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SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




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FORM 10-K



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|- | ----------------------------------------------------------------------------------------
|x | Annual Report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934

For the fiscal year ended December 31, 2002




|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|o | Transition Report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934

For the transition period from


Commission file number: 333-40907

Town Sports International, Inc.


(Exact name of Registrant as specified in its
charter)


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|-------------------------------------------------------------------------------- |  | -------------------------------------------------------
|                                                                                
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|                                                                                
|NEW YORK
     (State or other jurisdiction of
    incorporation or organization) |  | 13-2749906
    (I.R.S. Employer
    Identification No.)

888 SEVENTH AVENUE

NEW YORK, NEW YORK 10106


(212)-246-6700


(Address, including zip code and telephone
number,


including area code, of registrants
principal executive offices)


Securities registered pursuant to Section 12(b) of the
Act: None

Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirement for the past
90 days.  Yes x No o

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part IV of this
Form 10-K or any amendment to this
Form 10-K.  x

Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2).  Yes o No x

The aggregate market value of Common Stock held by
non-affiliates of the registrant: Not applicable

As of June 30, 2002, there were 1,028,698 shares of
Class A Common Stock of the Company outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain exhibits filed with the Registrants Registration
Statements on Form S-1 and Forms S-4
(File Nos. 333-61439, 333-40907 and 333-82607, as
amended) are incorporated by reference into Part IV of this
Report on Form 10-K.



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TABLE OF CONTENTS

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|ITEM |  |                                                                                           
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|     |  | PART I                                                                                     |  |  |    | 
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|1.   |  | Business                                                                                   |  |  | 1  | 
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|2.   |  | Properties                                                                                 |  |  | 10 | 
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|3.   |  | Legal Proceedings                                                                          |  |  | 14 | 
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|4.   |  | Submission of Matters to a Vote of Security
    Holders                                    |  |  | 14 | 
|     |  | PART II                                                                                    |  |  |    | 
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|5.   |  | Market for Registrants Common Stock and
    Related Shareholder Matters                   |  |  | 14 | 
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|6.   |  | Selected Financial Data                                                                    |  |  | 15 | 
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|7.   |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations  |  |  | 21 | 
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|7A.  |  | Quantitative and Qualitative Disclosures About
    Market Risks                            |  |  | 30 | 
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|8.   |  | Financial Statements and Supplementary Data                                                |  |  | 30 | 
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|9.   |  | Changes in and Disagreements with Accountants on
    Accounting and Financial   Disclosure |  |  | 30 | 
|     |  | PART III                                                                                   |  |  |    | 
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|10.  |  | Directors and Executive Officers of the Registrant                                         |  |  | 31 | 
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|11.  |  | Executive Compensation                                                                     |  |  | 32 | 
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|12.  |  | Security Ownership of Certain Beneficial Owners
    and Management                         |  |  | 34 | 
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|13.  |  | Certain Relationships and Related Transactions                                             |  |  | 36 | 
|     |  | PART IV                                                                                    |  |  |    | 
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|14.  |  | Controls and Procedures                                                                    |  |  | 37 | 
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|15.  |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                       |  |  | 38 | 

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TOWN SPORTS INTERNATIONAL, INC.

PART I

Item 1.     Business

General

Town Sports International, Inc. and its subsidiaries (as used
herein, the Company, Town Sports,
we, us and our) is one of
the two leading owners and operators of fitness clubs in the
Northeast and Mid-Atlantic regions of the United States. As of
December 31, 2002, we owned and operated 127 fitness
clubs and partly owned and operated two fitness clubs. These
129 clubs collectively served approximately
342,000 members. We develop clusters of clubs to serve
densely populated major metropolitan regions in which a high
percentage of the population commutes to work. We service such
populations by clustering clubs near the highest concentrations
of our target members areas of both employment and
residence. Our target member is college-educated, typically
between the ages of 21 and 50 and earns an annual income between
$50,000 and $150,000.

Our goal is to develop the premier health club network in each
of the major metropolitan regions we serve. We believe that
clustering clubs allows us to achieve strategic operating
advantages that enhance our ability to achieve this goal. When
entering new regions, we develop clusters by initially opening
or acquiring clubs located in the more central urban markets of
the region and then branching out from these urban centers to
suburbs and ancillary communities. Capitalizing on this
clustering of clubs, as of December 31, 2002, approximately
47% of our members participated in a membership plan that allows
unlimited access to all of our clubs for a higher membership fee.

We have executed this strategy successfully in the New York
region through the network of fitness clubs we operate under our
New York Sports Club (NYSC) brand name. We are the
largest fitness club operator in Manhattan with
37 locations and operate a total of 85 clubs under the NYSC
name within a defined radius of New York City. We operate
20 clubs in the Boston region and 15 clubs in the
Washington, DC region under our Boston Sports Club
(BSC) and Washington Sports Club (WSC)
brand names, respectively and have begun establishing a similar
cluster in the Philadelphia region with six clubs under our
Philadelphia Sports Club (PSC) brand name. In
addition, we operate three clubs in Switzerland. We employ
localized brand names for our clubs to create an image and
atmosphere consistent with the local community and to foster
recognition as a regional network of quality fitness clubs
rather than a national chain.

We principally sell month to month membership payment plans that
are generally cancelable by our members at any time with
30 days notice, although certain monthly contracts (usually
discounted corporate memberships) commit a member to a period of
membership of twelve months before becoming
non-commit.. As of December 31, 2002,
approximately 92% of our members had such a
non-commit monthly membership plan. We believe
members generally prefer this non-commit membership plan over
long-term commitments, thus giving us an advantage over
competitors that only sell longer term or
paid-in-full contracts. The non-commit membership
plan also provides an incentive for us to deliver high quality
programs and services in order to retain members.

We have experienced significant growth over the past several
years through a combination of (i) acquiring existing,
privately owned, single and multi-club businesses, and
(ii) developing and opening greenfield club
locations (a greenfield club is a new location we have
constructed). From January 1, 1998, to December 31,
2002, we acquired 45 existing clubs, opened 48 greenfield clubs,
relocated two clubs, sold one club, and closed one club to
increase our total clubs under operation from 40 to 129. We
currently plan to open five more clubs prior to
December 31, 2003. We have achieved revenue growth over the
five year period ended December 31, 2002 at a compound
annual rate of approximately 30.8% from $109.3 million for
the year ended December 31, 1998 to $319.4 million for
the year ended December 31, 2002. This growth has been
driven not only by the addition of acquired and greenfield club
locations, but also through mature club revenue growth, which
has ranged from 4.1% to 18.6% for the five year period ended
December 31, 2002 and averaged 13.0% over that period. Such
growth was 4.1% for the year ended December 31, 2002.
Mature club, defined as those clubs that we operated for more
than 24 months, revenue growth has enabled us to increase
revenue per weighted average club over the five year period
ended December 31, 2002. Revenue per weighted average club





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Selected Financial Data Selected Financial
Data


Over our 29-year history, we have developed and refined a model
club format that allows us to cost effectively construct and
efficiently operate our fitness clubs. Our model club ranges in
size from approximately 15,000 to 25,000 square feet. Excluding
a single large 200,000 square foot club, our average club is
22,000 square feet. Clubs typically have an open space to
accommodate cardiovascular and strength-training exercise, as
well as special purpose rooms to accommodate group fitness class
instruction and other exercise programs as well as massage.
Locker rooms generally include a sauna and steam room. We seek
to provide a broad array of high quality exercise programs and
equipment that is both popular and effective, while reinforcing
the quality exercise experience we strive to make available to
our members. While we do not generally build locations with
amenities such as swimming pools or racquet and basketball
courts, we do strive to establish at least one flagship club
that has such amenities in each of our markets. We believe that
it is generally more economical to acquire clubs with such
amenities than to develop them as greenfield clubs.

We engage in detailed site analyses and selection process based
upon information provided by our customized development software
to identify potential target areas for additional clubs based
upon population demographics, psychographics, traffic and
commuting patterns, availability of sites and competitive market
information. In addition to our existing 129 clubs under
operation and the seven sites for which we have entered into
lease commitments, we have identified approximately
70 target areas in which we may add clubs under the brand
names NYSC, BSC, WSC, or PSC. We estimate that we will identify
approximately 35 additional target areas in which we may add
clubs under these brand names. Once we begin to approach
saturation of these regions, we will explore expansion
opportunities in other markets in the United States sharing
similar demographic characteristics to those in which we
currently operate.

We possess an experienced management team, four of the top five
executives of which have been working together at the Company
since 1990. We believe that we have the depth, experience and
motivation to manage our internal and external growth, and that
we have put in place the infrastructure and systems to manage
effectively our planned expansion. We believe that the presence
of such infrastructure will enable us over time to leverage
certain fixed cost aspects of corporate overhead to realize
increased EBITDA margins as we continue to expand our club base.
This operating leverage has already helped us to increase EBITDA
margin to 21.9% for the year ended December 31, 2002
compared to approximately 17.9% in 1998. Similarly, operating
income as a percent of revenue increased to 11.9% for the year
ended December 31, 2002 compared to 6.7% in 1998, and cash
flows from operations as a percent of revenue increased to 15.9%
from 14.6% over these respective periods.

Industry Overview

Demographic trends have helped fuel the growth experienced by
the fitness industry over the past decade. The industry has
benefited from the aging of the baby boomer
generation (ages 38 to 56) and the coming of age of their
offspring, the echo boomers (ages seven to 25).
Government-sponsored reports, such as the Surgeon Generals
Report on Physical Activity & Health (1996) and the
Call to Action to Prevent and Decrease Overweight and Obesity
(2002) have helped to increase the general awareness of the
benefits of physical exercise to these demographic segments over
those of prior generations. Membership penetration (defined as
club members as a percentage of the total U.S. population)
has increased significantly from 8.3% in 1991 to 11.9% in 2001.

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Fitness Club Revenues(1)

(in $ billions)

CLUB REVENUES



| |     |                                                       
| | --- | ------------------------------------------------------
| | (1) | Industry revenues for 1991 and 1992 are not available.

U.S. Fitness Clubs Membership

(in millions)

CLUB MEMBERSHIP

Total fitness club industry revenues increased at a compound
annual growth rate of 8.2% from $6.5 billion in 1993 to
$12.2 billion in 2001, while the total number of clubs
increased at a compound annual growth rate of 3.9%, from 12,146
in 1991 to 17,807 in 2001. Growth in club memberships outpaced
club growth during this period, increasing at a compound annual
growth rate of 4.9% from 21.0 million in 1991 to
33.8 million in 2001. As a result, average members per club
has increased from 1,729 in 1991 to 1,898 in 2001, indicating
industry-wide demand for further expansion of the existing club
base.

Notwithstanding these longstanding growth trends, the fitness
club industry continues to be highly fragmented. Only 10% of
clubs in the United States are owned and operated by companies
that own more than 25 clubs, and the two largest fitness
club operators each generate less than 8% of total fitness club
revenues.

As a large operator with recognized brand names, leading
regional market shares and an established operating history, we
believe we are well positioned to benefit from these favorable
industry dynamics.

We believe that the growth in fitness club memberships is
attributable to several factors. Americans are focused on
achieving a healthier, more active and less stressful lifestyle.
Of the factors members consider very important in their decision
to join a fitness club, the most commonly mentioned is health,
closely followed by appearance related factors including muscle
tone, looking better and weight control. We believe that the
increased emphasis on appearance and wellness in the media has
heightened the focus on self image and fitness and will continue
to do so. We also believe that fitness clubs provide a more
convenient venue for exercise than outdoor activities,
particularly in densely populated metropolitan areas. According
to published industry reports, convenience is an important
factor in choosing a fitness club.

