |                     | $   | 0.03       |               |   | $   | 0.04 | 
|                                                                                                                                       | Pro forma   |                     | $   | 0.03       |               |   | $   | 0.03 | 
|Diluted earnings (loss) per share:                                                                                                     |             |                     |     |            |               |   |     |     
|                                                                                                                                       | As reported |                     | $   | 0.03       |               |   | $   | 0.04 | 
|                                                                                                                                       | Pro forma   |                     | $   | 0.03       |               |   | $   | 0.03 | 



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                             |  |                |           |           |          |           |             |          |  |           |          |  |  |   |       | 
|---------------------------- |  | -------------- | --------- | --------- | -------- | --------- | ----------- | -------- |  | --------- | -------- |  |  | - | ----- | 
|                             |  |                |           |           |          | Weighted- |             |          | 
|                             |  |                |           |           |          | Average   |             |          | 
|                             |  |                |           | Weighted- |          |           | Remaining   |          |  | Aggregate |         
|                             |  |                |           | Average   |          |           | Contractual |          |  | Intrinsic |         
|                             |  | Shares         |           |           | Exercise |           |             | Term (in |  |           | Value    | 
|                             |  | (in thousands) |           |           | Price    |           |             | years)   |  |           | ($000s) | 
|                             |  |                |           |           |          |           |             |          |  |           |          | 
|Outstanding at June 30, 2006 |  |                | 1,095,080 |           |          | $         | 6.41        |          |  |           | 6.4      |  |  | $ | 6,331 | 
|Vested at June 30, 2006      |  |                | 304,640   |           |          | $         | 7.46        |          |  |           | 5.5      |  |  | $ | 1,445 | 
|Exercisable at June 30, 2006 |  |                | 304,640   |           |          | $         | 7.46        |          |  |           | 5.5      |  |  | $ | 1,445 | 

in-the






|   |                               
|-- | ------------------------------
|7. | Goodwill and Other Intangibles





|                                                           |  |   |        | 
|---------------------------------------------------------- |  | - | ------ | 
|Balance as of December 31, 2005                            |  | $ | 49,974 | 
|Changes due to foreign currency exchange rate fluctuations |  |   | 50     | 
|                                                           |  |   |       
|Balance as of June 30, 2006                                |  | $ | 50,024 | 
|                                                           |  |   |       

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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                           |  |                         |        |  |              |   |         |                 |  |   |     | 
|-------------------------- |  | ----------------------- | ------ |  | ------------ | - | ------- | --------------- |  | - | --- | 
|                           |  | As of December 31, 2005 |       
|                           |  | ($000s)                |       
|                           |  |                         |       
|                           |  | Gross Carrying          |        |  | Accumulated  |   |         |                
|Acquired Intangible Assets |  | Amount                  |        |  | Amortization |   |         | Net Intangibles | 
|                           |  |                         |        |  |              |   |         |                 | 
|Membership lists           |  | $                       | 11,450 |  |              | $ | (10,939 | )               |  | $ | 511 | 
|Covenants-not-to-compete   |  |                         | 1,151  |  |              |   | (949    | )               |  |   | 202 | 
|Beneficial lease           |  |                         | 223    |  |              |   | (195    | )               |  |   | 28  | 
|                           |  |                         |        |  |              |   |         |                 | 
|                           |  | $                       | 12,824 |  |              | $ | (12,083 | )               |  | $ | 741 | 
|                           |  |                         |        |  |              |   |         |                 | 

|                         |  |                     |        |  |              |   |         |                 |  |   |     | 
|------------------------ |  | ------------------- | ------ |  | ------------ | - | ------- | --------------- |  | - | --- | 
|                         |  | As of June 30, 2006 |       
|                         |  | ($000s)            |       
|                         |  |                     |       
|                         |  | Gross Carrying      |        |  | Accumulated  |   |         |                
|                         |  | Amount              |        |  | Amortization |   |         | Net Intangibles | 
|                         |  |                     |        |  |              |   |         |                 | 
|Membership lists         |  | $                   | 11,450 |  |              | $ | (11,227 | )               |  | $ | 223 | 
|Covenants-not-to-compete |  |                     | 1,151  |  |              |   | (977    | )               |  |   | 174 | 
|Beneficial lease         |  |                     | 223    |  |              |   | (200    | )               |  |   | 23  | 
|                         |  |                     |        |  |              |   |         |                 | 
|                         |  | $                   | 12,824 |  |              | $ | (12,404 | )               |  | $ | 420 | 
|                         |  |                     |        |  |              |   |         |                 | 



|                                                                      |  |   |     | 
|--------------------------------------------------------------------- |  | - | --- | 
|Aggregate Amortization Expense for the years ending June 30, ($000s) |  |  
|                                                                      |  |  
|2007                                                                  |  | $ | 289 | 
|2008                                                                  |  |   | 65  | 
|2009                                                                  |  |   | 57  | 
|2010                                                                  |  |   | 9   | 
|                                                                      |  |   |    
|                                                                      |  | $ | 420 | 
|                                                                      |  |   |    





|   |                              
|-- | -----------------------------
|8. | Commitments and Contingencies

Sarah Cruz, et
ano v. Town Sports International, Inc.


Carlos Urbina et ano v 26
Court Street Associates, LLC et al.


11



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                                    
|-- | -----------------------------------
|9. | Investments in Affiliated Companies



|                       |  |                |     |  |                  |   |     |      |  |   |       |  |  |   |       | 
|---------------------- |  | -------------- | --- |  | ---------------- | - | --- | ---- |  | - | ----- |  |  | - | ----- | 
|                       |  | Three months   |     |  | Six months ended |  
|                       |  | ended June 30, |     |  | June 30,         |  
|                       |  | ($000s)       |     |  | ($000s)         |  
|                       |  |                |     |  |                  |  
|                       |  | 2005           |     |  | 2006             |   |     | 2005 |  |   | 2006  | 
|                       |  |                |     |  |                  |   |     |      |  |   |       | 
|Revenue                |  | $              | 873 |  |                  | $ | 880 |      |  | $ | 1,761 |  |  | $ | 1,786 | 
|Income from operations |  |                | 325 |  |                  |   | 428 |      |  |   | 737   |  |  |   | 795   | 
|Net income             |  |                | 294 |  |                  |   | 412 |      |  |   | 675   |  |  |   | 759   | 



|    |                  
|--- | -----------------
|10. | Subsequent Events









|    |           
|--- | ----------
|11. | Guarantors

5 8


3-10d S-X


12



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Balance Sheet


December 31, 2005


(All figures in $000s)


(Unaudited)


|                                      |                                           |                                              |          |       |          |   |            |            |         |           |            |        |         |              |     |        |              |   |          |        |          |   |          |        |          |  
|------------------------------------- | ----------------------------------------- | -------------------------------------------- | -------- | ----- | -------- | - | ---------- | ---------- | ------- | --------- | ---------- | ------ | ------- | ------------ | --- | ------ | ------------ | - | -------- | ------ | -------- | - | -------- | ------ | -------- | -
|                                      |                                           |                                              |          |       |          |   |            | Non-       |         |           |            |        |        
|                                      |                                           | TSI                                          |          |       |          |   | Subsidiary |            |         | Guarantor |            |        |         |              |    
|                                      |                                           | Holdings                                     |          |       | TSI      |   |            | Guarantors |         |           | Subsidiary |        |         | Eliminations |     |        | Consolidated |  
|                                      |                                           |                                              |          |       |          |   |            |            |         |           |            |        |         |              |     |        |              |  
|ASSETS                               
|Current assets:                       |                                           |                                              |          |       |          |   |            |            |         |           |            |        |         |              |     |        |              |   |          |        |          |   |          |       
|                                      | Cash and cash equivalents                 |                                              | $        | 1     |          |   |            | 1,359      |         |           | $          | 48,682 |         |              | $   | 1,262  |              |   | $        |       |          |   | $        | 51,304 |         
|                                      | Accounts receivable, net                  |                                              |          |      |          |   |            | 3,664      |         |           |            | 6,144  |         |              |     | 133    |              |   |          | (2,838 | )        |   |          | 7,103  |         
|                                      | Inventory                                 |                                              |          |      |          |   |            |           |         |           |            | 395    |         |              |     | 26     |              |   |          |       |          |   |          | 421    |         
|                                      | Prepaid corporate income taxes            |                                              |          |      |          |   |            | 4,550      |         |           |            | (32    | )       |              |     |       |              |   |          |       |          |   |          | 4,518  |         
|                                      | Inter-company receivable (payable)        |                                              |          | 1,137 |          |   |            | (1,137     | )       |           |            |       |         |              |     |       |              |   |          |       |          |   |          |       |         
|                                      | Prepaid expenses and other current assets |                                              |          |      |          |   |            | 5,425      |         |           |            | 10,195 |         |              |     | (1,713 | )            |   |          |       |          |   |          | 13,907 |         
|                                      |                                           |                                              |          |       |          |   |            |            |         |           |            |        |         |              |     |        |              |  
|                                      |                                           | Total current assets                         |          |       | 1,138    |   |            |            | 13,861  |           |            |        | 65,384  |              |     |        | (292         | ) |          |        | (2,838   | ) |          |        | 77,253   |  
|Investment in subsidiaries            |                                           |                                              | 18,941   |       |          |   | 253,702    |            |         |           |           |        |         |              |    |        |              |   | (272,643 | )      |          |   |         |       
|Fixed assets, net                     |                                           |                                              |         |       |          |   | 10,114     |            |         |           | 242,149    |        |         |              | 868 |        |              |   |         |        |          |   | 253,131  |       
|Goodwill                              |                                           |                                              |         |       |          |   |           |            |         |           | 49,215     |        |         |              | 759 |        |              |   |         |        |          |   | 49,974   |       
|Intangible assets, net                |                                           |                                              |         |       |          |   |           |            |         |           | 741        |        |         |              |    |        |              |   |         |        |          |   | 741      |       
|Deferred tax assets, net              |                                           |                                              | 13,560   |       |          |   | 11,354     |            |         |           | (492       | )      |         |              | (44 | )      |              |   |         |        |          |   | 24,378   |       
|Deferred membership costs             |                                           |                                              |         |       |          |   | 94         |            |         |           | 11,428     |        |         |              |    |        |              |   |         |        |          |   | 11,522   |       
|Other assets                          |                                           |                                              | 3,755    |       |          |   | 11,833     |            |         |           | 1,184      |        |         |              |    |        |              |   |         |        |          |   | 16,772   |       
|                                      |                                           |                                              |          |       |          |   |            |            |         |           |            |        |         |              |     |        |              |  
|                                      |                                           | Total assets                                 |          | $     | 37,394   |   |            | $          | 300,958 |           |            | $      | 369,609 |              |     | $      | 1,291        |   |          | $      | (275,481 | ) |          | $      | 433,771  |  
|                                      |                                           |                                              |          |       |          |   |            |            |         |           |            |        |         |              |     |        |              |  
|LIABILITIES AND STOCKHOLDERS DEFICIT
|Current liabilities                   |                                           |                                              |          |       |          |   |            |            |         |           |            |        |         |              |     |        |              |   |          |        |          |   |          |       
|                                      | Current portion of long-term debt         |                                              | $        |      |          |   | $          |           |         |           | $          | 1,267  |         |              | $   |       |              |   | $        |       |          |   |          | 1,267  |         
|                                      | Accounts payable                          |                                              |          |      |          |   |            | (82        | )       |           |            | 8,415  |         |              |     |       |              |   |          |       |          |   |          | 8,333  |         
|                                      | Accrued expenses                          |                                              |          |      |          |   |            | 13,364     |         |           |            | 17,864 |         |              |     | 392    |              |   |          |       |          |   |          | 31,620 |         
|                                      | Accrued interest                          |                                              |          |      |          |   |            | 5,264      |         |           |            | 2,841  |         |              |     |       |              |   |          | (2,838 | )        |   |          | 5,267  |         
|                                      | Deferred revenue                          |                                              |          |      |          |   |            |           |         |           |            | 32,940 |         |              |     | 88     |              |   |          |       |          |   |          | 33,028 |         
|                                      |                                           |                                              |          |       |          |   |            |            |         |           |            |        |         |              |     |        |              |  
|                                      |                                           | Total current liabilities                    |          |       |         |   |            |            | 18,546  |           |            |        | 63,327  |              |     |        | 480          |   |          |        | (2,838   | ) |          |        | 79,515   |  
|Long-term debt                        |                                           |                                              | 153,077  |       |          |   | 255,000    |            |         |           | 1,818      |        |         |              |    |        |              |   |         |        |          |   | 409,895  |       
|Deferred lease liabilities            |                                           |                                              |         |       |          |   | 452        |            |         |           | 48,446     |        |         |              |    |        |              |   |         |        |          |   | 48,898   |       
|Deferred revenue                      |                                           |                                              |         |       |          |   |           |            |         |           | 2,905      |        |         |              |    |        |              |   |         |        |          |   | 2,905    |       
|Other liabilities                     |                                           |                                              |         |       |          |   | 8,019      |            |         |           | 222        |        |         |              |    |        |              |   |         |        |          |   | 8,241    |       
|                                      |                                           |                                              |          |       |          |   |            |            |         |           |            |        |         |              |     |        |              |  
|                                      |                                           | Total liabilities                            |          |       | 153,077  |   |            |            | 282,017 |           |            |        | 116,718 |              |     |        | 480          |   |          |        | (2,838   | ) |          |        | 549,454  |  
|                                      |                                           |                                              |          |       |          |   |            |            |         |           |            |        |         |              |     |        |              |  
|Stockholders deficit:                |                                           |                                              |          |       |          |   |            |            |         |           |            |        |         |              |     |        |              |   |          |        |          |   |          |       
|Common stockholders deficit          |                                           |                                              | (116,069 | )     |          |   | 18,941     |            |         |           | 252,881    |        |         |              | 435 |        |              |   | (272,257 | )      |          |   | (116,069 | )     
|                                      | Accumulated other comprehensive income    |                                              |          | 386   |          |   |            |           |         |           |            | 10     |         |              |     | 376    |              |   |          | (386   | )        |   |          | 386    |         
|                                      |                                           |                                              |          |       |          |   |            |            |         |           |            |        |         |              |     |        |              |  
|                                      |                                           | Total stockholders deficit                  |          |       | (115,683 | ) |            |            | 18,941  |           |            |        | 252,891 |              |     |        | 811          |   |          |        | (272,643 | ) |          |        | (115,683 | )
|                                      |                                           |                                              |          |       |          |   |            |            |         |           |            |        |         |              |     |        |              |  
|                                      |                                           | Total liabilities and stockholders deficit: |          | $     | 37,394   |   |            | $          | 300,958 |           |            | $      | 369,609 |              |     | $      | 1,291        |   |          | $      | (275,481 | ) |          | $      | 433,771  |  
|                                      |                                           |                                              |          |       |          |   |            |            |         |           |            |        |         |              |     |        |              |  

13



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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


June 30, 2006


(All figures in $000s)


(Unaudited)