We believe the industry can be segregated into three tiers based
upon price, service and quality: (i) an upper tier
consisting of clubs with monthly membership dues averaging in
excess of $90.00 per month; (ii) a middle tier consisting
of clubs with monthly membership dues averaging between $90.00
and $40.00 per month; and (ii) a lower tier consisting of
clubs with monthly membership dues averaging less than $40.00
per month. We compete in the middle tier in terms of pricing and
because of our wide array of programs and

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Marketing

Our marketing campaign, which has become a large driver of the
brand, is directed by our in-house media department which is
headed by the Chief Executive Officer. This team develops
advertising strategies to convey each of the our regionally
branded networks as the premier network of fitness clubs in that
region. Our media teams goal is to achieve broad awareness
of our regional brand names primarily through radio, television,
newspaper, billboard, and direct mail advertising. We believe
that clustering clubs creates economies in our marketing and
advertising strategy that increase the efficiency and
effectiveness of these campaigns.

Advertisements generally feature creative slogans that
communicate the serious approach we take toward fitness in a
provocative and/or humorous tone, rather than pictures of our
clubs, pricing specials or members exercising. Promotional
marketing campaigns will typically feature opportunities to
participate in value-added services such as personal training
for a limited time at a discount to the standard rate. On
occasion, we will also offer reduced initiation fees to
encourage enrollment. Additionally, we frequently sponsor member
referral incentive programs. Such incentive programs include a
free month of membership, personal training sessions, and sports
equipment.

We also engage in public relations and special events to promote
our image in the local communities. We believe that these public
relations efforts enhance our image and the image of our local
brand names in the communities in which we operate. We also seek
to build our community image through co-operative advertising
campaigns with local and regional retailers.

We maintain the following web site: www.mysportsclubs.com that
provides information about club locations, program offerings,
exercise class schedules and on-line promotions. Our web site
provides our members a venue to give us direct feedback on all
of our services and offerings. We also use our web site to
promote career opportunities.

Sales

Sales of new memberships are generally handled at the club
level. We employ approximately 400 in-club
membership consultants who are responsible for new membership
sales. Each club generally has two or three full-time and one
part-time membership consultants. These consultants report both
to our area sales managers, who in turn report to our Vice
President Sales. Membership consultants compensation
consists of a base salary plus commission. Sales commissions
range from $45 to $65 per new member enrolled. We provide
additional incentive-based compensation in the form of bonuses
contingent upon individual, club and Company-wide enrollment
goals. Membership consultants must successfully complete a
three-month, in-house training program through which they learn
our sales strategy. In making a sales presentation, membership
consultants emphasize: (i) the proximity of our clubs to
concentrated commercial and residential areas convenient to
where target members live and work; (ii) the lack of a
long-term obligation on the part of the enrollee; (iii) the
price value relationship of a Town Sports membership; and
(iv) access to value-added services. We believe that
providing employees with opportunities for career advancement is
essential to our ability to attract and retain qualified sales
personnel. We also employ six full-time corporate sales managers
whose responsibility is to solicit group memberships through
senior level corporate contacts.

We believe that clustering clubs allows us to sell memberships
based upon the opportunity for members to utilize multiple club
locations to differing degrees. We have a streamlined membership
structure to simplify the sales process. In addition, our
proprietary centralized computer software ensures consistency of
pricing and controls enrollment processing at the club level. We
generally offer three principal types of memberships:



| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Passport Membership, priced from $67 to $93 per month, is
    our higher priced membership and entitles members to use any
    Town Sports club at any time. This membership is held by
    approximately

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| |                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 47% of our members. In addition, we have introduced a Passport
    Premium membership for a select club, that includes more member
    services, at a price greater than $100 per month.                                                                                                           
|
| | The Gold Membership, priced from $39 to $82 per month based on
    the market area of enrollment, enables members to use a specific
    club, or a group of specific clubs, at any time and any Town
    Sports club during off-peak times. This membership is held by
    over 52% of our members.
|
| | The Off-peak Membership, priced from $39 to $75 per month, is
    the least expensive membership, and allows members to use any
    Town Sports club only during off-peak times. This membership is
    held by approximately 1% of our members.                                                   
|
| | We also offer corporate membership plans that vary in price
    depending on the respective corporations needs. The
    corporate membership plans are typically at a discount to that
    of individual membership plans.                                                                        

By clustering a group of clubs in a geographic area, the value
of our memberships is enhanced by our ability to offer Passport
Memberships, which allow our members to use any of our clubs at
any time. We believe the popularity of the Passport Membership
results from the broader privileges and greater convenience this
membership plan provides through the opportunity for members to
access club facilities near to both their homes and workplace.
Our clustering strategy also allows us to provide access to
special facilities and programs such as tennis, squash,
basketball and racquetball courts, swimming pools and programs
targeted at children and other groups, through flagship
locations strategically located in key target areas, without
offering such facilities or programs in every location.

In joining a club, a new member signs a membership agreement
which obligates the member to pay a one-time initiation fee and
monthly dues on an ongoing basis. Monthly Electronic Funds
Transfer EFT of individual membership dues averaged
approximately $70 per month for the year ended December 31,
2002. During that same period, initiation fees averaged $83 for
EFT members. We collect approximately 93.3% of all monthly
membership dues through EFT and EFT revenue constituted over
71.6% of consolidated revenue for the year ended
December 31, 2002. Substantially all other membership dues
are paid in advance. EFT members can generally cancel
memberships at any time upon 30 days notice. Based upon a
study of the membership base at our clubs open over 24 months,
however, the average length of our memberships is approximately
24 months. The membership agreement calls for monthly dues
to be collected by EFT based on credit card or bank account
debit authorization contained in the agreement. We believe that
our EFT program of monthly dues collection provides a
predictable and stable cash flow for us, eliminates the
traditional accounts receivable function, and minimizes bad-debt
write-offs while providing a significant competitive advantage
in terms of the sales process, dues collection, working capital
management and membership retention. In addition, it enables us
to increase our dues in an efficient and consistent manner which
we typically do annually by between 1% and 3%, in line with cost
of living increases. During the first week of each month, we
receive the EFT dues for that month initiated by a third party
EFT processor. Discrepancies and insufficient funds incidents
are researched and resolved by our in-house staff. For the year
ended December 31, 2002, we experienced an average of
uncollected EFT dues of 1.5%.

Our total EFT revenue has increased by $15.7 million per
month from $5.1 million in December, 1997 to
$20.8 million in December, 2002. While we strongly
encourage monthly EFT memberships, approximately 8% of our
members (often corporate group members) purchase paid-in-full
memberships for a one year term.

Ancillary Revenue

Over the past five years we have expanded the level of ancillary
services provided to our members. Ancillary revenue has
increased by $31.0 million from $11.8 million in 1998
to $42.8 million in 2002. Increases in personal training
revenue in particular have contributed to $21.0 million of
the increase in ancillary revenue from 1998 to 2002. In addition
the Company has added Sports Club for Kids and Group Exclusives
(both additional fee for service programs) at selected clubs.
Ancillary revenue as a percentage of total revenue has increased
from 10.6% for the year ended December 31, 1998 to 13.3%
for the year ended

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Club Format and Locations

Our clubs are typically located in well-established,
higher-income residential, commercial or mixed urban
neighborhoods within major metropolitan areas which are capable
of supporting the development of a cluster of clubs. Our clubs
generally have relatively high retail visibility,
and close proximity to transportation. In the New York City,
Boston and Washington, DC markets, we have created clusters of
clubs in urban areas and their commuter suburbs in accordance
with our operating strategy of offering our target members the
convenience of multiple locations close to where they live and
work, reciprocal use privileges and standardized facilities and
services. We have begun establishing a similar cluster in
Philadelphia.

Approximately half of the clubs we operate are urban clubs while
half are suburban. Our urban clubs generally range in size from
15,000 to 25,000 square feet and average approximately 20,000
square feet. Our suburban clubs vary in size from 15,000 square
feet to 75,000 square feet, with one club being 200,000 square
feet. Excluding this single large club, the average suburban
club is 24,000 square feet. Membership for each club generally
ranges from 2,000 to 4,500 members at maturity. Although club
members represent a cross-section of the population in a given
geographic market, our target member is college educated,
between the ages of 21 and 50 and has an annual income of
between $50,000 and $150,000.

General

Our facilities include state-of-the-art cardiovascular
equipment, including upright and recumbent bikes, steppers,
treadmills, and elliptical motion machines; strength equipment
and free weights, including Cybex, Icarian, Nautilus, Free
Motion, and Hammer Strength equipment; group exercise and
cycling studio(s); the Sportsclub Network entertainment system;
locker rooms, including shower facilities, towel service, and
other amenities such as, saunas and steamrooms; babysitting, and
a retail shop. Personal training services are offered at all
locations and massage is offered at most clubs, each at an
additional charge. At certain flagship locations, additional
facilities also are offered, including swimming pools, racquet
and basketball courts. Also, we have significantly expanded the
availability of fee-based programming at many of our clubs,
including programs targeted at children, members and non-member
adult customers.

We have recently launched our Xpressline strength workout.
Xpressline is a trainer-supervised, eight-station total-body
circuit workout designed to accommodate all fitness levels. This
service is a free service provided to our members. We have also
introduced FitMap, which is a visual tool that provides our
members with guidance on how to use our equipment through safe
progressions of difficulty.

Our Sportsclub Network personal entertainment units have been
installed in over 95% of our clubs. Over 5,200 of these
entertainment units have been installed. The units are typically
mounted on cardiovascular equipment and are equipped with a
color screen for television viewing, a compact disk player and
most models have audio cassette players. The Sportsclub Network
also broadcasts our own personalized music video channel that
provides us with a direct means of advertising products and
services to our membership base.

Club Services and Operations

We emphasize consistency and quality in all of our club
operations, including:

Management.We believe that our success is largely
dependent on the selection and training of our staff and
management. Our management structure is designed, therefore, to
support the professional development of highly motivated
managers who will execute our directives and support growth.

Corporate departments are responsible for each area of club
services, such as exercise group programs, fitness programming,
personal training, facility and equipment maintenance,
housekeeping and laundry. This centralization allows local
general managers at each club to focus on customer service, club
staffing and providing a high quality exercise experience.
General managers are responsible for the day-to-day manage-

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Personal Training.All of our fitness clubs offer
one-on-one personal training, which is sold by the single
session or in multi-session packages. We have implemented a
comprehensive staff education curriculum which progresses from
basic knowledge and practical skills to advanced concepts and
training techniques. Our education program provides professional
standards to ensure that our trainers provide superior service
and fitness expertise to our members. There are four levels of
professional competency for which different levels of
compensation are paid, with mandatory requirements trainers must
meet in order to achieve and maintain such status. We believe
the qualifications of the personal training staff helps ensure
that members receive a consistent level of quality service
throughout our club base. We believe that our personal training
programs provide valuable guidance to our members and a
significant source of incremental revenue from value-added
services. In addition, we believe that members who participate
in personal training programs have a longer membership life.

Group Fitness.Our commitment to providing a quality
workout experience to our members extends to the employment of
program instructors, who teach aerobics, cycling, strength
conditioning, boxing, yoga and step aerobics classes, among
others. Our clustering strategy enables us to staff program
instructors and professional personal trainers at more than one
club. As a result, we can vary a given clubs instructors,
while providing instructors sufficient classes to effectively
and economically treat these instructors as full-time employees.
All program instructors report to a centralized management
structure, headed by the Vice President of Programs and Services
whose department is responsible for overseeing auditions and
providing in-house training to keep instructors current in the
latest training techniques and program offerings. We also
provide Group Exclusive offerings to our members, which are
for-fee based programs that have smaller groups and provide more
focused, and typically more advanced training classes. Some
examples of these offerings include: Pilates, boxing camps, and
cycling.

Sports Clubs for Kids. During 2000, we began offering
programs for children under the Sports Club for Kids
(SCFK) brand in the NYSC and PSC regions. As of
December 2002, SCFK was operating in 18 locations throughout our
four major markets. In addition to extending fitness offerings
to a market not previously served by us, we expect that SCFK
programming will help position our suburban clubs as family
clubs, which should provide us with a competitive advantage.
Depending upon the facilities available at a location, Sports
Clubs for Kids programming can include traditional youth
offerings such as day camps, sports camps, swim lessons, hockey
and soccer leagues, gymnastics, dance, martial arts and birthday
parties. It also can include innovative and proprietary
programming such as Kidspin Theater, a multi-media cycling
experience, and non-competitive learn-to-play sports
programs. In selected locations we also offer laser tag.