|                                      |                                                     |                                             |         |         |         |   |            |            |         |           |            |         |         |              |     |        |              |  |          |          |          |   |         |         |         |  
|------------------------------------- | --------------------------------------------------- | ------------------------------------------- | ------- | ------- | ------- | - | ---------- | ---------- | ------- | --------- | ---------- | ------- | ------- | ------------ | --- | ------ | ------------ |  | -------- | -------- | -------- | - | ------- | ------- | ------- | -
|                                      |                                                     |                                             |         |         |         |   |            | Non-       |         |           |            |         |        
|                                      |                                                     | TSI                                         |         |         |         |   | Subsidiary |            |         | Guarantor |            |         |         |              |    
|                                      |                                                     | Holdings                                    |         |         | TSI     |   |            | Guarantors |         |           | Subsidiary |         |         | Eliminations |     |        | Consolidated | 
|                                      |                                                     |                                             |         |         |         |   |            |            |         |           |            |         |         |              |     |        |              | 
|ASSETS                               
|Current assets:                       |                                                     |                                             |         |         |         |   |            |            |         |           |            |         |         |              |     |        |              |  |          |          |          |   |         |        
|                                      | Cash and cash equivalents                           |                                             | $       | 63,288  |         |   | $          | 753        |         |           | $          | 5,671   |         |              | $   | 1,642  |              |  | $        |         |          |   | $       | 71,354  |        
|                                      | Accounts receivable                                 |                                             |         |        |         |   |            | 3,909      |         |           |            | 2,151   |         |              |     | 229    |              |  |          |         |          |   |         | 6,289   |        
|                                      | Inventory                                           |                                             |         |        |         |   |            |           |         |           |            | 518     |         |              |     | 28     |              |  |          |         |          |   |         | 546     |        
|                                      | Prepaid corporate income taxes                      |                                             |         | 3,473   |         |   |            | (1,989     | )       |           |            | 19      |         |              |     |       |              |  |          |         |          |   |         | 1,503   |        
|                                      | Intercompany receivable (payable)                   |                                             |         | (97     | )       |   |            | 97         |         |           |            |        |         |              |     |       |              |  |          |         |          |   |         |        |        
|                                      | Prepaid expenses and other current assets           |                                             |         |        |         |   |            | 9,069      |         |           |            | 5,356   |         |              |     | (1,631 | )            |  |          |         |          |   |         | 12,794  |        
|                                      |                                                     |                                             |         |         |         |   |            |            |         |           |            |         |         |              |     |        |              | 
|                                      |                                                     | Total current assets                        |         |         | 66,664  |   |            |            | 11,839  |           |            |         | 13,715  |              |     |        | 268          |  |          |          |         |   |         |         | 92,486  |  
|Investment in subsidaries             |                                                     |                                             | 51,094  |         |         |   | 198,050    |            |         |           |           |         |         |              |    |        |              |  | (249,144 | )        |          |   |        |        
|Fixed assets, net                     |                                                     |                                             |        |         |         |   | 9,171      |            |         |           | 247,004    |         |         |              | 793 |        |              |  |         |          |          |   | 256,968 |        
|Goodwill                              |                                                     |                                             |        |         |         |   |           |            |         |           | 49,214     |         |         |              | 810 |        |              |  |         |          |          |   | 50,024  |        
|Intangible assets, net                |                                                     |                                             |        |         |         |   |           |            |         |           | 420        |         |         |              |    |        |              |  |         |          |          |   | 420     |        
|Deferred tax assets, net              |                                                     |                                             | 13,864  |         |         |   | 14,839     |            |         |           | (491       | )       |         |              | (52 | )      |              |  |         |          |          |   | 28,160  |        
|Deferred membership costs             |                                                     |                                             |        |         |         |   | 113        |            |         |           | 14,310     |         |         |              |    |        |              |  |         |          |          |   | 14,423  |        
|Other assets                          |                                                     |                                             | 3,575   |         |         |   | 8,740      |            |         |           | 1,212      |         |         |              |    |        |              |  |         |          |          |   | 13,527  |        
|                                      |                                                     |                                             |         |         |         |   |            |            |         |           |            |         |         |              |     |        |              | 
|                                      |                                                     | Total assets                                |         | $       | 135,197 |   |            | $          | 242,752 |           |            | $       | 325,384 |              |     | $      | 1,819        |  |          | $        | (249,144 | ) |         | $       | 456,008 |  
|                                      |                                                     |                                             |         |         |         |   |            |            |         |           |            |         |         |              |     |        |              | 
|                                     
|LIABILITIES AND STOCKHOLDERS DEFICIT
|Current liabilities:                  |                                                     |                                             |         |         |         |   |            |            |         |           |            |         |         |              |     |        |              |  |          |          |          |   |         |        
|                                      | Current portion of long-term debt                   |                                             | $       | 56,645  |         |   | $          |           |         |           | $          | 2,212   |         |              | $   |       |              |  | $        |         |          |   | $       | 58,857  |        
|                                      | Accounts payable                                    |                                             |         |        |         |   |            | (1,942     | )       |           |            | 8,398   |         |              |     |       |              |  |          |         |          |   |         | 6,456   |        
|                                      | Accrued expenses and corporate income taxes payable |                                             |         |        |         |   |            | 10,354     |         |           |            | 22,458  |         |              |     | 366    |              |  |          |         |          |   |         | 33,178  |        
|                                      | Accrued interest                                    |                                             |         |        |         |   |            | 3,522      |         |           |            | 3       |         |              |     |       |              |  |          |         |          |   |         | 3,525   |        
|                                      | Deferred revenue                                    |                                             |         |        |         |   |            |           |         |           |            | 37,160  |         |              |     | 93     |              |  |          |         |          |   |         | 37,253  |        
|                                      |                                                     |                                             |         |         |         |   |            |            |         |           |            |         |         |              |     |        |              | 
|                                      |                                                     | Total current liabilities                   |         |         | 56,645  |   |            |            | 11,934  |           |            |         | 70,231  |              |     |        | 459          |  |          |          |         |   |         |         | 139,269 |  
|Long-term debt                        |                                                     |                                             | 104,830 |         |         |   | 169,999    |            |         |           | 131        |         |         |              |    |        |              |  |         |          |          |   | 274,960 |        
|Deferred lease liabilities            |                                                     |                                             |        |         |         |   | 372        |            |         |           | 50,091     |         |         |              |    |        |              |  |         |          |          |   | 50,463  |        
|Deferred revenue                      |                                                     |                                             |        |         |         |   |           |            |         |           | 8,012      |         |         |              |    |        |              |  |         |          |          |   | 8,012   |        
|Other Liabilities                     |                                                     |                                             |        |         |         |   | 9,353      |            |         |           | 229        |         |         |              |    |        |              |  | 1        |          |          |   | 9,583   |        
|                                      |                                                     |                                             |         |         |         |   |            |            |         |           |            |         |         |              |     |        |              | 
|                                      |                                                     | Total liabilities                           |         |         | 161,475 |   |            |            | 191,658 |           |            |         | 128,694 |              |     |        | 459          |  |          |          | 1        |   |         |         | 482,287 |  
|Stockholders Deficit:                |                                                     |                                             |         |         |         |   |            |            |         |           |            |         |         |              |     |        |              |  |          |          |          |   |         |        
|                                      | Common Stockholders deficit                        |                                             |         | (26,832 | )       |   |            | 51,094     |         |           |            | 196,675 |         |              |     | 1,375  |              |  |          | (249,145 | )        |   |         | (26,833 | )      
|                                      | Accumulated other comprehensive income              |                                             |         | 554     |         |   |            |           |         |           |            | 15      |         |              |     | (15    | )            |  |          |         |          |   |         | 554     |        
|                                      |                                                     |                                             |         |         |         |   |            |            |         |           |            |         |         |              |     |        |              | 
|                                      |                                                     | Total stockholders deficit                 |         |         | (26,278 | ) |            |            | 51,094  |           |            |         | 196,690 |              |     |        | 1,360        |  |          |          | (249,145 | ) |         |         | (26,279 | )
|                                      |                                                     |                                             |         |         |         |   |            |            |         |           |            |         |         |              |     |        |              | 
|                                      |                                                     | Total liabilities and stockholders deficit |         | $       | 135,197 |   |            | $          | 242,752 |           |            | $       | 325,384 |              |     | $      | 1,819        |  |          | $        | (249,144 | ) |         | $       | 456,008 |  
|                                      |                                                     |                                             |         |         |         |   |            |            |         |           |            |         |         |              |     |        |              | 

14



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Statements of Operations


For the three months ended June 30, 2005


(All figures in $000s)


(Unaudited)


|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |        |  |              |       |       |              |  |         |         |   |  |        |        | 
|--------------------------------------------------- | ----------------------------------------------------------------------- | -------- | ------ | ------ | --- |  | ---------- | ---------- | - | --------- | ---------- | ------ |  | ------------ | ----- | ----- | ------------ |  | ------- | ------- | - |  | ------ | ------ | 
|                                                    |                                                                         |          |        |        |     |  |            | Non-       |   |           |            |        | 
|                                                    |                                                                         | TSI      |        |        |     |  | Subsidiary |            |   | Guarantor |            |        |  |              |      
|                                                    |                                                                         | Holdings |        |        | TSI |  |            | Guarantors |   |           | Subsidiary |        |  | Eliminations |       |       | Consolidated | 
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |        |  |              |       |       |              | 
|Revenues:                                           |                                                                         |          |        |        |     |  |            |            |   |           |            |        |  |              |       |       |              |  |         |         |   |  |        |       
|                                                    | Club Operations                                                         |          | $      |       |     |  | $          | 24         |   |           | $          | 95,898 |  |              | $     | 1,156 |              |  | $       |        |   |  | $      | 97,078 | 
|                                                    | Fees and other                                                          |          |        |       |     |  |            | 142        |   |           |            | 1,797  |  |              |       |      |              |  |         | (1,021  | ) |  |        | 918    | 
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |        |  |              |       |       |              | 
|                                                    |                                                                         |          |       |        |     |  | 166        |            |   |           | 97,695     |        |  |              | 1,156 |       |              |  | (1,021  | )       |   |  | 97,996 |       
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |        |  |              |       |       |              | 
|Operating expenses:                                 |                                                                         |          |        |        |     |  |            |            |   |           |            |        |  |              |       |       |              |  |         |         |   |  |        |       
|                                                    | Payroll and related                                                     |          |        |       |     |  |            | 5,826      |   |           |            | 32,896 |  |              |       | 446   |              |  |         |        |   |  |        | 39,168 | 
|                                                    | Club operating                                                          |          |        |       |     |  |            | 872        |   |           |            | 31,385 |  |              |       | 341   |              |  |         | (881    | ) |  |        | 31,717 | 
|                                                    | General and administrative                                              |          |        | 5      |     |  |            | 183        |   |           |            | 6,343  |  |              |       | 76    |              |  |         | (140    | ) |  |        | 6,467  | 
|                                                    | Depreciation and amortization                                           |          |        |       |     |  |            | 1,028      |   |           |            | 8,965  |  |              |       | 91    |              |  |         |        |   |  |        | 10,084 | 
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |        |  |              |       |       |              | 
|                                                    |                                                                         |          | 5      |        |     |  | 7,909      |            |   |           | 79,589     |        |  |              | 954   |       |              |  | (1,021  | )       |   |  | 87,436 |       
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |        |  |              |       |       |              | 
|                                                    | Operating Income (loss)                                                 |          |        | (5     | )   |  |            | (7,743     | ) |           |            | 18,106 |  |              |       | 202   |              |  |         |        |   |  |        | 10,560 | 
|Interest expense                                    |                                                                         |          | 3,920  |        |     |  | 6,587      |            |   |           | 94         |        |  |              | (3    | )     |              |  | (90     | )       |   |  | 10,508 |       
|Interest income                                     |                                                                         |          | (1     | )      |     |  | (550       | )          |   |           | (3         | )      |  |              |      |       |              |  | 89      |         |   |  | (465   | )     
|Equity in the income of investees and rental income |                                                                         |          |       |        |     |  | (267       | )          |   |           | (137       | )      |  |              |      |       |              |  |        |         |   |  | (404   | )     
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |        |  |              |       |       |              | 
|                                                    | Income (loss) before provision (benefit) for corporate income
    taxes |          |        | (3,924 | )   |  |            | (13,513    | ) |           |            | 18,152 |  |              |       | 205   |              |  |         | 1       |   |  |        | 921    | 
|Provision (benefit) for income taxes                |                                                                         |          | (1,783 | )      |     |  | (6,227     | )          |   |           | 8,379      |        |  |              | 61    |       |              |  |        |         |   |  | 430    |       
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |        |  |              |       |       |              | 
|                                                    | Income (loss) before equity earnings                                    |          |        | (2,141 | )   |  |            | (7,286     | ) |           |            | 9,773  |  |              |       | 144   |              |  |         | 1       |   |  |        | 491    | 
|Equity earnings from subsidiaries                   |                                                                         |          | 2,632  |        |     |  | 9,918      |            |   |           |           |        |  |              |      |       |              |  | (12,550 | )       |   |  |       |       
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |        |  |              |       |       |              | 
|                                                    | Net income                                                              |          | $      | 491    |     |  | $          | 2,632      |   |           | $          | 9,773  |  |              | $     | 144   |              |  | $       | (12,549 | ) |  | $      | 491    | 
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |        |  |              |       |       |              | 

15



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Statements of Operations


For the three months ended June 30, 2006


(All figures in $000s)


(Unaudited)


|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              |  |   |         |   |  |         |         |  
|--------------------------------------------------- | ----------------------------------------------------------------------- | -------- | ------ | ------ | --- |  | ---------- | ---------- | - | --------- | ---------- | ------- |  | ------------ | ----- | ----- | ------------ |  | - | ------- | - |  | ------- | ------- | -
|                                                    |                                                                         | TSI      |        |        |     |  | Subsidiary |            |   | Guarantor |            |         |  |              |      
|                                                    |                                                                         | Holdings |        |        | TSI |  |            | Guarantors |   |           | Subsidiary |         |  | Eliminations |       |       | Consolidated | 
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|Revenues:                                           |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              |  |   |         |   |  |         |        
|                                                    | Club operations                                                         |          | $      |       |     |  | $          |           |   |           | $          | 106,526 |  |              | $     | 1,133 |              |  | $ |        |   |  | $       | 107,659 |  
|                                                    | Management fees and other                                               |          |        |       |     |  |            | 199        |   |           |            | 1,611   |  |              |       |      |              |  |   |        |   |  |         | 1,810   |  
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                    |                                                                         |          |       |        |     |  | 199        |            |   |           | 108,137    |         |  |              | 1,133 |       |              |  |  |         |   |  | 109,469 |        
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|Operating expenses:                                 |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              |  |   |         |   |  |         |        
|                                                    | Payroll and related                                                     |          |        |       |     |  |            | 6,069      |   |           |            | 34,060  |  |              |       | 462   |              |  |   |        |   |  |         | 40,591  |  
|                                                    | Club operating                                                          |          |        |       |     |  |            | 1,342      |   |           |            | 35,124  |  |              |       | 315   |              |  |   |        |   |  |         | 36,781  |  
|                                                    | General and administrative                                              |          |        |       |     |  |            | 1,735      |   |           |            | 6,255   |  |              |       | 116   |              |  |   |        |   |  |         | 8,106   |  
|                                                    | Depreciation and amortization                                           |          |        |       |     |  |            | 843        |   |           |            | 9,466   |  |              |       | 91    |              |  |   |        |   |  |         | 10,400  |  
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                    |                                                                         |          |       |        |     |  | 9,989      |            |   |           | 84,905     |         |  |              | 984   |       |              |  |  |         |   |  | 95,878  |        
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|Operating income (loss)                             |                                                                         |          |       |        |     |  | (9,790     | )          |   |           | 23,232     |         |  |              | 149   |       |              |  |  |         |   |  | 13,591  |        
|Loss on extinguishment of debt                      |                                                                         |          |       |        |     |  | 8,667      |            |   |           |           |         |  |              |      |       |              |  |  |         |   |  | 8,667   |        
|Interest expense                                    |                                                                         |          | 4,363  |        |     |  | 4,511      |            |   |           | 1,526      |         |  |              | (5    | )     |              |  |  |         |   |  | 10,395  |        
|Interest income                                     |                                                                         |          |       |        |     |  | (656       | )          |   |           | (6         | )       |  |              |      |       |              |  |  |         |   |  | (662    | )      
|Equity in the income of investees and rental income |                                                                         |          |       |        |     |  | (260       | )          |   |           | (215       | )       |  |              |      |       |              |  |  |         |   |  | (475    | )      
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                    | Income (loss) before provision (benefit) for corporate income
    taxes |          |        | (4,363 | )   |  |            | (22,052    | ) |           |            | 21,927  |  |              |       | 154   |              |  |   |        |   |  |         | (4,334  | )
|Provision (benefit) for corporate income taxes      |                                                                         |          | (1,920 | )      |     |  | (7,987     | )          |   |           | 8,114      |         |  |              | 111   |       |              |  |  |         |   |  | (1,682  | )      
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                    | Income (loss) before equity earnings                                    |          |        | (2,443 | )   |  |            | (14,065    | ) |           |            | 13,813  |  |              |       | 43    |              |  |   |        |   |  |         | (2,652  | )
|                                                    | Equity earnings from subsidaries                                        |          |        | (209   | )   |  |            | 13,856     |   |           |            |        |  |              |       |      |              |  |   | (13,647 | ) |  |         |        |  
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                    | Net Income                                                              |          | $      | (2,652 | )   |  | $          | (209       | ) |           | $          | 13,813  |  |              | $     | 43    |              |  | $ | (13,647 | ) |  | $       | (2,652  | )
|                                                    |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 

16



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Statements of Operations


For the six months ended June 30, 2005


(All figures in $000s)


(Unaudited)


|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              |  |         |         |   |  |         |         | 
|----------------------------------------------------- | ----------------------------------------------------------------------- | -------- | ------ | ------ | --- |  | ---------- | ---------- | - | --------- | ---------- | ------- |  | ------------ | ----- | ----- | ------------ |  | ------- | ------- | - |  | ------- | ------- | 
|                                                      |                                                                         |          |        |        |     |  |            | Non-       |   |           |            |         | 
|                                                      |                                                                         | TSI      |        |        |     |  | Subsidiary |            |   | Guarantor |            |         |  |              |      
|                                                      |                                                                         | Holdings |        |        | TSI |  |            | Guarantors |   |           | Subsidiary |         |  | Eliminations |       |       | Consolidated | 
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|Revenues:                                             |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              |  |         |         |   |  |         |        
|                                                      | Club Operations                                                         |          | $      |       |     |  | $          | 36         |   |           | $          | 187,441 |  |              | $     | 2,432 |              |  | $       |        |   |  | $       | 189,909 | 
|                                                      | Fees and Other                                                          |          |        |       |     |  |            | 288        |   |           |            | 3,814   |  |              |       |      |              |  |         | (2,169  | ) |  |         | 1,933   | 
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                      |                                                                         |          |       |        |     |  | 324        |            |   |           | 191,255    |         |  |              | 2,432 |       |              |  | (2,169  | )       |   |  | 191,842 |        
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|Operating expenses:                                   |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              |  |         |         |   |  |         |        
|                                                      | Payroll and related                                                     |          |        |       |     |  |            | 11,268     |   |           |            | 63,375  |  |              |       | 921   |              |  |         |        |   |  |         | 75,564  | 
|                                                      | Club operating                                                          |          |        |       |     |  |            | 1,218      |   |           |            | 63,195  |  |              |       | 642   |              |  |         | (1,889  | ) |  |         | 63,166  | 
|                                                      | General and administrative                                              |          |        | 18     |     |  |            | 614        |   |           |            | 12,608  |  |              |       | 185   |              |  |         | (280    | ) |  |         | 13,145  | 
|                                                      | Depreciation and amortization                                           |          |        |       |     |  |            | 2,165      |   |           |            | 17,463  |  |              |       | 195   |              |  |         |        |   |  |         | 19,823  | 
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                      |                                                                         |          | 18     |        |     |  | 15,265     |            |   |           | 156,641    |         |  |              | 1,943 |       |              |  | (2,169  | )       |   |  | 171,698 |        
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                      | Operating income (loss)                                                 |          |        | (18    | )   |  |            | (14,941    | ) |           |            | 34,614  |  |              |       | 489   |              |  |         |        |   |  |         | 20,144  | 
|Interest expense                                      |                                                                         |          | 7,706  |        |     |  | 12,920     |            |   |           | 184        |         |  |              | (3    | )     |              |  | (179    | )       |   |  | 20,628  |        
|Interest income                                       |                                                                         |          | (2     | )      |     |  | (1,007     | )          |   |           | (4         | )       |  |              |      |       |              |  | 179     |         |   |  | (834    | )      
|Equity in the earnings of investees and rental income |                                                                         |          |       |        |     |  | (535       | )          |   |           | (340       | )       |  |              |      |       |              |  |        |         |   |  | (875    | )      
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                      | Income (loss) before provision (benefit) for corporate income
    taxes |          |        | (7,722 | )   |  |            | (26,319    | ) |           |            | 34,774  |  |              |       | 492   |              |  |         |        |   |  |         | 1,225   | 
|Provision (benefit) for corporate income taxes        |                                                                         |          | (3,420 | )      |     |  | (11,451    | )          |   |           | 15,284     |         |  |              | 142   |       |              |  |        |         |   |  | 555     |        
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                      | Income (loss) before equity earnings                                    |          |        | (4,302 | )   |  |            | (14,868    | ) |           |            | 19,490  |  |              |       | 350   |              |  |         |        |   |  |         | 670     | 
|Equity earnings from subsidiaries                     |                                                                         |          | 4,972  |        |     |  | 19,840     |            |   |           |           |         |  |              |      |       |              |  | (24,812 | )       |   |  |        |        
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                      | Net income                                                              |          | $      | 670    |     |  | $          | 4,972      |   |           | $          | 19,490  |  |              | $     | 350   |              |  | $       | (24,812 | ) |  | $       | 670     | 
|                                                      |                                                                         |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 