Employee Compensation and Benefits. We provide
performance-based incentives to our management. Senior
management compensation, for example, is tied to our overall
performance. Departmental directors, area managers and general
managers have bonuses tied to financial and member retention
targets for a particular club or group of clubs. We offer our
employees various benefits including; health, dental,
disability, insurance, pre-tax healthcare and dependent care
accounts, and a 401(k) plan. We believe the availability of
employee benefits provides us with a strategic advantage in
attracting and retaining quality managers, program instructors
and professional personal trainers and that this strategic
advantage in turn translates into a more consistent and higher
quality workout experience for those members who utilize such
services.

Proprietary Centralized Information Systems

Currently we are utilizing a proprietary system developed
internally to track and analyze sales, leads, and membership
statistics which, in conjunction with our other systems, allows
us to track the frequency of member workouts, multi-club
utilization, value-added services and demographic profiles by
member, which enables us to develop targeted direct marketing
programs and to modify our broadcast and print advertising to
improve consumer response. These systems also assist us in
evaluating staffing needs and program offerings. In addition, we
rely on certain data gathered through our information systems to
assist in the identification of new markets for clubs and site
selection within those markets.

7



---



##### 



Planned Information Systems Developments

We recognize the value of enhancing and extending the uses of
information technology in virtually every area of our business.
After developing an information technology strategy to support
the business strategy, we have developed a comprehensive
multi-year plan to replace or upgrade key systems.

We expect to begin implementation of a new fully integrated club
management system in 2003. We have been actively involved in the
design of the software and are currently in the final phase of
acceptance testing. This system incorporates contemporary
browser-based, n-tier technology and open architecture to allow
for scalability and extensibility to support our projected
growth and diversification of services. This system will provide
enhanced or new functionality for member services, contract
management, electronic billing, point of sale, inventory
control, scheduling resources, reservations, and cash management.

During 2001, we implemented a new time capture system that
integrates with our payroll processing system. This system will
also integrate with the new club management system to fully
automate the various compensation plans for all employees. In
addition, during 2002, we implemented a new budgeting and
forecasting product that will be expanded later in 2003 for data
warehousing capabilities which will enable enhanced managerial
and analytical reporting. We implemented application and
telephone systems to manage our internal customer service center
which supports information technology, facilities, equipment and
Sportsclub Network service call requests for all locations.
Numerous infrastructure changes were implemented to accommodate
our growth, to provide network redundancy, efficiencies in
operations, and to improve management of all components of the
technical architecture.

Our website will be expanded after the implementation of the
above mentioned club management system to incorporate e-business
functionality such as sales of products, services, and
memberships, member self service and reservations. We have built
an intranet to provide the portal for the newly implemented
browser-based application. Development of intranet features to
support corporate communications, human resources programs, and
training is ongoing.

In the first half of 2004, we will assess our current financial
systems and provide recommendations for implementation of new
fully integrated software.

Coinciding with the implementation of the new club management
system, we will implement an updated Disaster Recovery plan that
will include a designated hot site, recovery
procedures, data restoration testing, and training of personnel.

Strategic Planning

During 2001, the Company began a strategic planning process.
That process, spearheaded by the Chairman and the Chief
Executive Officer, produced a new set of Core Values, a revised
Mission Statement and a set of five-year performance targets. In
2002, more than 40 projects were completed in support of the
Plans Strategic Initiatives and Objectives. Our Chairman
and Chief Executive led the strategy process, which produced
significant changes in our approach to our Brand, our Core
Business Development process and our Intranet strategy.

The Strategic Plan has been updated for 2003 with new Strategic
Initiatives in several areas. Senior Management continues to
support the Strategic Planning process and believes that
accomplishing our Strategic Objectives will cause us to attain
the five-year performance targets outlined in the 2003 Plan.

Intellectual Property

We have registered, and are in the process of registering,
various trademarks and service marks with the U.S. Patent and
Trademark Office, including New York Sports Clubs, Washington
Sports Clubs, Boston Sports Clubs, Philadelphia Sports Clubs,
TSIand Town Sports International, Inc.

8



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##### 



Competition

The fitness club industry is highly competitive. We compete with
other fitness clubs, physical fitness and recreational
facilities established by local governments and hospitals and by
businesses for their employees, amenity and condominium clubs,
the YMCA and similar organizations and, to a certain extent,
with racquet and tennis and other athletic clubs, country clubs,
weight reducing salons and the home-use fitness equipment
industry. We also compete with other entertainment and retail
businesses for the discretionary income of our target markets.
There can be no assurance that we will be able to compete
effectively in the future in the markets in which we operate.
Competitors, which may include companies which are larger and
have greater resources than we have, may enter these markets to
our detriment. These competitive conditions may limit our
ability to increase dues without a material loss in membership,
attract new members and attract and retain qualified personnel.
Additionally, consolidation in the fitness club industry could
result in increased competition among participants, particularly
large multi-facility operators that are able to compete for
attractive acquisition candidates, and real estate availability
thereby increasing costs associated with expansion through both
acquisitions, and greenfields.

We believe that our market leadership, experience and operating
efficiencies enable us to provide the consumer with a superior
product in terms of convenience, quality service and
affordability. We believe that there are significant barriers to
entry in our urban markets, including restrictive zoning laws,
lengthy permit processes and a shortage of appropriate real
estate, which could discourage any large competitor from
attempting to open a chain of clubs in these markets. However,
such a competitor could enter these markets more easily through
one or a series of acquisitions.

Employees

At December 31, 2002, the Company had approximately 7,700
employees, of which approximately 2,900 were employed full-time.
Approximately 325 employees were corporate personnel working in
the Manhattan, Boston or Washington, DC offices. We are not a
party to any collective bargaining agreement with our employees.
We have never experienced any significant labor shortages nor
had any difficulty in obtaining adequate replacements for
departing employees and consider our relations with our
employees to be good. We believe that we offer employee benefits
(including health, dental, disability insurance, pre-tax
healthcare and dependent care accounts, and a 401(k) plan) which
are superior to those generally offered by our competitors.

Government Regulation

Our operations and business practices are subject to regulation
at the federal, state and, in some cases, local levels. State
and local consumer protection laws and regulations govern our
advertising, sales and other trade practices.

Statutes and regulations affecting the fitness industry have
been enacted in states in which we conduct business; many other
states into which we may expand have adopted or likely will
adopt similar legislation. Typically, these statutes and
regulations prescribe certain forms and provisions of membership
contracts, afford members the right to cancel the contract
within a specified time period after signing, require an escrow
of funds received from pre-opening sales or the posting of a
bond or proof of financial responsibility, and may establish
maximum prices for membership contracts and limitations on the
term of contracts. In addition, we are subject to numerous other
types of federal and state regulations governing the sale of
memberships. These laws and regulations are subject to varying
interpretations by a number of state and federal enforcement
agencies and the courts. We maintain internal review procedures
in order to comply with these requirements, and believes that
our activities are in substantial compliance with all applicable
statutes, rules and decisions.

Under so-called state cooling-off statutes, a member
has the right to cancel his or her membership for a period of
three to ten days (depending on the applicable state law) and,
in such event, is entitled to a refund of any initiation fee
paid. In addition, our membership contracts provide that a
member may cancel his or her membership at any time for medical
reasons or relocation a certain distance from the nearest club.
The specific procedures for cancellation in these circumstances
vary due to differing state laws. In each instance,

9



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##### 





FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on our Form 10-K
for the year ended December 31, 2002 are forward-looking
statements, including, without limitation, statements regarding
future financial results and performance, potential sales
revenue, legal contingencies and tax benefits. These statements
are subject to various risks and uncertainties, many of which
are outside of our control, including the level of market demand
for our services, competitive pressures, the ability to achieve
reductions in operating costs and to continue to integrate
acquisitions, environmental matters, the application of Federal
and state tax laws and regulations, and other specific factors
discussed herein and in other Securities and Exchange Commission
filings by us. The information contained herein represents our
best judgement as of the date hereof based on information
currently available; however, we do not intend to update this
information except as required by law, to reflect development or
information obtained after the date hereof and disclaim any
legal obligation to the contrary.

Item 2.  Properties

|                       |  |           |  |            |                          |                |  |  |                 | 
|---------------------- |  | --------- |  | ---------- | ------------------------ | -------------- |  |  | --------------- | 
|                       |  |           |  |            |                          | Date Opened or
|                       |  |           |  | Management
|Location               |  | Address   |  | Assumed   
|                       |  |           |  |           
|                       |  |           |  |            |                          |               
|                      
|                      
|                      
|                      
|New York Sports Clubs: |  |           |  |            |                          |                |  | 
|                      
|                      
|                      
|                      
|1.                     |  | Manhattan |  |            | 151 East 86th Street     |                |  |  | January, 1977   | 
|                      
|                      
|                      
|                      
|2.                     |  | Manhattan |  |            | 61 West 62nd Street      |                |  |  | July, 1983      | 
|                      
|                      
|                      
|                      
|3.                     |  | Manhattan |  |            | 614 Second Avenue        |                |  |  | July, 1986      | 
|                      
|                      
|                      
|                      
|4.                     |  | Manhattan |  |            | 380 Madison Avenue       |                |  |  | January, 1990   | 
|                      
|                      
|                      
|                      
|5.                     |  | Manhattan |  |            | 151 Reade Street         |                |  |  | January, 1990   | 
|                      
|                      
|                      
|                      
|6.                     |  | Manhattan |  |            | 1601 Broadway            |                |  |  | September, 1991 | 
|                      
|                      
|                      
|                      
|7.                     |  | Manhattan |  |            | 50 West 34th Street      |                |  |  | August, 1992    | 
|                      
|                      
|                      
|                      
|8.                     |  | Manhattan |  |            | 349 East 76th Street     |                |  |  | April, 1994     | 
|                      
|                      
|                      
|                      
|9.                     |  | Manhattan |  |            | 248 West 80th Street     |                |  |  | May, 1994       | 
|                      
|                      
|                      
|                      
|10.                    |  | Manhattan |  |            | 502 Park Avenue          |                |  |  | February, 1995  | 
|                      
|                      
|                      
|                      
|11.                    |  | Manhattan |  |            | 117 Seventh Avenue South |                |  |  | March, 1995     | 
|                      
|                      
|                      
|                      
|12.                    |  | Manhattan |  |            | 303 Park Avenue South    |                |  |  | December, 1995  | 
|                      
|                      
|                      
|                      
|13.                    |  | Manhattan |  |            | 30 Wall Street           |                |  |  | May, 1996       | 
|                      
|                      
|                      
|                      
|14.                    |  | Manhattan |  |            | 1635 Third Avenue        |                |  |  | October, 1996   | 
|                      
|                      
|                      
|                      
|15.                    |  | Manhattan |  |            | 575 Lexington Avenue     |                |  |  | November, 1996  | 
|                      
|                      
|                      
|                      
|16.                    |  | Manhattan |  |            | 278 Eighth Avenue        |                |  |  | December, 1996  | 
|                      
|                      
|                      
|                      
|17.                    |  | Manhattan |  |            | 200 Madison Avenue       |                |  |  | February, 1997  | 
|                      
|                      
|                      
|                      
|18.                    |  | Manhattan |  |            | 131 East 31st Street     |                |  |  | February, 1997  | 
|                      
|                      
|                      
|                      
|19.                    |  | Manhattan |  |            | 2162 Broadway            |                |  |  | November, 1997  | 
|                      
|                      
|                      
|                      
|20.                    |  | Manhattan |  |            | 633 Third Avenue         |                |  |  | April, 1998     | 
|                      
|                      
|                      
|                      
|21.                    |  | Manhattan |  |            | 1657 Broadway            |                |  |  | July, 1998      | 
|                      
|                      
|                      
|                      
|22.                    |  | Manhattan |  |            | 217 Broadway             |                |  |  | March, 1999     | 
|                      
|                      
|                      
|                      
|23.                    |  | Manhattan |  |            | 23 West 73rd Street      |                |  |  | April, 1999     | 
|                      
|                      
|                      
|                      
|24.                    |  | Manhattan |  |            | 34 West 14th Street      |                |  |  | July, 1999      | 
|                      
|                      
|                      
|                      
|25.                    |  | Manhattan |  |            | 503-511 Broadway         |                |  |  | July, 1999      | 
|                      
|                      
|                      
|                      
|26.                    |  | Manhattan |  |            | 1372 Broadway            |                |  |  | October, 1999   | 
|                      
|                      
|                      
|                      
|27.                    |  | Manhattan |  |            | 300 West 125th Street    |                |  |  | May, 2000       | 
|                      
|                      
|                      
|                      
|28.                    |  | Manhattan |  |            | 102 North End Avenue     |                |  |  | May, 2000       | 
|                      
|                      
|                      
|                      
|29.                    |  | Manhattan |  |            | 14 West 44th Street      |                |  |  | August, 2000    | 