17



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Statements of Operations


For the six months ended June 30, 2006


(All figures in $000s)


(Unaudited)


|                                                    |                                                              |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              |  |   |         |   |  |         |         |  
|--------------------------------------------------- | ------------------------------------------------------------ | -------- | ------ | ------ | --- |  | ---------- | ---------- | - | --------- | ---------- | ------- |  | ------------ | ----- | ----- | ------------ |  | - | ------- | - |  | ------- | ------- | -
|                                                    |                                                              |          |        |        |     |  |            | Non-       |   |           |            |         | 
|                                                    |                                                              | TSI      |        |        |     |  | Subsidiary |            |   | Guarantor |            |         |  |              |      
|                                                    |                                                              | Holdings |        |        | TSI |  |            | Guarantors |   |           | Subsidiary |         |  | Eliminations |       |       | Consolidated | 
|                                                    |                                                              |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|Revenues:                                           |                                                              |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              |  |   |         |   |  |         |        
|                                                    | Club operations                                              |          | $      |       |     |  | $          |           |   |           | $          | 208,199 |  |              | $     | 2,383 |              |  | $ |        |   |  | $       | 210,582 |  
|                                                    | Fees and Other                                               |          |        |       |     |  |            | 460        |   |           |            | 2,453   |  |              |       |      |              |  |   |        |   |  |         | 2,913   |  
|                                                    |                                                              |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                    |                                                              |          |       |        |     |  | 460        |            |   |           | 210,652    |         |  |              | 2,383 |       |              |  |  |         |   |  | 213,495 |        
|                                                    |                                                              |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|Operating expenses:                                 |                                                              |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              |  |   |         |   |  |         |        
|                                                    | Payroll and related                                          |          |        |       |     |  |            | 14,112     |   |           |            | 66,431  |  |              |       | 944   |              |  |   |        |   |  |         | 81,487  |  
|                                                    | Club operating                                               |          |        |       |     |  |            | 1,780      |   |           |            | 68,848  |  |              |       | 623   |              |  |   |        |   |  |         | 71,251  |  
|                                                    | General and administrative                                   |          |        |       |     |  |            | 3,155      |   |           |            | 12,557  |  |              |       | 255   |              |  |   |        |   |  |         | 15,967  |  
|                                                    | Depreciation and amortization                                |          |        |       |     |  |            | 2,124      |   |           |            | 18,476  |  |              |       | 186   |              |  |   |        |   |  |         | 20,786  |  
|                                                    |                                                              |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                    |                                                              |          |       |        |     |  | 21,171     |            |   |           | 166,312    |         |  |              | 2,008 |       |              |  |  |         |   |  | 189,491 |        
|                                                    |                                                              |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                    | Operating income (loss)                                      |          |        |       |     |  |            | (20,711    | ) |           |            | 44,340  |  |              |       | 375   |              |  |   |        |   |  |         | 24,004  |  
|Loss on extinguishment of debt                      |                                                              |          |       |        |     |  | 8,667      |            |   |           |           |         |  |              |      |       |              |  |  |         |   |  | 8,667   |        
|Interest expense                                    |                                                              |          | 8,587  |        |     |  | 9,778      |            |   |           | 2,723      |         |  |              | (5    | )     |              |  |  |         |   |  | 21,083  |        
|Interest income                                     |                                                              |          |       |        |     |  | (1,381     | )          |   |           | (6         | )       |  |              |      |       |              |  |  |         |   |  | (1,387  | )      
|Equity in the income of investees and rental income |                                                              |          |       |        |     |  | (521       | )          |   |           | (387       | )       |  |              |      |       |              |  |  |         |   |  | (908    | )      
|                                                    |                                                              |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                    | Income before provision (benefit) for corporate income taxes |          |        | (8,587 | )   |  |            | (37,254    | ) |           |            | 42,010  |  |              |       | 380   |              |  |   |        |   |  |         | (3,451  | )
|Provision (benefit) for corporate income taxes      |                                                              |          | (3,778 | )      |     |  | (12,541    | )          |   |           | 15,544     |         |  |              | 111   |       |              |  |  |         |   |  | (664    | )      
|                                                    |                                                              |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                    | Income (loss) before equity earnings                         |          |        | (4,809 | )   |  |            | (24,713    | ) |           |            | 26,466  |  |              |       | 269   |              |  |   |        |   |  |         | (2,787  | )
|                                                    | Equity earnings from subsidiaries                            |          |        | 2,022  |     |  |            | 26,735     |   |           |            |        |  |              |       |      |              |  |   | (28,757 | ) |  |         |        |  
|                                                    |                                                              |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 
|                                                    | Net Income                                                   |          | $      | (2,787 | )   |  | $          | 2,022      |   |           | $          | 26,466  |  |              | $     | 269   |              |  | $ | (28,757 | ) |  | $       | (2,787  | )
|                                                    |                                                              |          |        |        |     |  |            |            |   |           |            |         |  |              |       |       |              | 

18



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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Statement of Cash Flows


For the six months ended June 30, 2005


(All figures in $000s)


(Unaudited)


|                                                                                      |                                                       |                                                      |   |        |      |   |            |            |         |           |            |        |         |              |   |      |              |   |   |         |        |  |   |        |         |  
|------------------------------------------------------------------------------------- | ----------------------------------------------------- | ---------------------------------------------------- | - | ------ | ---- | - | ---------- | ---------- | ------- | --------- | ---------- | ------ | ------- | ------------ | - | ---- | ------------ | - | - | ------- | ------ |  | - | ------ | ------- | -
|                                                                                      |                                                       |                                                      |   |        |      |   |            | Non-       |         |           |            |        |        
|                                                                                      |                                                       | TSI                                                  |   |        |      |   | Subsidiary |            |         | Guarantor |            |        |         |              |  
|                                                                                      |                                                       | Holdings                                             |   |        | TSI  |   |            | Guarantors |         |           | Subsidiary |        |         | Eliminations |   |      | Consolidated |  
|                                                                                      |                                                       |                                                      |   |        |      |   |            |            |         |           |            |        |         |              |   |      |              |  
|Cash flows from operating activities:                                                 |                                                       |                                                      |   |        |      |   |            |            |         |           |            |        |         |              |   |      |              |   |   |         |        |  |   |       
|                                                                                      | Net income                                            |                                                      | $ | 670    |      |   | $          | 4,972      |         |           | $          | 19,490 |         |              | $ | 350  |              |   | $ | (24,812 | )      |  | $ | 670    |        
|                                                                                      |                                                       |                                                      |   |        |      |   |            |            |         |           |            |        |         |              |   |      |              |  
|Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                       |                                                      |   |        |      |   |            |            |         |           |            |        |         |              |   |      |              |   |   |         |        |  |   |       
|                                                                                      | Depreciation and amortization                         |                                                      |   |       |      |   |            | 2,165      |         |           |            | 17,463 |         |              |   | 195  |              |   |   |        |        |  |   | 19,823 |        
|                                                                                      | Compensation expense in connection with stock options |                                                      |   |       |      |   |            | 25         |         |           |            |       |         |              |   |     |              |   |   |        |        |  |   | 25     |        
|                                                                                      | Noncash rental expense, net of noncash rental income  |                                                      |   |       |      |   |            | (81        | )       |           |            | 1,049  |         |              |   |     |              |   |   |        |        |  |   | 968    |        
|                                                                                      | Amortization of debt issuance costs                   |                                                      |   | 161    |      |   |            | 656        |         |           |            |       |         |              |   |     |              |   |   |        |        |  |   | 817    |        
|                                                                                      | Changes in operating assets and liabilities           |                                                      |   | 4,064  |      |   |            | 2,584      |         |           |            | 1,275  |         |              |   | (335 | )            |   |   |        |        |  |   | 7,588  |        
|                                                                                      | Other                                                 |                                                      |   | (4,954 | )    |   |            | (21,164    | )       |           |            | 1,430  |         |              |   | (460 | )            |   |   | 24,812  |        |  |   | (336   | )      
|                                                                                      |                                                       |                                                      |   |        |      |   |            |            |         |           |            |        |         |              |   |      |              |  
|                                                                                      |                                                       | Total adjustments                                    |   |        | (729 | ) |            |            | (15,815 | )         |            |        | 21,217  |              |   |      | (600         | ) |   |         | 24,812 |  |   |        | 28,885  |  
|                                                                                      |                                                       |                                                      |   |        |      |   |            |            |         |           |            |        |         |              |   |      |              |  
|                                                                                      |                                                       | Net cash provided by (used in) operating activities  |   |        | (59  | ) |            |            | (10,843 | )         |            |        | 40,707  |              |   |      | (250         | ) |   |         |       |  |   |        | 29,555  |  
|                                                                                      |                                                       |                                                      |   |        |      |   |            |            |         |           |            |        |         |              |   |      |              |  
|                                                                                      |                                                       | Net cash used in investing activities                |   |        |     |   |            |            | (925    | )         |            |        | (23,955 | )            |   |      | 249          |   |   |         |       |  |   |        | (24,631 | )
|                                                                                      |                                                       |                                                      |   |        |      |   |            |            |         |           |            |        |         |              |   |      |              |  
|                                                                                      |                                                       | Net cash (used in) provided by financing activities  |   |        | (27  | ) |            |            | 8,677   |           |            |        | (9,362  | )            |   |      | 29           |   |   |         |       |  |   |        | (683    | )
|                                                                                      |                                                       |                                                      |   |        |      |   |            |            |         |           |            |        |         |              |   |      |              |  
|                                                                                      |                                                       | Net increase (decrease) in cash and cash equivalents |   |        | (86  | ) |            |            | (3,091  | )         |            |        | 7,390   |              |   |      | 28           |   |   |         |       |  |   |        | 4,241   |  
|                                                                                      |                                                       | 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           |   | $      | 188  |   |            | $          | 334     |           |            | $      | 58,717  |              |   | $    | 2,508        |   |   | $       |       |  |   | $      | 61,747  |  
|                                                                                      |                                                       |                                                      |   |        |      |   |            |            |         |           |            |        |         |              |   |      |              |  

19



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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Statement of Cash Flows


For the six months ended June 30, 2006


(All figures in $000s)


(Unaudited)


|                                                                                     |                                                       |                                                      |   |        |        |  |            |            |        |           |            |        |         |              |       |       |              |  |   |         |        |  |        |        |         |  
|------------------------------------------------------------------------------------ | ----------------------------------------------------- | ---------------------------------------------------- | - | ------ | ------ |  | ---------- | ---------- | ------ | --------- | ---------- | ------ | ------- | ------------ | ----- | ----- | ------------ |  | - | ------- | ------ |  | ------ | ------ | ------- | -
|                                                                                     |                                                       |                                                      |   |        |        |  |            | Non-       |        |           |            |        |        
|                                                                                     |                                                       | TSI                                                  |   |        |        |  | Subsidiary |            |        | Guarantor |            |        |         |              |      
|                                                                                     |                                                       | Holdings                                             |   |        | TSI    |  |            | Guarantors |        |           | Subsidiary |        |         | Eliminations |       |       | Consolidated | 
|                                                                                     |                                                       |                                                      |   |        |        |  |            |            |        |           |            |        |         |              |       |       |              | 
|Cash flows from Operating Activities:                                                |                                                       |                                                      |   |        |        |  |            |            |        |           |            |        |         |              |       |       |              |  |   |         |        |  |        |       
|                                                                                     | Net Income                                            |                                                      | $ | (2,787 | )      |  | $          | 2,022      |        |           | $          | 26,466 |         |              | $     | 269   |              |  | $ | (28,757 | )      |  | $      | (2,787 | )      
|                                                                                     |                                                       |                                                      |   |        |        |  |            |            |        |           |            |        |         |              |       |       |              | 
|Adjustments to reconcile net income to net cash provided by
    operating activities |                                                       |                                                      |   |        |        |  |            |            |        |           |            |        |         |              |       |       |              |  |   |         |        |  |        |       
|                                                                                     | Depreciation & Amortization                           |                                                      |   |       |        |  |            | 2,124      |        |           |            | 18,476 |         |              |       | 186   |              |  |   |        |        |  |        | 20,786 |        
|                                                                                     | Compensation expense in connection with stock options |                                                      |   |       |        |  |            | 574        |        |           |            |       |         |              |       |      |              |  |   |        |        |  |        | 574    |        
|                                                                                     | Noncash rental expense, net of noncash rental income  |                                                      |   |       |        |  |            | (81        | )      |           |            | 39     |         |              |       |      |              |  |   |        |        |  |        | (42    | )      
|                                                                                     | Loss on extinguishment of debt                        |                                                      |   |       |        |  |            | 8,667      |        |           |            |       |         |              |       |      |              |  |   |        |        |  |        | 8,667  |        
|                                                                                     | Amortization of debt issuance costs                   |                                                      |   | 180    |        |  |            | 635        |        |           |            |       |         |              |       |      |              |  |   |        |        |  |        | 815    |        
|                                                                                     | Changes in operating assets and liabilities           |                                                      |   | (2,239 | )      |  |            | 20,148     |        |           |            | 2,551  |         |              |       | (152  | )            |  |   |        |        |  |        | 20,308 |        
|                                                                                     | Other                                                 |                                                      |   | 6,072  |        |  |            | (38,028    | )      |           |            | 3,208  |         |              |       | 77    |              |  |   | 28,757  |        |  |        | 86     |        
|                                                                                     |                                                       |                                                      |   |        |        |  |            |            |        |           |            |        |         |              |       |       |              | 
|                                                                                     |                                                       | Total adjustments                                    |   |        | 4,013  |  |            |            | (5,961 | )         |            |        | 24,274  |              |       |       | 111          |  |   |         | 28,757 |  |        |        | 51,194  |  
|                                                                                     |                                                       |                                                      |   |        |        |  |            |            |        |           |            |        |         |              |       |       |              | 
|                                                                                     |                                                       | Net cash provided by operating activities            |   |        | 1,226  |  |            |            | (3,939 | )         |            |        | 50,740  |              |       |       | 380          |  |   |         |       |  |        |        | 48,407  |  
|                                                                                     |                                                       |                                                      |   |        |        |  |            |            |        |           |            |        |         |              |       |       |              | 
|                                                                                     |                                                       | Net cash used in investing activities                |   |        |       |  |            |            | (2,995 | )         |            |        | (23,009 | )            |       |       |             |  |   |         |       |  |        |        | (26,004 | )
|                                                                                     |                                                       |                                                      |   |        |        |  |            |            |        |           |            |        |         |              |       |       |              | 
|                                                                                     |                                                       | Net cash provided by financing activities            |   |        | 62,061 |  |            |            | 6,328  |           |            |        | (70,742 | )            |       |       |             |  |   |         |       |  |        |        | (2,353  | )
|                                                                                     |                                                       |                                                      |   |        |        |  |            |            |        |           |            |        |         |              |       |       |              | 
|                                                                                     |                                                       | Net increase (decrease) in cash and cash equivalents |   |        | 63,287 |  |            |            | (606   | )         |            |        | (43,011 | )            |       |       | 380          |  |   |         |       |  |        |        | 20,050  |  
|Cash and cash equivalents at beginning of period                                     |                                                       |                                                      | 1 |        |        |  | 1,359      |            |        |           | 48,682     |        |         |              | 1,262 |       |              |  |  |         |        |  | 51,304 |       
|                                                                                     |                                                       |                                                      |   |        |        |  |            |            |        |           |            |        |         |              |       |       |              | 
|                                                                                     | Cash and cash equivalents at end of period            |                                                      | $ | 63,288 |        |  | $          | 753        |        |           | $          | 5,671  |         |              | $     | 1,642 |              |  | $ |        |        |  | $      | 71,354 |        
|                                                                                     |                                                       |                                                      |   |        |        |  |            |            |        |           |            |        |         |              |       |       |              | 

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

Introduction












| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | Providing our members access to an extensive network of
    locations;                                                               
|
| |  | Lower capital investment overall, by locating special
    facilities, such as pools, racquet sports, etc. at selected
    clubs only;
|
| |  | More cost-effective regional management and control;                                                                                 
|
| |  | Allocating certain costs, such as advertising, in a focused
    region over multiple locations; and                                  
|
| |  | Strengthening brand awareness.                                                                                                       







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our largest sources of revenue are dues and initiation fees paid
    by our members. This comprises 81.6% of our total revenue for
    the six months ended June 30, 2006. We recognize revenue
    from membership dues in the month when the services are
    rendered. Approximately 93% of our members pay their monthly
    dues by Electronic Funds Transfer, or EFT, while the balance is
    paid annually in advance. We recognize revenue from initiation
    fees over the expected average life of the membership. Prior to
    January 1, 2006 the expected average life of a membership
    was 24 months. Effective January 1, 2006 we have
    revised this estimate to 30 months based on more favorable
    membership attrition trends.

21



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| |   |                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For the six months ended June 30, 2006, we generated 11.9%
    of our revenue from personal training and 5.2% of our revenue
    from other ancillary programs and services consisting of
    programming for children, group fitness training and other
    member activities, as well as sales of miscellaneous sports
    products.