10



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##### 



|         |  |                      |  |            |                                   |                |  |  |                 | 
|-------- |  | -------------------- |  | ---------- | --------------------------------- | -------------- |  |  | --------------- | 
|         |  |                      |  |            |                                   | Date Opened or
|         |  |                      |  | Management
|Location |  | Address              |  | Assumed   
|         |  |                      |  |           
|         |  |                      |  |            |                                   |               
|        
|        
|        
|        
|30.      |  | Manhattan            |  |            | 128 Eighth Avenue                 |                |  |  | December, 2000  | 
|        
|        
|        
|        
|31.      |  | Manhattan            |  |            | 2521-23 Broadway                  |                |  |  | August, 2001    | 
|        
|        
|        
|        
|32.      |  | Manhattan            |  |            | 3 Park Avenue                     |                |  |  | August, 2001    | 
|        
|        
|        
|        
|33.      |  | Manhattan            |  |            | 19 Irving Place                   |                |  |  | November, 2001  | 
|        
|        
|        
|        
|34.      |  | Manhattan            |  |            | 160 Water Street                  |                |  |  | November, 2001  | 
|        
|        
|        
|        
|35.      |  | Manhattan            |  |            | 230 West 41st Street              |                |  |  | November, 2001  | 
|        
|        
|        
|        
|36.      |  | Manhattan            |  |            | 1221 Avenue of the Americas       |                |  |  | January, 2002   | 
|        
|        
|        
|        
|37.      |  | Manhattan            |  |            | 200 Park Avenue                   |                |  |  | December, 2002  | 
|        
|        
|        
|        
|        
|38.      |  | Brooklyn, NY         |  |            | 110 Boerum Place                  |                |  |  | October, 1985   | 
|        
|        
|        
|        
|39.      |  | Brooklyn, NY         |  |            | 1736 Shore Parkway                |                |  |  | June, 1998      | 
|        
|        
|        
|        
|40.      |  | Brooklyn, NY         |  |            | 179 Remsen Street                 |                |  |  | May, 2001       | 
|        
|        
|        
|        
|41.      |  | Brooklyn, NY        |  |            | 453 Fifth Avenue                  |                |  |  | Opening 2003    | 
|        
|        
|        
|        
|42.      |  | Queens, NY           |  |            | 69-33 Austin Street, Forest Hills |                |  |  | April, 1997     | 
|        
|        
|        
|        
|43.      |  | Queens, NY           |  |            | 153-67 A Cross Island Parkway     |                |  |  | June, 1998      | 
|        
|        
|        
|        
|44.      |  | Staten Island, NY    |  |            | 300 West Service Road             |                |  |  | June, 1998      | 
|        
|        
|        
|        
|        
|45.      |  | Scarsdale, NY        |  |            | 696 White Plains Road             |                |  |  | October, 1995   | 
|        
|        
|        
|        
|46.      |  | Mamaroneck, NY       |  |            | 124 Palmer Avenue                 |                |  |  | January, 1997   | 
|        
|        
|        
|        
|47.      |  | White Plains, NY     |  |            | 1 North Broadway                  |                |  |  | September, 1997 | 
|        
|        
|        
|        
|48.      |  | Croton-on-Hudson, NY |  |            | 420 South Riverside Drive         |                |  |  | January, 1998   | 
|        
|        
|        
|        
|49.      |  | Larchmont, NY        |  |            | 15 Madison Avenue                 |                |  |  | December, 1998  | 
|        
|        
|        
|        
|50.      |  | Nanuet, NY           |  |            | 58 Demarest Mill Road             |                |  |  | May, 1998       | 
|        
|        
|        
|        
|51.      |  | Great Neck, NY       |  |            | 15 Barstow Road                   |                |  |  | July, 1989      | 
|        
|        
|        
|        
|52.      |  | East Meadow, NY      |  |            | 625 Merrick Avenue                |                |  |  | January, 1999   | 
|        
|        
|        
|        
|53.      |  | Commack, NY          |  |            | 6136 Jericho Turnpike             |                |  |  | January, 1999   | 
|        
|        
|        
|        
|54.      |  | Oceanside, NY        |  |            | 2909 Lincoln Avenue               |                |  |  | May, 1999       | 
|        
|        
|        
|        
|55.      |  | Long Beach, NY       |  |            | 265 East Park Avenue              |                |  |  | July, 1999      | 
|        
|        
|        
|        
|56.      |  | Garden City, NY      |  |            | 833 Franklin Avenue               |                |  |  | May, 2000       | 
|        
|        
|        
|        
|57.      |  | Huntington, NY       |  |            | 350 New York Avenue               |                |  |  | February, 2001  | 
|        
|        
|        
|        
|58.      |  | Syosset, NY          |  |            | 49 Ira Road                       |                |  |  | March, 2001     | 
|        
|        
|        
|        
|59.      |  | Woodmere, NY         |  |            | 158 Irving Street                 |                |  |  | March, 2002     | 
|        
|        
|        
|        
|60.      |  | West Nyack, NY       |  |            | 3656 Palisades Center Drive       |                |  |  | February, 2002  | 
|        
|        
|        
|        
|        
|61.      |  | Stamford, CT         |  |            | 6 Landmark Square                 |                |  |  | December, 1997  | 
|        
|        
|        
|        
|62.      |  | Stamford, CT         |  |            | 106 Commerce Road                 |                |  |  | January, 1998   | 
|        
|        
|        
|        
|63.      |  | Danbury, CT          |  |            | 38 Mill Plain Road                |                |  |  | January, 1998   | 
|        
|        
|        
|        
|64.      |  | Stamford, CT         |  |            | 1063 Hope Street                  |                |  |  | November, 1998  | 
|        
|        
|        
|        
|65.      |  | Norwalk, CT          |  |            | 250 Westport Avenue               |                |  |  | March, 1999     | 
|        
|        
|        
|        
|66.      |  | Greenwich, CT        |  |            | 6 Liberty Way                     |                |  |  | May, 1999       | 
|        
|        
|        
|        
|67.      |  | Westport, CT         |  |            | 427 Post Road, East               |                |  |  | January, 2002   | 
|        
|        
|        
|        
|        
|68.      |  | East Brunswick, NJ   |  |            | 8 Cornwall Court                  |                |  |  | January, 1990   | 
|        
|        
|        
|        
|69.      |  | Princeton, NJ        |  |            | 301 North Harrison Street         |                |  |  | May, 1997       | 
|        
|        
|        
|        
|70.      |  | Freehold, NJ         |  |            | 200 Daniels Way                   |                |  |  | April, 1998     | 
|        
|        
|        
|        
|71.      |  | Matawan, NJ          |  |            | 163 Route 34                      |                |  |  | April, 1998     | 
|        
|        
|        
|        
|72.      |  | Old Bridge, NJ       |  |            | Gaub Road and Route 516           |                |  |  | April, 1998     | 
|        
|        
|        
|        
|73.      |  | Marlboro, NJ         |  |            | 34 Route 9 North                  |                |  |  | April, 1998     | 
|        
|        
|        
|        
|74.      |  | Fort Lee, NJ         |  |            | 1355 15th Street                  |                |  |  | June, 1998      | 

11



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##### 



|                         |  |                    |  |            |                                  |                |  |  |                 | 
|------------------------ |  | ------------------ |  | ---------- | -------------------------------- | -------------- |  |  | --------------- | 
|                         |  |                    |  |            |                                  | Date Opened or
|                         |  |                    |  | Management
|Location                 |  | Address            |  | Assumed   
|                         |  |                    |  |           
|                         |  |                    |  |            |                                  |               
|                        
|                        
|                        
|                        
|75.                      |  | Ramsey, NJ         |  |            | 1100 Route 17 North              |                |  |  | June, 1998      | 
|                        
|                        
|                        
|                        
|76.                      |  | Mahwah, NJ         |  |            | 7 Leighton Place                 |                |  |  | June, 1998      | 
|                        
|                        
|                        
|                        
|77.                      |  | Parsippany, NJ     |  |            | 2651 Route 10                    |                |  |  | August, 1998    | 
|                        
|                        
|                        
|                        
|78.                      |  | Springfield, NJ    |  |            | 215 Morris Avenue                |                |  |  | August, 1998    | 
|                        
|                        
|                        
|                        
|79.                      |  | Colonia, NJ        |  |            | 1250 Route 27                    |                |  |  | August, 1998    | 
|                        
|                        
|                        
|                        
|80.                      |  | Franklin Park, NJ  |  |            | 3911 Route 27                    |                |  |  | August, 1998    | 
|                        
|                        
|                        
|                        
|81.                      |  | Plainsboro, NJ     |  |            | 10 Schalks Crossing              |                |  |  | August, 1998    | 
|                        
|                        
|                        
|                        
|82.                      |  | Somerset, NJ       |  |            | 120 Cedar Grove Lane             |                |  |  | August, 1998    | 
|                        
|                        
|                        
|                        
|83.                      |  | Hoboken, NJ        |  |            | 221 Washington Street            |                |  |  | October, 1998   | 
|                        
|                        
|                        
|                        
|84.                      |  | West Caldwell, NJ  |  |            | 913 Bloomfield Avenue            |                |  |  | April, 1999     | 
|                        
|                        
|                        
|                        
|85.                      |  | Jersey City, NJ    |  |            | 147 Two Harborside Financial     |                |  |  | July, 2002      | 
|                        
|                        
|                        
|                        
|86.                      |  | Newark, NJ         |  |            | 1 Gateway Center                 |                |  |  | October, 2002   | 
|                        
|                        
|                        
|                        
|87.                      |  | Ridgewood, NJ     |  |            | 129 S. Broad Street              |                |  |  | Opening 2003    | 
|                        
|                        
|                        
|                        
|88.                      |  | Westwood, NJ      |  |            | 35 Jefferson Avenue              |                |  |  | Opening 2003    | 
|                        
|                        
|                        
|                        
|Boston Sports Clubs:     |  |                    |  |            |                                  |                |  | 
|                        
|                        
|                        
|                        
|89.                      |  | Boston, MA         |  |            | 561 Boylston Street              |                |  |  | November, 1991  | 
|                        
|                        
|                        
|                        
|90.                      |  | Allston, MA        |  |            | 15 Gorham Street                 |                |  |  | July, 1997      | 
|                        
|                        
|                        
|                        
|91.                      |  | Boston, MA         |  |            | 1 Bulfinch Place                 |                |  |  | August, 1998    | 
|                        
|                        
|                        
|                        
|92.                      |  | Natick, MA         |  |            | Sherwood Plaza, 124 Worcester Rd |                |  |  | September, 1998 | 
|                        
|                        
|                        
|                        
|93.                      |  | Weymouth, MA       |  |            | 553 Washington Street            |                |  |  | May, 1999       | 
|                        
|                        
|                        
|                        
|94.                      |  | Boston, MA         |  |            | 201 Brookline Avenue             |                |  |  | June, 2000      | 
|                        
|                        
|                        
|                        
|95.                      |  | Wellesley, MA      |  |            | 140 Great Plain Avenue           |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|96.                      |  | Boston, MA         |  |            | One Devonshire Place             |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|97.                      |  | Andover, MA        |  |            | 307 Lowell Street                |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|98.                      |  | Lynnfield, MA      |  |            | 425 Walnut Street                |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|99.                      |  | Lexington, MA      |  |            | 475 Bedford Avenue               |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|100.                     |  | Franklin, MA       |  |            | 750 Union Street                 |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|101.                     |  | Framingham, MA     |  |            | 1657 Worcester Street            |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|102.                     |  | Danvers, MA        |  |            | 50 Ferncroft Road                |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|103.                     |  | Cambridge, MA      |  |            | 625 Massachusetts Avenue         |                |  |  | January, 2001   | 
|                        
|                        
|                        
|                        
|104.                     |  | East Cambridge, MA |  |            | 6 Museum Way                     |                |  |  | January, 2001   | 
|                        
|                        
|                        
|                        
|105.                     |  | Boston, MA         |  |            | 361 Newbury Street               |                |  |  | November, 2001  | 
|                        
|                        
|                        
|                        
|106.                     |  | West Newton, MA    |  |            | 1359 Washington Street           |                |  |  | November, 2001  | 
|                        
|                        
|                        
|                        
|107.                     |  | Boston, MA         |  |            | 350 Washington Street            |                |  |  | February, 2002  | 
|                        
|                        
|                        
|                        
|108.                     |  | Waltham, MA        |  |            | 840 Winter Street                |                |  |  | November, 2002  | 
|                        
|                        
|                        
|                        
|Washington Sports Clubs: |  |                    |  |            |                                  |                |  | 
|                        
|                        
|                        
|                        
|109.                     |  | Washington, DC     |  |            | 214 D Street, S.E.               |                |  |  | January, 1980   | 
|                        
|                        
|                        
|                        
|110.                     |  | Washington, DC     |  |            | 1835 Connecticut Avenue, N.W.    |                |  |  | January, 1990   | 
|                        
|                        
|                        
|                        
|111.                     |  | Washington, DC     |  |            | 1990 M Street, N.W.              |                |  |  | February, 1993  | 
|                        
|                        
|                        
|                        
|112.                     |  | Washington, DC     |  |            | 2251 Wisconsin Avenue, N.W.      |                |  |  | May, 1994       | 
|                        
|                        
|                        
|                        
|113.                     |  | Washington, DC     |  |            | 1211 Connecticut Avenue          |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|114.                     |  | Washington, DC     |  |            | 1345 F Street, NW                |                |  |  | August, 2002    | 
|                        
|                        
|                        
|                        
|                        
|115.                     |  | Bethesda, MD       |  |            | 4903 Elm Street                  |                |  |  | May, 1994       | 
|                        
|                        
|                        
|                        
|116.                     |  | North Bethesda, MD |  |            | 10400 Old Georgetown Road        |                |  |  | June, 1998      | 
|                        
|                        
|                        
|                        
|117.                     |  | Germantown, MD     |  |            | 12623 Wisteria Drive             |                |  |  | July, 1998      | 
|                        
|                        
|                        
|                        
|118.                     |  | Chevy Chase, MD    |  |            | 5346 Wisconsin Ave., NW          |                |  |  | February, 2002  | 