Revenue (in $000s) is comprised of the following:


|                             |  |                    |        |  |                  |   |         |      |  |   |         |  |  |   |         | 
|---------------------------- |  | ------------------ | ------ |  | ---------------- | - | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                             |  | Three Months Ended |        |  | Six Months Ended |  
|                             |  | June 30,           |        |  | June 30,         |  
|                             |  |                    |        |  |                  |  
|                             |  | 2005               |        |  | 2006             |   |         | 2005 |  |   | 2006    | 
|                             |  |                    |        |  |                  |   |         |      |  |   |         | 
|Membership dues              |  | $                  | 77,493 |  |                  | $ | 86,764  |      |  | $ | 152,071 |  |  | $ | 169,903 | 
|Initiation fees              |  |                    | 3,044  |  |                  |   | 2,321   |      |  |   | 6,122   |  |  |   | 4,252   | 
|                             |  |                    |        |  |                  |   |         |      |  |   |         | 
|Membership revenue           |  |                    | 80,537 |  |                  |   | 89,085  |      |  |   | 158,193 |  |  |   | 174,155 | 
|Personal training revenue    |  |                    | 11,593 |  |                  |   | 13,084  |      |  |   | 21,973  |  |  |   | 25,352  | 
|Other ancillary club revenue |  |                    | 4,948  |  |                  |   | 5,490   |      |  |   | 9,743   |  |  |   | 11,075  | 
|                             |  |                    |        |  |                  |   |         |      |  |   |         | 
|Ancillary club revenue       |  |                    | 16,541 |  |                  |   | 18,574  |      |  |   | 31,716  |  |  |   | 36,427  | 
|Fees and Other revenue       |  | $                  | 918    |  |                  | $ | 1,810   |      |  | $ | 1,933   |  |  | $ | 2,913   | 
|                             |  |                    |        |  |                  |   |         |      |  |   |         | 
|Total revenue                |  | $                  | 97,996 |  |                  | $ | 109,469 |      |  | $ | 191,842 |  |  | $ | 213,495 | 
|                             |  |                    |        |  |                  |   |         |      |  |   |         | 







22



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##### Table of Contents



Historical Club Growth




|                                                                  |  |      |     |  |      |  |     |    |  |  |     |   |  |       |     |  |    |  |     |    |  |  |     |   |  |  |     |  
|----------------------------------------------------------------- |  | ---- | --- |  | ---- |  | --- | -- |  |  | --- | - |  | ----- | --- |  | -- |  | --- | -- |  |  | --- | - |  |  | --- | -
|                                                                  |  | 2005 |     |  | 2006 | 
|                                                                  |  |      |     |  |      | 
|                                                                  |  | Q1   |     |  | Q2   |  |     | Q3 |  |  | Q4  |   |  | Total |     |  | Q1 |  |     | Q2 | 
|                                                                  |  |      |     |  |      |  |     |    |  |  |     |   |  |       |     |  |    |  |     |    | 
|Clubs at beginning of period                                      |  |      | 137 |  |      |  | 140 |    |  |  | 140 |   |  |       | 140 |  |    |  | 137 |    |  |  | 141 |   |  |  | 145 |  
|Greenfield clubs(a)                                               |  |      | 3   |  |      |  |    |    |  |  | 1   |   |  |       | 1   |  |    |  | 5   |    |  |  | 5   |   |  |  |    |  
|Acquired clubs                                                    |  |      |    |  |      |  | 1   |    |  |  | 1   |   |  |       |    |  |    |  | 2   |    |  |  |    |   |  |  |    |  
|Clubs closed and merged into new clubs                            |  |      |    |  |      |  | (1  | )  |  |  | (1  | ) |  |       |    |  |    |  | (2  | )  |  |  | (1  | ) |  |  | (1  | )
|Club closed for renovation and expansion                          |  |      |    |  |      |  |    |    |  |  | (1  | ) |  |       |    |  |    |  | 1   |    |  |  |    |   |  |  |    |  
|                                                                  |  |      |     |  |      |  |     |    |  |  |     |   |  |       |     |  |    |  |     |    | 
|                                                                  |  |      | 140 |  |      |  | 140 |    |  |  | 140 |   |  |       | 141 |  |    |  | 141 |    |  |  | 145 |   |  |  | 144 |  
|                                                                  |  |      |     |  |      |  |     |    |  |  |     |   |  |       |     |  |    |  |     |    | 
|Number of partly-owned clubs included at the end of the period(b) |  |      | 2   |  |      |  | 2   |    |  |  | 2   |   |  |       | 2   |  |    |  | 2   |    |  |  | 2   |   |  |  | 2   |  






|    |                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | A Greenfield club is a new location constructed by
    us.                                                                                                                                                                                        
|   
|(b) | We include in the club count wholly and partly-owned clubs. In
    addition to the above count, as of December 31, 2005 and
    June 30, 2006 we managed five university-owned clubs,
    respectively, in which we did not have an equity interest.

Results of Operations




|                                                             |                               |               |       |      |               |  |       |      |  |  |       |      |  |  |       |      | 
|------------------------------------------------------------ | ----------------------------- | ------------- | ----- | ---- | ------------- |  | ----- | ---- |  |  | ----- | ---- |  |  | ----- | ---- | 
|                                                             |                               | Three Months  |       |      | Six Months    | 
|                                                             |                               | Ended June 30 |       |      | Ended June 30 | 
|                                                             |                               |               |       |      |               | 
|                                                             |                               | 2005          |       |      | 2006          |  |       | 2005 |  |  | 2006  |     
|                                                             |                               |               |       |      |               |  |       |      |  |  |       |     
|Revenue                                                      |                               |               | 100.0 | %    |               |  | 100.0 | %    |  |  | 100.0 | %    |  |  | 100.0 | %   
|                                                             |                               |               |       |      |               |  |       |      |  |  |       |     
|Operating expenses:                                          |                               |               |       |      |               |  |       |      |  |  |       |      |  |  |       |     
|                                                             | Payroll and related           |               |       | 40.0 |               |  |       | 37.1 |  |  |       | 39.4 |  |  |       | 38.2 | 
|                                                             | Club operating                |               |       | 32.3 |               |  |       | 33.6 |  |  |       | 32.9 |  |  |       | 33.4 | 
|                                                             | General and administrative    |               |       | 6.6  |               |  |       | 7.4  |  |  |       | 6.9  |  |  |       | 7.5  | 
|                                                             | Depreciation and amortization |               |       | 10.3 |               |  |       | 9.5  |  |  |       | 10.3 |  |  |       | 9.7  | 
|                                                             |                               |               |       |      |               |  |       |      |  |  |       |     
|Operating income                                             |                               |               | 10.8  |      |               |  | 12.4  |      |  |  | 10.5  |      |  |  | 11.2  |     
|Loss on extinguishment of debt                               |                               |               |      |      |               |  | 7.9   |      |  |  |      |      |  |  | 4.0   |     
|Interest expense                                             |                               |               | 10.8  |      |               |  | 9.5   |      |  |  | 10.8  |      |  |  | 9.8   |     
|Interest income                                              |                               |               | (0.5  | )    |               |  | (0.6  | )    |  |  | (0.4  | )    |  |  | (0.6  | )   
|Equity in the earnings of investees and rental income        |                               |               | (0.4  | )    |               |  | (0.4  | )    |  |  | (0.5  | )    |  |  | (0.4  | )   
|                                                             |                               |               |       |      |               |  |       |      |  |  |       |     
|Income before provision (benefit) for corporate income taxes |                               |               | 0.9   |      |               |  | (4.0  | )    |  |  | 0.6   |      |  |  | (1.6  | )   
|Provision (benefit) for corporate income taxes               |                               |               | 0.4   |      |               |  | (1.6  | )    |  |  | 0.3   |      |  |  | (0.3  | )   
|                                                             |                               |               |       |      |               |  |       |      |  |  |       |     
|Net income (loss)                                            |                               |               | 0.5   | %    |               |  | (2.4  | )%   |  |  | 0.3   | %    |  |  | (1.3  | )%  
|                                                             |                               |               |       |      |               |  |       |      |  |  |       |     



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Three Months Ended June 30, 2006 Compared to Three
    Months Ended June 30, 2005

Revenues.


23



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##### Table of Contents







Operating Expenses.






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Payroll costs directly related to our personal training, Group
    Exclusive, and Sports Club for Kids programs increased
    $0.8 million or 9.0%, due to an increase in demand for
    these programs.                                                                                                                                                                                                                                                 
|
| |  | Share-based compensation costs related to outstanding stock
    options increased $521,000 to $531,000 from $10,000 in the
    quarter ended June 30, 2005. These 2006 charges principally
    relate to common stock options that were issued to a departing
    executive.                                                                                                                                                                             
|
| |  | Offsetting these aforementioned increases in the quarter ended
    June 30, 2006 was a $1.3 million decrease in sales
    salary and commission and deferred sales related payroll costs.
    The increase in the estimated average-life of our memberships
    from 24 months to 30 months resulted in a reduction in
    amortization of deferred sales related payroll costs in the
    second quarter of 2006 compared to the second quarter of 2005.





| |   |                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Rent and occupancy expenses increased $1.6 million. Rent
    and occupancy costs at clubs that have opened since July 1,
    2005, or that are currently under construction, increased
    $1.0 million. The remaining $596,000 increase in rent and
    occupancy expenses relates to our clubs that were open prior to
    July 1, 2005.
|
| |  | Utility costs increased $1.7 million. We saw a $632,000
    increase at our clubs that we opened or acquired in 2005 and
    2006. The balance of the increase is due to an increase in
    utility rates throughout the remainder of our club base.                                                                                      
|
| |  | Marketing and advertising costs increased $1.4 million to
    $3.5 million in the second quarter of 2006 from
    $2.1 million in the second quarter of 2005. This increase
    was due to an increase in the level of our radio and print
    advertising campaigns in this second quarter of 2006 when
    compared to 2005.            





| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In the quarter ended June 30, 2006 we incurred
    $1.1 million in costs related to the examination of
    strategic and financing alternatives while no such costs were
    recorded in the quarter ended June 30, 2005.
|
| |  | Liability and related insurance increased $654,000 in the
    quarter ended June 30, 2006. This increase is related to an
    increase in premiums associated with the Companys growth
    as well an increase in our   

24



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##### Table of Contents



| |  |                                                                                                                             
| |  | ----------------------------------------------------------------------------------------------------------------------------
| |  | general liability reserve. General liability reserves are based
    on an actuarial analysis that reflects claims processed.