12



---



##### 



|                           |  |                      |  |            |                            |                |  |  |                 | 
|-------------------------- |  | -------------------- |  | ---------- | -------------------------- | -------------- |  |  | --------------- | 
|                           |  |                      |  |            |                            | Date Opened or
|                           |  |                      |  | Management
|Location                   |  | Address              |  | Assumed   
|                           |  |                      |  |           
|                           |  |                      |  |            |                            |               
|                          
|                          
|                          
|                          
|119.                       |  | Alexandria, VA       |  |            | 3654 King Street           |                |  |  | June, 1999      | 
|                          
|                          
|                          
|                          
|120.                       |  | Sterling, VA         |  |            | 21800 Town Center Plaza    |                |  |  | October, 1999   | 
|                          
|                          
|                          
|                          
|121.                       |  | Fairfax, VA          |  |            | 11001 Lee Highway          |                |  |  | October, 1999   | 
|                          
|                          
|                          
|                          
|122.                       |  | West Springfield, VA |  |            | 8430 Old Keene Mill        |                |  |  | September, 2000 | 
|                          
|                          
|                          
|                          
|123.                       |  | Clarendon, VA        |  |            | 2700 Clarendon Boulevard   |                |  |  | November, 2001  | 
|                          
|                          
|                          
|                          
|Philadelphia Sports Clubs: |  |                      |  |            |                            |                |  | 
|                          
|                          
|                          
|                          
|124.                       |  | Philadelphia, PA     |  |            | 220 South 5th Street       |                |  |  | January, 1999   | 
|                          
|                          
|                          
|                          
|125.                       |  | Philadelphia, PA     |  |            | 2000 Hamilton Street       |                |  |  | July, 1999      | 
|                          
|                          
|                          
|                          
|126.                       |  | Chalfont, PA         |  |            | One Highpoint Drive        |                |  |  | January, 2000   | 
|                          
|                          
|                          
|                          
|127.                       |  | Cherry Hill, NJ      |  |            | Route 70 and Kings Highway |                |  |  | April, 2000     | 
|                          
|                          
|                          
|                          
|128.                       |  | Philadelphia, PA     |  |            | 1735 Market Street         |                |  |  | October, 2000   | 
|                          
|                          
|                          
|                          
|129.                       |  | Ardmore, PA          |  |            | 34 W. Lancaster Avenue     |                |  |  | March, 2002     | 
|                          
|                          
|                          
|                          
|Swiss Sports Clubs:        |  |                      |  |            |                            |                |  | 
|                          
|                          
|                          
|                          
|130.                       |  | Basel, Switzerland   |  |            | St. Johanns-Vorstadt 41    |                |  |  | August, 1987    | 
|                          
|                          
|                          
|                          
|131.                       |  | Zurich, Switzerland  |  |            | Glarnischstrasse 35        |                |  |  | August, 1987    | 
|                          
|                          
|                          
|                          
|132.                       |  | Basel, Switzerland   |  |            | Basel FC Soccer Stadium    |                |  |  | August, 2001    | 




|  |                    
|- | -------------------
| | Under construction.



| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have also signed four leases for greenfield club development.
    These locations are however part of development projects and are
    subject to various conditions, including delivery of the space
    as specified in the lease.

13



---



##### 



We own the 151 East 86th Street location, which houses a
fitness club and a retail tenant that generated approximately
$560,000 of rental income for us during the twelve months ended
December 31, 2002. Our fitness clubs occupy leased space
pursuant to long-term leases (generally 15 to 25 years,
including options). In the next four years (ending
December 31, 2006), three of our fitness club leases will
expire without any renewal option. In each case, we have, or
will have, on the date of expiration, a new Town Sports club in
close proximity, and intend to transfer members to these clubs
when and if the expiring leases are not extended.

We lease approximately 40,000 square feet of office space in New
York City, and have smaller regional offices in Fairfax, VA,
East Brunswick, NJ, Old Bridge, NJ, Philadelphia, PA, Stamford,
CT and Wakefield, MA, for administrative, and general corporate
purposes. We also lease warehouse and commercial space in Long
Island City, New York, NY and Brooklyn, NY, for storage purposes
and for the operation of a centralized laundry facility for
certain New York fitness clubs.

As of December 31, 2002, 127 of the existing fitness clubs
were wholly owned by us and two were managed and partly owned
(the Partly Owned Clubs). In addition, we provide
management services at two fitness clubs in which we have no
equity interest.

Item 3.  Legal Proceedings

On February 13, 2003, an individual filed suit against us
in the Supreme Court, New York County, alleging that on
January 14, 2003, he sustained an injury at one of our club
locations resulting in serious bodily injury. His complaint
seeks $250 million in damages for personal injuries, in addition
to $250 million of punitive damages. We have in force $51
million of insurance coverage to cover claims of this nature. We
intend to vigorously contest this lawsuit and presently
anticipate that these matters will be covered by insurance.

We are a party to various lawsuits arising in the normal course
of business. We believe that the ultimate outcome of these
matters will not have a material adverse effect on our business,
results of operations, cash flows, or financial condition.

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

Not applicable.

PART II

Item 5.  Market for Registrants
Common Equity and Related Shareholder Matters

Not applicable.

14



---



##### 



Item 6.  Selected Financial Data

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

(In thousands, except club and membership data)


Set forth below is our selected historical consolidated
financial, other operating data and club and membership data as
of the dates and for the periods presented. The selected
historical consolidated statement of operations data for the
years ended December 31, 2000, 2001, and 2002 and the
selected historical consolidated balance sheet data as of
December 31, 2001 and 2002, were derived from the audited
Consolidated Financial Statements, which are included herein.
The selected historical consolidated statement of operations
data for seven months ended December 31, 1998 and the year
ended May 31, 1997 and 1998 and the selected historical
consolidated balance sheet data as of December 31, 1998,
1999 and 2000 were derived from our audited consolidated
financial statements of the Company, which are not included
herein. The selected historical consolidated statement of
operations data for the seven months ended December 31,
1997 and for the year ended December 31, 1998, were derived
from our unaudited consolidated financial statements which are
not included herein. In 1998, we changed our fiscal year end
from May 31 to December 31, which resulted in a
transition period of seven months ended December 31, 1998.
The decision to change the fiscal year was made for more
convenience in both internal and external communications. The
information contained in this table and accompanying notes
should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and
accompanying notes thereto appearing elsewhere herein.

|                                                                                                   |                                  |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |         |  
|-------------------------------------------------------------------------------------------------- | -------------------------------- | ------------------ | ------ | ------------------ | - | ---- | ------ | ------- | - | - | ------ | ------- | - | - | ------ | ------- | -
|                                                                                                   |                                  |                    |        |                    |   |     
|                                                                                                   |                                  |                    |        | Seven Months      
|                                                                                                   |                                  | Year Ended May 31, |        | Ended December 31,
|                                                                                                   |                                  |                    |        |                   
|                                                                                                   |                                  | 1997               |        | 1998               |   | 1997 |        | 1998   
|                                                                                                   |                                  |                    |        |                    |   |      |        |        
|Statement of Operations Data:                                                                      |                                  |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Revenues                                                                                           |                                  | $                  | 56,567 |                    |   | $    | 81,610 |         |   | $ | 42,990 |         |   | $ | 70,641 |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Operating expenses:                                                                                |                                  |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Payroll and related              |                    |        | 29,254             |   |      |        | 34,535  |   |   |        | 18,018  |   |   |        | 28,113  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Club operating                   |                    |        | 18,044             |   |      |        | 25,634  |   |   |        | 13,258  |   |   |        | 23,943  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | General and administrative       |                    |        | 3,774              |   |      |        | 5,773   |   |   |        | 2,742   |   |   |        | 5,765   |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Depreciation and amortization(1) |                    |        | 4,219              |   |      |        | 7,520   |   |   |        | 3,944   |   |   |        | 8,578   |  
|                                                                                                   |                                  |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |        
|Operating income                                                                                   |                                  |                    | 1,276  |                    |   |      | 8,148  |         |   |   | 5,028  |         |   |   | 4,242  |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Interest expense, net of interest income(2)                                                        |                                  |                    | 2,455  |                    |   |      | 7,308  |         |   |   | 4,676  |         |   |   | 5,279  |        
|                                                                                                   |                                  |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |        
|Income (loss) from continuing operations before
    provision (benefit) for corporate income taxes |                                  |                    | (1,179 | )                  |   |      | 840    |         |   |   | 352    |         |   |   | (1,037 | )      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Provision (benefit) for corporate income tax                                                       |                                  |                    | (243   | )                  |   |      | 494    |         |   |   | 264    |         |   |   | (431   | )      
|                                                                                                   |                                  |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |        
|Income (loss) from continuing operations                                                           |                                  |                    | (936   | )                  |   |      | 346    |         |   |   | 88     |         |   |   | (606   | )      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Income from discontinued operations of a closed
    club, net of income taxes(3)                   |                                  |                    |       |                    |   |      | 19     |         |   |   |       |         |   |   | 46     |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Cumulative effect of a change in accounting
    policy, net of income taxes(4)                     |                                  |                    |       |                    |   |      | (88    | )       |   |   | (88    | )       |   |   |       |        
|                                                                                                   |                                  |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |        
|Net income (loss)                                                                                  |                                  |                    | (936   | )                  |   |      | 277    |         |   |   |       |         |   |   | (560   | )      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Accreted dividends on preferred stock                                                              |                                  |                    | (1,286 | )                  |   |      | (2,387 | )       |   |   | (1,485 | )       |   |   | (2,146 | )      
|                                                                                                   |                                  |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |        
|Net loss attributable to common stockholders                                                       |                                  | $                  | (2,222 | )                  |   | $    | (2,110 | )       |   | $ | (1,485 | )       |   | $ | (2,706 | )      
|                                                                                                   |                                  |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |        
|Other Data:                                                                                        |                                  |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Non-cash rental lease expense, net of non-cash
    income                                          |                                  | $                  | 1,620  |                    |   | $    | 2,670  |         |   | $ | 1,354  |         |   | $ | 1,493  |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Cash provided by (used in):                                                                        |                                  |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Operating activities             |                    |        | 12,302             |   |      |        | 15,733  |   |   |        | 7,193   |   |   |        | 7,393   |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Investing activities             |                    |        | (13,571            | ) |      |        | (36,040 | ) |   |        | (12,362 | ) |   |        | (47,352 | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Financing activities             |                    |        | 2,809              |   |      |        | 40,836  |   |   |        | 42,361  |   |   |        | 36,116  |  

15



---



##### 



|                                                                                                   |                                                                                  |                                                                    |        |                    |        |      |         |       |        |   |        |       |        |   |         |       |        |  
|-------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------ | ------------------ | ------ | ---- | ------- | ----- | ------ | - | ------ | ----- | ------ | - | ------- | ----- | ------ | -
|                                                                                                   |                                                                                  |                                                                    |        |                    |        |     
|                                                                                                   |                                                                                  |                                                                    |        | Seven Months      
|                                                                                                   |                                                                                  | Year Ended May 31,                                                 |        | Ended December 31,
|                                                                                                   |                                                                                  |                                                                    |        |                   
|                                                                                                   |                                                                                  | 1997                                                               |        | 1998               |        | 1997 |         | 1998 
|                                                                                                   |                                                                                  |                                                                    |        |                    |        |      |         |      
|Reconciliation of cash flows provided by
    operating activities and net income (loss) to EBITDA: |                                                                                  |                                                                    |        |                    |        |      |         |       |        |   |        |       |        |   |         |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Net cash provided by operating activities                                                          |                                                                                  | $                                                                  | 12,302 |                    |        | $    | 15,733  |       |        | $ | 7,193  |       |        | $ | 7,393   |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                  | Compensation expense incurred in connection with
    stock options |        |                    | (5,933 | )    |         |       | (1,442 | ) |        |       | (397   | ) |         |       | (434   | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                  | Depreciation and amortization                                      |        |                    | (4,219 | )    |         |       | (7,520 | ) |        |       | (3,944 | ) |         |       | (8,578 | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                  | Depreciation and amortization of discontinued
    clubs            |        |                    |       |      |         |       | (216   | ) |        |       |       |   |         |       | (240   | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                  | Amortization of debt issuance costs                                |        |                    | (156   | )    |         |       | (412   | ) |        |       | (245   | ) |         |       | (363   | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                  | Losses from extinguishment of debt                                 |        |                    |       |      |         |       | (1,406 | ) |        |       | (1,377 | ) |         |       |       |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                  | Write-off of organization costs                                    |        |                    |       |      |         |       | (158   | ) |        |       | (158   | ) |         |       |       |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                  | Noncash rental expense, net of noncash rental
    income           |        |                    | (1,620 | )    |         |       | (2,670 | ) |        |       | (1,354 | ) |         |       | (1,493 | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                  | Change in certain working capital components                       |        |                    | (4,389 | )    |         |       | (4,316 | ) |        |       | (1,620 | ) |         |       | (204   | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                  | Increase in deferred tax asset                                     |        |                    | 2,058  |      |         |       | 1,187  |   |        |       | 1,081  |   |         |       | 1,411  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                  | Increase in deferred membership costs                              |        |                    | 847    |      |         |       | 1,403  |   |        |       | 708    |   |         |       | 2,072  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                  | Other                                                              |        |                    | 174    |      |         |       | 94     |   |        |       | 113    |   |         |       | (124   | )
|                                                                                                   |                                                                                  |                                                                    |        |                    |        |      |         |       |        |   |        |       |        |   |         |      
|Net income (loss)                                                                                  |                                                                                  |                                                                    | (936   | )                  |        |      | 277     |       |        |   |       |       |        |   | (560    | )    
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Depreciation and amortization(1)                                                 |                                                                    |        | 4,219              |        |      |         | 7,520 |        |   |        | 3,944 |        |   |         | 8,578 |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Interest expense, net of interest income                                         |                                                                    |        | 2,455              |        |      |         | 7,308 |        |   |        | 4,676 |        |   |         | 5,279 |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Provision (benefit) for corporate income tax                                     |                                                                    |        | (243               | )      |      |         | 494   |        |   |        | 264   |        |   |         | (431  | )     
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Income from discontinued operations of a closed
    club, net of income taxes(3) |                                                                    |        |                   |        |      |         | (19   | )      |   |        |      |        |   |         | (46   | )     
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Cumulative effect of a change in accounting
    policy, net of income taxes(4)   |                                                                    |        |                   |        |      |         | 88    |        |   |        | 88    |        |   |         |      |       
|                                                                                                   |                                                                                  |                                                                    |        |                    |        |      |         |       |        |   |        |       |        |   |         |      
|EBITDA(5)                                                                                          |                                                                                  | $                                                                  | 5,495  |                    |        | $    | 15,668  |       |        | $ | 8,972  |       |        | $ | 12,820  |      
|                                                                                                   |                                                                                  |                                                                    |        |                    |        |      |         |       |        |   |        |       |        |   |         |      
|                                                                                                   | EBITDA Margin(5)                                                                 |                                                                    |        | 9.7                | %      |      |         | 19.2  | %      |   |        | 20.9  | %      |   |         | 18.1  | %     
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Club and Membership Data:                                                                          |                                                                                  |                                                                    |        |                    |        |      |         |       |        |   |        |       |        |   |         |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|New clubs opened(6)                                                                                |                                                                                  |                                                                    | 3      |                    |        |      | 1       |       |        |   |       |       |        |   | 4       |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Clubs acquired(6)                                                                                  |                                                                                  |                                                                    | 5      |                    |        |      | 13      |       |        |   | 5      |       |        |   | 16      |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Wholly owned clubs operated at end of period(6)                                                    |                                                                                  |                                                                    | 28     |                    |        |      | 45      |       |        |   | 35     |       |        |   | 65      |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Total clubs operated at end of period(7)                                                           |                                                                                  |                                                                    | 35     |                    |        |      | 49      |       |        |   | 40     |       |        |   | 69      |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Members at end of period(8)                                                                        |                                                                                  |                                                                    | 78,600 |                    |        |      | 125,100 |       |        |   | 99,900 |       |        |   | 178,700 |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Mature club revenue increase(9)                                                                    |                                                                                  |                                                                    | 9.9    | %                  |        |      | 12.6    | %     |        |   | 12.6   | %     |        |   | 16.8    | %    
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Revenue per weighted average club (in
    thousands)(10)                                           |                                                                                  | $                                                                  | 2,267  |                    |        | $    | 2,287   |       |        | $ | 1,289  |       |        | $ | 1,184   |      

16



---



##### 



|                                                                                                                                            |                                  |                                                                    |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | ------------------------------------------------------------------ | ------- | ------- | ------- | ---- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                                                                                                            |                                  |                                                                   
|                                                                                                                                            |                                  | Year Ended                                                        
|                                                                                                                                            |                                  | December 31,                                                      
|                                                                                                                                            |                                  |                                                                   
|                                                                                                                                            |                                  | 1998                                                               |         | 1999    |         | 2000 |         | 2001    |         | 2002
|                                                                                                                                            |                                  |                                                                    |         |         |         |      |         |         |         |     
|Statement of Operations Data:                                                                                                               |                                  |                                                                    |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|Revenues                                                                                                                                    |                                  | $                                                                  | 109,261 |         |         | $    | 158,184 |         |         | $    | 223,828 |         |         | $ | 281,633 |         |         |   | 319,427 |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|Operating expenses:                                                                                                                         |                                  |                                                                    |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            | Payroll and related              |                                                                    |         | 44,630  |         |      |         | 63,838  |         |      |         | 90,801  |         |   |         | 112,766 |         |   |         | 129,105 |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            | Club operating                   |                                                                    |         | 36,319  |         |      |         | 52,048  |         |      |         | 68,806  |         |   |         | 88,941  |         |   |         | 99,113  |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            | General and administrative       |                                                                    |         | 8,796   |         |      |         | 10,797  |         |      |         | 14,626  |         |   |         | 18,785  |         |   |         | 21,368  |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            | Depreciation and amortization(1) |                                                                    |         | 12,154  |         |      |         | 20,513  |         |      |         | 26,248  |         |   |         | 32,185  |         |   |         | 31,748  |        
|                                                                                                                                            |                                  |                                                                    |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Operating income                                                                                                                            |                                  |                                                                    | 7,362   |         |         |      | 10,988  |         |         |      | 23,347  |         |         |   | 28,956  |         |         |   | 38,093  |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|Interest expense, net of interest income                                                                                                    |                                  |                                                                    | 7,911   |         |         |      | 10,243  |         |         |      | 13,120  |         |         |   | 14,527  |         |         |   | 16,421  |        
|                                                                                                                                            |                                  |                                                                    |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Income (loss) from continuing operations before
    provision (benefit) for corporate income tax                                            |                                  |                                                                    | (549    | )       |         |      | 745     |         |         |      | 10,227  |         |         |   | 14,429  |         |         |   | 21,672  |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|Provision (benefit) for corporate income tax                                                                                                |                                  |                                                                    | (201    | )       |         |      | 622     |         |         |      | 5,031   |         |         |   | 6,853   |         |         |   | 9,709   |        
|                                                                                                                                            |                                  |                                                                    |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Income (loss) from continuing operations                                                                                                    |                                  |                                                                    | (348    | )       |         |      | 123     |         |         |      | 5,196   |         |         |   | 7,576   |         |         |   | 11,963  |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|Income (loss) from discontinued operations of
    closed clubs(3) (including loss on club closure of $996 in
    2002), net of income taxes |                                  |                                                                    | 65      |         |         |      | (74     | )       |         |      | (365    | )       |         |   | (530    | )       |         |   | (767    | )      
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|Cumulative effect of a change in accounting
    principle, net of income tax
    benefit of $612(4)                                         |                                  |                                                                    |        |         |         |      |        |         |         |      |        |         |         |   |        |         |         |   | (689    | )      
|                                                                                                                                            |                                  |                                                                    |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Net income (loss)                                                                                                                           |                                  |                                                                    | (283    | )       |         |      | 49      |         |         |      | 4,831   |         |         |   | 7,046   |         |         |   | 10,507  |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|Accreted dividends on preferred stock                                                                                                       |                                  |                                                                    | (3,048  | )       |         |      | (7,880  | )       |         |      | (9,016  | )       |         |   | (10,201 | )       |         |   | (11,543 | )      
|                                                                                                                                            |                                  |                                                                    |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Net loss attributable to common stockholders                                                                                                |                                  | $                                                                  | (3,331  | )       |         | $    | (7,831  | )       |         | $    | (4,185  | )       |         | $ | (3,155  | )       |         | $ | (1,036  | )      
|                                                                                                                                            |                                  |                                                                    |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Other Data:                                                                                                                                 |                                  |                                                                    |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|Non-cash rental lease expense, net of non-cash
    income                                                                                   |                                  | $                                                                  | 2,809   |         |         | $    | 3,061   |         |         | $    | 2,976   |         |         | $ | 4,224   |         |         | $ | 1,670   |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|Cash provided by (used in):                                                                                                                 |                                  |                                                                    |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            | Operating activities             |                                                                    |         | 15,933  |         |      |         | 29,496  |         |      |         | 40,573  |         |   |         | 44,348  |         |   |         | 50,805  |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            | Investing activities             |                                                                    |         | (71,030 | )       |      |         | (55,078 | )       |      |         | (70,048 | )       |   |         | (58,358 | )       |   |         | (40,182 | )      
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            | Financing activities             |                                                                    | $       | 34,591  |         |      | $       | 33,553  |         |      | $       | 5,715   |         |   | $       | 16,103  |         |   | $       | (10,530 | )      
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|Reconciliation of cash flows provided by
    operating activities and net income (loss) to EBITDA:                                          |                                  |                                                                    |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|Net cash provided by operating activities                                                                                                   |                                  | $                                                                  | 15,933  |         |         | $    | 29,496  |         |         | $    | 40,573  |         |         | $ | 44,348  |         |         | $ | 50,805  |        
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            |                                  | Compensation expense incurred in connection with
    stock options |         |         | (1,479  | )    |         |         | (2,042  | )    |         |         | (1,836  | ) |         |         | (1,149  | ) |         |         | (1,207  | )
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            |                                  | Depreciation and amortization                                      |         |         | (12,154 | )    |         |         | (20,513 | )    |         |         | (26,248 | ) |         |         | (32,185 | ) |         |         | (31,748 | )
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            |                                  | Depreciation and amortization of discontinued
    clubs            |         |         | (456    | )    |         |         | (422    | )    |         |         | (394    | ) |         |         | (482    | ) |         |         | (277    | )
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            |                                  | Goodwill impairment write-off                                      |         |         |        |      |         |         |        |      |         |         |        |   |         |         |        |   |         |         | (1,301  | )
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            |                                  | Club closure costs                                                 |         |         |        |      |         |         |        |      |         |         |        |   |         |         |        |   |         |         | (996    | )
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            |                                  | Amortization of debt issuance costs                                |         |         | (530    | )    |         |         | (1,147  | )    |         |         | (1,531  | ) |         |         | (1,882  | ) |         |         | (1,928  | )
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            |                                  | Noncash rental expense, net of noncash rental
    income           |         |         | (2,809  | )    |         |         | (3,061  | )    |         |         | (2,976  | ) |         |         | (4,224  | ) |         |         | (1,670  | )
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            |                                  | Net change in certain working capital components                   |         |         | (2,900  | )    |         |         | (9,596  | )    |         |         | (9,392  | ) |         |         | (3,475  | ) |         |         | (2,413  | )
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            |                                  | Increase in deferred tax asset                                     |         |         | 1,517   |      |         |         | 3,259   |      |         |         | 3,326   |   |         |         | 4,526   |   |         |         | 1,162   |  
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            |                                  | Increase (decrease) in deferred membership costs                   |         |         | 2,767   |      |         |         | 3,836   |      |         |         | 2,745   |   |         |         | 1,162   |   |         |         | (340    | )
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                           
|                                                                                                                                            |                                  | Other                                                              |         |         | (172    | )    |         |         | 239     |      |         |         | 564     |   |         |         | 407     |   |         |         | 420     |  
|                                                                                                                                            |                                  |                                                                    |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Net income (loss)                                                                                                                           |                                  |                                                                    | (283    | )       |         |      | 49      |         |         |      | 4,831   |         |         |   | 7,046   |         |         |   | 10,507  |        