Loss on Extinguishment of Debt. 5 8


Interest Expense. 5 8


Interest Income.


Provision for Corporate Income Taxes.




| |                                                                              
| | -----------------------------------------------------------------------------
| | Six Months Ended June 30, 2006 Compared to Six Months
    Ended June 30, 2005

Revenues.




Operating Expenses.






| |   |                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the first quarter of 2006 our Chairman and certain
    executives agreed to severance packages totaling an estimated
    $1.6 million. The total cost of these severance packages
    were recorded in the six month period ended June 30, 2006
    while no such costs were incurred in the same period of the
    prior year.

25



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Payroll costs directly related to our personal training, Group
    Exclusive, and Sports Club for Kids programs increased
    $2.2 million or 13.5%, due to an increase in demand for
    these programs.                                                                                                                                                                                                                                                                       
|
| |  | Share-based compensation costs related to outstanding stock
    options increased $549,000 to $574,000 from $25,000 during the
    six months ended June 30, 2005. These 2006 charges
    principally relate to common stock options that were issued to a
    departing executive.                                                                                                                                                                                             
|
| |  | Offsetting these aforementioned increases during the six months
    ended June 30, 2006 was a $2.3 million decrease in
    sales salary and commissions and deferred sales related payroll
    costs. The increase in the estimated average-life of our
    memberships from 24 months to 30 months resulted in a
    reduction in amortization of deferred sales related payroll
    costs in the six month period ended June 30, 2006 compared
    to the same period of 2005.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Rent and occupancy expenses increased $3.6 million. Rent
    and occupancy costs at clubs that have opened since July 1,
    2005, or that are currently under construction, increased
    $2.6 million. Also, during the six months ended
    June 30, 2006 we closed a club, and merged the membership
    base at this club into one of our newly opened nearby clubs.
    This resulted in a $225,000 lease termination expense. The
    remaining $733,000 increase in rent and occupancy expenses
    relates to our clubs that were open prior to July 1, 2005.
|
| |  | Utility costs increased $2.9 million. We saw a
    $1.0 million increase at our clubs that we opened or
    acquired in 2005 and 2006. The balance of the increase is due to
    an increase in utility rates throughout the remainder of our
    club base.                                                                                                                                                                                                                                                                                                          
|
| |  | Marketing and advertising costs increased $773,000. Marketing
    and advertising costs as a percent of revenue were 2.6% and 2.7%
    for the first six months of 2005 and 2006 respectively.                                                                                                                                                                                                                                                                                                                                                                        





| |   |                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In the six months ended June 30, 2006 we incurred
    $1.7 million in costs related to the examination of
    strategic and financing alternatives while no such costs were
    recorded in the six months ended June 30, 2005.                                                                                                                                                                  
|
| |  | Liability and related insurance increased $900,000 during the
    six months ended June 30, 2006 when compared to the same
    period in 2005. The increase is related to an increase in
    premiums associated with the Companys growth as well as an
    increase in general liability reserves. General liability
    reserves are based on an actuarial analysis that claims
    processed.



Loss on Extinguishment of Debt. 5 8


Interest Expense. 5 8


26



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##### Table of Contents



Interest Income.


Provision for Corporate Income Taxes.




Operating Activities.


paid-in paid-in 30-month paid-in


Investing Activities.


Financing Activities.




27



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##### Table of Contents



5 8


5 8








| |   |                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
    $16.4 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








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|                                   |  |                                    |           |           |        |   |         |           |       |   |           |  |  |         |         |  |  |   |         | 
|---------------------------------- |  | ---------------------------------- | --------- | --------- | ------ | - | ------- | --------- | ----- | - | --------- |  |  | ------- | ------- |  |  | - | ------- | 
|                                   |  | Payments Due by Period (in $000s) |          
|                                   |  |                                    |          
|                                   |  |                                    |           | Less than |        |   |         |           | After |  
|Contractual Obligations            |  | Total                              |           |           | 1 Year |   |         | 2-3 Years |       |   | 4-5 Years |  |  | 5 Years |        
|                                   |  |                                    |           |           |        |   |         |           |       |   |           |  |  |         |        
|Long-Term Debt(1)                  |  | $                                  | 574,203   |           |        | $ | 81,565  |           |       | $ | 63,316    |  |  | $       | 229,774 |  |  | $ | 199,548 | 
|Operating Lease Obligations(2)     |  |                                    | 714,940   |           |        |   | 62,893  |           |       |   | 125,841   |  |  |         | 117,784 |  |  |   | 408,422 | 
|                                   |  |                                    |           |           |        |   |         |           |       |   |           |  |  |         |        
|Total Contractual Cash Obligations |  | $                                  | 1,289,143 |           |        | $ | 144,458 |           |       | $ | 189,157   |  |  | $       | 347,558 |  |  | $ | 607,970 | 
|                                   |  |                                    |           |           |        |   |         |           |       |   |           |  |  |         |        








|    |                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The long-term debt contractual cash obligations include
    principal and interest payment requirements. Interest on our
    95/8% Senior Notes amounts to $16.4 million
    annually.                                             
|   
|(2) | Operating lease obligations include base rent only. Certain
    leases provide for additional rent based on in real estate
    taxes, common area maintenance and defined amounts based on the
    operating results of the lessee.

Subsequent Events








Forward-Looking Statements


10-Q,


29



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##### Table of Contents








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










|        |                         
|------- | ------------------------
|ITEM 4. | Controls and Procedures.

13a-15.







PART II. OTHER INFORMATION







|        |                   
|------- | ------------------
|ITEM 1. | Legal Proceedings.

Sarah Cruz, et
ano v. Town Sports International, Inc.


Carlos Urbina et ano v 26
Court Street Associates, LLC et al.,


30



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##### Table of Contents








|         |             
|-------- | ------------
|Item 1A. | Risk Factors

10-K


10-K







|        |                                                                
|------- | ---------------------------------------------------------------
|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.





| |   |                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the adoption and approval of the Companys Amended and
    Restated Certificate of Incorporation;                                                                                                                                                                                                                                                                          
|
| |  | authorized, directed and empowered the proper officers of the
    Company to execute and file the Companys Amended and
    Restated Certificate of Incorporation with the Secretary of
    State of the State of Delaware in order to effectuate the
    adoption of the Amended and Restated Certificate of
    Incorporation upon the consummation of the Companys IPO;
|
| |  | conditioned upon consummation of the Companys IPO, the
    adoption and approval of the Companys Amended and Restated
    By-laws;                                                                                                                                                                                                                                       
|
| |  | upon consummation of the IPO, the proper officers of the Company
    were authorized, directed and empowered , in the name and on
    behalf of the Company, to file the Companys Amended and
    Restated By-laws with the minutes of the Company;                                                                                                                       
|
| |  | the adoption and approval of the Companys 2006 Stock
    Incentive Plan; and                                                                                                                                                                                                                                                                                              
|
| |  | that reservation by the Company under and pursuant to, the
    Companys 2006 Stock Incentive Plan, of
    1,300,000 shares of the Companys common stock.                                                                                                                                                                                                                 






|        |                   
|------- | ------------------
|ITEM 5. | Other Information.








|        |          
|------- | ---------
|ITEM 6. | Exhibits.



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

|               |  |                                                                                                  
|-------------- |  | -------------------------------------------------------------------------------------------------
|Exhibit 3.1    |  | Amended and Restated Certificate of Incorporation at Town Sports
    International Holdings, Inc.
|Exhibit 3.5    |  | Amended and Restated By-Laws of Town Sports International
    Holdings, Inc.                     
|Exhibit 10.9.1 |  | Amendment No. 2 to the Registration Rights Agreement dated
    as of May 30, 2006.               
|Exhibit 10.26  |  | Amendment No. 1 to the Town Sports International Holdings,
    Inc. 2006 Stock Incentive Plan    

31



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##### Table of Contents



|             |  |                                                                                                
|------------ |  | -----------------------------------------------------------------------------------------------
|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 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.   

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##### Table of Contents






SIGNATURES






| |                                               
| | ----------------------------------------------
| | TOWN SPORTS INTERNATIONAL 
     HOLDINGS, INC.



| |     |                 
| | --- | ----------------
| | By: | /s/ Richard Pyle

| |                                          
| | -----------------------------------------
| |                                          
| | Richard Pyle                             
| | Chief Financial Officer                  
| | (principal financial, accounting officer)



| |     |                    
| | --- | -------------------
| | By: | /s/ Robert Giardina

| |                              
| | -----------------------------
| |                              
| | Robert Giardina              
| | Chief Executive Officer      
| | (principal executive officer)

33