17



---



##### 



|                                                         |                                                                                        |              |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |        |  
|-------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------------ | ------- | ------ | - | ---- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | - | - | ------- | ------ | -
|                                                         |                                                                                        |             
|                                                         |                                                                                        | Year Ended  
|                                                         |                                                                                        | December 31,
|                                                         |                                                                                        |             
|                                                         |                                                                                        | 1998         |         | 1999   |   | 2000 |         | 2001   |   | 2002
|                                                         |                                                                                        |              |         |        |   |      |         |        |   |     
|                                                         | Depreciation and amortization(1)                                                       |              |         | 12,154 |   |      |         | 20,513 |   |      |         | 26,248 |   |   |         | 32,185 |   |   |         | 31,748 |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Interest expense, net of interest income                                               |              |         | 7,911  |   |      |         | 10,243 |   |      |         | 13,120 |   |   |         | 14,527 |   |   |         | 16,421 |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Provision (benefit) for corporate income tax                                           |              |         | (201   | ) |      |         | 622    |   |      |         | 5,031  |   |   |         | 6,853  |   |   |         | 9,709  |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | (Income) loss from discontinued operations or
    closed clubs, net of income taxes(3) |              |         | (65    | ) |      |         | 74     |   |      |         | 365    |   |   |         | 530    |   |   |         | 767    |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Cumulative effect of a change in accounting
    policy, net of income taxes(4)         |              |         |       |   |      |         |       |   |      |         |       |   |   |         |       |   |   |         | 689    |  
|                                                         |                                                                                        |              |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|EBITDA(5)                                                |                                                                                        | $            | 19,516  |        |   | $    | 31,501  |        |   | $    | 49,595  |        |   | $ | 61,141  |        |   | $ | 69,841  |       
|                                                         |                                                                                        |              |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|                                                         | EBITDA Margin(5)                                                                       |              |         | 17.9   | % |      |         | 19.9   | % |      |         | 22.2   | % |   |         | 21.7   | % |   |         | 21.9   | %
|                                                        
|                                                        
|                                                        
|                                                        
|Club and Membership Data:                                |                                                                                        |              |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|                                                        
|                                                        
|                                                        
|                                                        
|New clubs opened(6)                                      |                                                                                        |              | 5       |        |   |      | 14      |        |   |      | 9       |        |   |   | 12      |        |   |   | 8       |       
|                                                        
|                                                        
|                                                        
|                                                        
|Clubs acquired(6)                                        |                                                                                        |              | 25      |        |   |      | 4       |        |   |      | 11      |        |   |   | 2       |        |   |   | 4       |       
|                                                        
|                                                        
|                                                        
|                                                        
|Closed or sold clubs                                     |                                                                                        |              |        |        |   |      |        |        |   |      |        |        |   |   |        |        |   |   | (2      | )     
|                                                        
|                                                        
|                                                        
|                                                        
|Wholly owned clubs operated at
    end of period(6)      |                                                                                        |              | 65      |        |   |      | 82      |        |   |      | 103     |        |   |   | 117     |        |   |   | 127     |       
|                                                        
|                                                        
|                                                        
|                                                        
|Total clubs operated at end of period(7)                 |                                                                                        |              | 69      |        |   |      | 86      |        |   |      | 105     |        |   |   | 119     |        |   |   | 129     |       
|                                                        
|                                                        
|                                                        
|                                                        
|Members at end of period(8)                              |                                                                                        |              | 178,700 |        |   |      | 203,100 |        |   |      | 278,000 |        |   |   | 317,000 |        |   |   | 342,000 |       
|                                                        
|                                                        
|                                                        
|                                                        
|Mature club revenue increase(9)                          |                                                                                        |              | 14.2    | %      |   |      | 16.0    | %      |   |      | 18.6    | %      |   |   | 12.3    | %      |   |   | 4.1     | %     
|                                                        
|                                                        
|                                                        
|                                                        
|Revenue per weighted average club
    (in thousands)(10) |                                                                                        | $            | 2,156   |        |   | $    | 2,130   |        |   | $    | 2,428   |        |   | $ | 2,619   |        |   | $ | 2,606   |       

|                                               |  |                    |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                               |  |                   
|                                               |  | As of December 31,
|                                               |  |                   
|                                               |  | 1998               |         | 1999 |  | 2000 |         | 2001 |  | 2002
|                                               |  |                    |         |      |  |      |         |      |  |     
|Balance Sheet Data:                            |  |                    |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                                              
|                                              
|                                              
|                                              
|Working capital (deficit)(11)                  |  | $                  | 478     |      |  | $    | (1,015  | )    |  | $    | (38,414 | ) |  | $ | (42,565 | ) |  | $ | (43,192 | )
|                                              
|                                              
|                                              
|                                              
|Total assets                                   |  |                    | 157,416 |      |  |      | 215,678 |      |  |      | 256,085 |   |  |   | 296,005 |   |  |   | 314,250 |  
|                                              
|                                              
|                                              
|                                              
|Long-term debt, including current installments |  |                    | 89,524  |      |  |      | 132,202 |      |  |      | 144,498 |   |  |   | 163,979 |   |  |   | 160,943 |  
|                                              
|                                              
|                                              
|                                              
|Redeemable senior preferred stock              |  |                    | 36,735  |      |  |      | 42,066  |      |  |      | 48,029  |   |  |   | 54,687  |   |  |   | 62,125  |  
|                                              
|                                              
|                                              
|                                              
|Redeemable Series A preferred stock(12)        |  |                    | 20,351  |      |  |      | 23,216  |      |  |      | 26,580  |   |  |   | 30,432  |   |  |   | 34,841  |  
|                                              
|                                              
|                                              
|                                              
|Total stockholders deficit                    |  | $                  | (22,684 | )    |  | $    | (28,813 | )    |  | $    | (30,491 | ) |  | $ | (32,797 | ) |  | $ | (31,740 | )




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Effective January 1, 2002 we implemented Statement of
    Financial Accounting Standards (SFAS) No. 142
    No. 142 (SFAS 142), Goodwill and Other Intangible
    Assets. In connection with this implementation we no longer
    amortize goodwill, but rather test it for impairment when
    circumstances indicate it is necessary, and at a minimum
    annually. A reconciliation of reported net income (loss) to net
    income (loss) adjusted for the impact of SFAS 142 is as
    follows for the presented periods:

|                              |  |            |      |              |  |                         |      |      |  |      |      |      |  |      |       |      |  |   |       |   |  |   |        |   |  |   |        |   |  |   |        |  
|----------------------------- |  | ---------- | ---- | ------------ |  | ----------------------- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ----- | ---- |  | - | ----- | - |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                              |  |            |      |              |  |                         |      |      |  |      |      |      |  |     
|                              |  |            |      | Seven Months |  |                         |      |      |  |      |      |     
|                              |  | Year ended |      | Ended        |  |                        
|                              |  | May 31,    |      | December 31, |  | Year ended December 31,
|                              |  |            |      |              |  |                        
|                              |  | 1997       |      | 1998         |  | 1997                    |      | 1998 |  | 1998 |      | 1999 |  | 2000 |       | 2001
|                              |  |            |      |              |  |                         |      |      |  |      |      |      |  |      |       |     
|Net income (loss) as reported |  | $          | (936 | )            |  | $                       | 277  |      |  | $    |     |      |  | $    | (560  | )    |  | $ | (283  | ) |  | $ | 49     |   |  | $ | 4,831  |   |  | $ | 7,046  |  
|                             
|                             
|                             
|                             
|Goodwill amortization         |  |            | 286  |              |  |                         | 843  |      |  |      | 294  |      |  |      | 1,512 |      |  |   | 2,061 |   |  |   | 2,845  |   |  |   | 3,545  |   |  |   | 4,436  |  
|                             
|                             
|                             
|                             
|Deferred tax benefit          |  |            | (120 | )            |  |                         | (354 | )    |  |      | (123 | )    |  |      | (635  | )    |  |   | (866  | ) |  |   | (1,195 | ) |  |   | (1,064 | ) |  |   | (1,344 | )
|                              |  |            |      |              |  |                         |      |      |  |      |      |      |  |      |       |      |  |   |       |   |  |   |        |   |  |   |        |   |  |   |        |  
|Net income (loss) as adjusted |  | $          | (770 | )            |  | $                       | 766  |      |  | $    | 171  |      |  | $    | 317   |      |  | $ | 912   |   |  | $ | 1,699  |   |  | $ | 7,312  |   |  | $ | 10,138 |  
|                              |  |            |      |              |  |                         |      |      |  |      |      |      |  |      |       |      |  |   |       |   |  |   |        |   |  |   |        |   |  |   |        |  



|    |                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Interest expense for the year ended May 31, 1998 and the
    seven months ended December 31, 1997 includes the write-off
    of $1,406 of previously capitalized fees and expenses related to
    the repayment of certain indebtedness.

18



---



##### 





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | In the fourth quarter of 2002, we closed two remote
    underperforming, wholly-owned clubs. In connection with the
    closure of one of the clubs, we recorded club closure costs of
    $996 related to the write-off fixed assets. We have accounted
    for these two clubs as discontinued operations and, accordingly,
    the results of their operations have been classified as
    discontinued in the Consolidated Statement of Operations and
    prior periods have been reclassified in accordance with
    Statement of Financial Accounting Standards (SFAS)
    No. 144, Accounting for the Impairment of Long-Lived
    Assets and Long-Lived Assets To Be Disposed Of.

Income (loss) from operations of these discontinued clubs was as
follows for the periods presented:

|                                                                                                          |  |         |    |              |  |                         |    |      |  |      |     |      |  |      |      |   |  |   |      |   |  |   |      |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------- |  | ------- | -- | ------------ |  | ----------------------- | -- | ---- |  | ---- | --- | ---- |  | ---- | ---- | - |  | - | ---- | - |  | - | ---- | - |  | - | ------ | -
|                                                                                                          |  |         |    | Seven        |  |                         |    |      |  |      |     |      |  |     
|                                                                                                          |  | Year    |    | Months       |  |                         |    |      |  |      |     |      |  |     
|                                                                                                          |  | Ended   |    | Ended        |  |                        
|                                                                                                          |  | May 31, |    | December 31, |  | Year Ended December 31,
|                                                                                                          |  |         |    |              |  |                        
|                                                                                                          |  | 1998    |    | 1998         |  | 1998                    |    | 1999 |  | 2000 |     | 2001 |  | 2002
|                                                                                                          |  |         |    |              |  |                         |    |      |  |      |     |      |  |     
|Income (loss) from operations of discontinued
    clubs, (including loss of club closure of $996 in 2002) |  | $       | 32 |              |  | $                       | 78 |      |  | $    | 110 |      |  | $    | (125 | ) |  | $ | (597 | ) |  | $ | (894 | ) |  | $ | (1,318 | )
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Provision (benefit) for corporate income tax                                                              |  |         | 13 |              |  |                         | 32 |      |  |      | 45  |      |  |      | (51  | ) |  |   | (232 | ) |  |   | (364 | ) |  |   | (551   | )
|                                                                                                          |  |         |    |              |  |                         |    |      |  |      |     |      |  |      |      |   |  |   |      |   |  |   |      |   |  |   |        |  
|Income (loss) from discontinued operations                                                                |  | $       | 19 |              |  | $                       | 46 |      |  | $    | 65  |      |  | $    | (74  | ) |  | $ | (365 | ) |  | $ | (530 | ) |  | $ | (767   | )
|                                                                                                          |  |         |    |              |  |                         |    |      |  |      |     |      |  |      |      |   |  |   |      |   |  |   |      |   |  |   |        |  



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (4) | Prior to fiscal 1998, we capitalized direct costs incurred to
    obtain leases for new clubs to be constructed. During the
    quarter ended May 31, 1998, we adopted the provisions of
    Statement of Position 98-5 Reporting on the Costs of Start-up
    Activities (SOP 98-5) which requires that these
    costs be expensed as incurred. In connection with the adoption
    of SOP 98-5, effective June 1, 1997, we recorded a pre-tax
    charge of $88 net of $70 in taxes, as the cumulative effect of
    this accounting change.

Effective January 1, 2002 we implemented SFAS 142. In
connection with the SFAS 142 transitional impairment test
we recorded a $1.3 million write-off of goodwill. A
deferred tax benefit of $612 was recorded as a result of this
goodwill write-off, resulting in a net cumulative effect of
change in accounting principle of $689 in 2002. The write-off of
goodwill related to four, remote underperforming clubs. The
impairment test was performed with discounted estimated future
cash flows as the criteria for determining fair market value.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | EBITDA is defined as earnings before interest, taxes,
    depreciation, amortization, income (loss) from operations of
    discontinued clubs, and cumulative effect of changes in
    accounting policy. EBITDA is presented because we believe it
    provides useful information regarding our liquidity. Our Senior
    Note holders and our principle bank often measure our liquidity
    with EBITDA. EBITDA should not be considered in isolation or as
    a substitute for net income, cash flows, or other consolidated
    income (loss) or cash flow data prepared in accordance with
    Generally Accepted Accounting Principles in the United States of
    America (GAAP). EBITDA Margin is defined as EBITDA
    as a percentage of revenues. Additionally, investors should be
    aware that EBITDA may not be comparable to similarly titled
    measures presented by other companies.
|   
|(6) | During fiscal 1997, we opened or acquired six clubs and
    relocated one club upon the expiration of its lease. During
    fiscal 1998, we opened or acquired 14 clubs and acquired three
    formerly partly owned clubs. During calendar 1998, we acquired
    one formerly partly owned club. During 1999, we relocated one
    club. During 2000, we acquired two formerly partly owned clubs
    and relocated one club upon the expiration of its lease.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(7) | Includes wholly-owned or partly owned and managed clubs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(8) | Represents members at wholly-owned or partly owned clubs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(9) | We define mature clubs as those clubs operated by us for more
    than 24 months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

19



---



##### 





|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Revenue per weighted average club is calculated as club revenue
    divided by the product of the total numbers of clubs and their
    weighted average months in operation as a percentage of the
    total year or the seven months ended, as applicable.                                                                                                                                                                                                                                                                                                                                                                                    
|    
|(11) | Working capital (deficit) is calculated as current assets less
    current liabilities. We normally operate with a working capital
    deficit because we receive dues or fee revenue either
    (i) during the month services are rendered, or
    (ii) when paid-in-full in advance. As a result, we have no
    material accounts receivable, and record a deferred revenue
    liability for membership or ancillary services billed in
    advance. We also record deferred revenue liability, because
    initiation fees are received at enrollment and are deferred and
    recognized over the estimated average term of a membership.



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(12) | We have 153,637 shares of Series A Redeemable
    Preferred Stock (Series A) outstanding at
    December 31, 2002. We have reclassified our 2001 financial
    statements to account for a redemption feature included in the
    Series A stock, in accordance with the guidance in EITF
    Topic No. D-98: Classification and Measurement of
    Redeemable Securities (EITF Topic
    No. D-98). EITF Topic No. D-98 provided
    additional guidance on the appropriate classification of
    redeemable preferred stock upon the occurrence of an event that
    is not solely within the control of an issuer. EITF Topic
    No. D-98 requires retroactive application in the first
    fiscal quarter ending after December 15, 2001 by
    reclassifying the financial statements of prior periods. The
    carrying value of the Series A stock, which was previously
    presented as a component of stockholders deficit, has been
    reclassified as redeemable preferred stock outside of
    stockholders deficit. The reclassification of the 2001
    financial statements for the Series A stock had no effect
    on our net income, net loss attributable to common stockholders
    or total assets. The following sets forth the overall effect of
    the reclassification on our stockholders deficit at
    December 31, 2001:

|                                                     |  |   |         |  
|---------------------------------------------------- |  | - | ------- | -
|                                                    
|                                                    
|                                                    
|                                                    
|Stockholders deficit prior to
    reclassification  |  | $ | (2,365  | )
|                                                    
|                                                    
|                                                    
|                                                    
|Reclassification of Series A stock                   |  | $ | (30,432 | )
|                                                    
|                                                    
|                                                    
|                                                    
|Stockholders deficit after the
    reclassification |  | $ | (32,797 | )



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | The balance sheet data for all periods presented have been
    adjusted to reflect the above reclassification.

20



---



##### 



Item 7.  Managements Discussion and
Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements in this Annual Report on our Form 10-K
for the year ended December 31, 2002 are forward-looking
statements, including, without limitation, statements regarding
future financial results and performance, potential sales
revenue, legal contingencies and tax benefits. These statements
are subject to various risks and uncertainties, many of which
are outside of our control, including the level of market demand
for our services, competitive pressures, the ability to achieve
reductions in operating costs and to continue to integrate
acquisitions, environmental matters, the application of Federal
and state tax laws and regulations, and other specific factors
discussed herein and in other Securities and Exchange Commission
filings by us. The information contained herein represents
managements best judgement as of the date hereof based on
or as to information currently available; however, we do not
intend to update this except as required by law, information to
reflect development or information obtained after the date
hereof and disclaim any legal obligation to the contrary.

Change of Financial Reporting Period

In 1998, we changed our fiscal year end from May 31 to
December 31, which resulted in a transition period of seven
months ended December 31, 1998. The decision to change the
fiscal year was made for more convenience in both internal and
external communications.

Historical Club Growth

|                                                                  |  |            |    |              |  |                         |    |      |  |      |    |      |  |      |    |   |  |  |     |   |  |  |     |  |  |  |     |  
|----------------------------------------------------------------- |  | ---------- | -- | ------------ |  | ----------------------- | -- | ---- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | --- | - |  |  | --- |  |  |  | --- | -
|                                                                  |  |            |    | Seven        |  |                         |    |      |  |      |    |     
|                                                                  |  | Year Ended |    | Months       |  |                        
|                                                                  |  | May 31,    |    | Ended        |  | Year Ended December 31,
|                                                                  |  |            |    | December 31, |  |                        
|                                                                  |  | 1997       |    | 1998         |  | 1998                    |    | 1999 |  | 2000 |    | 2001 |  | 2002
|                                                                  |  |            |    |              |  |                         |    |      |  |      |    |      |  |     
|Clubs at beginning of period                                      |  |            | 28 |              |  |                         | 35 |      |  |      | 49 |      |  |      | 69 |   |  |  | 86  |   |  |  | 105 |  |  |  | 119 |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Greenfield clubs(a)                                               |  |            | 3  |              |  |                         | 1  |      |  |      | 4  |      |  |      | 14 |   |  |  | 9   |   |  |  | 12  |  |  |  | 8   |  
|Acquired clubs                                                    |  |            | 5  |              |  |                         | 13 |      |  |      | 16 |      |  |      | 4  |   |  |  | 11  |   |  |  | 2   |  |  |  | 4   |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Sold, relocated or closed clubs                                   |  |            | (1 | )            |  |                         |   |      |  |      |   |      |  |      | (1 | ) |  |  | (1  | ) |  |  |    |  |  |  | (2  | )
|                                                                  |  |            |    |              |  |                         |    |      |  |      |    |      |  |      |    |   |  |  |     |   |  |  |     |  |  |  |     |  
|Clubs at end of period(b)                                         |  |            | 35 |              |  |                         | 49 |      |  |      | 69 |      |  |      | 86 |   |  |  | 105 |   |  |  | 119 |  |  |  | 129 |  
|                                                                  |  |            |    |              |  |                         |    |      |  |      |    |      |  |      |    |   |  |  |     |   |  |  |     |  |  |  |     |  
|Number of partly owned clubs included at the end
    of period(c) |  |            | 7  |              |  |                         | 4  |      |  |      | 4  |      |  |      | 4  |   |  |  | 2   |   |  |  | 2   |  |  |  | 2   |  



---



|    |                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | A Greenfield club is a new location constructed by
    us.                                                                                                                            
|   
|(b) | We include in the club count wholly owned and partly owned
    clubs. In addition, as of December 31, 2002 we managed two
    additional clubs in which we did not have an equity stake.
|   
|(c) | In March 2000, two clubs previously managed by us were
    purchased. Including these two clubs, the total number of clubs
    opened or acquired in 2000 totals 22.                    

Introduction

We are one of the two leading owners and operators of fitness
clubs in the Northeast and Mid-Atlantic regions of the United
States. As of December 31, 2002, we operated 129 clubs
that collectively served approximately 342,000 members. We
develop clusters of clubs to serve densely populated major
metropolitan regions in which a high percentage of the
population commutes to work. We service such populations by
clustering clubs near the highest concentrations of our target
members areas of both employment and residence. Our target
member is college-educated, typically between the ages of 21 and
50 and has an annual income of between $50,000 and $150,000.

21



---



##### 



Our goal is to develop the premier health club network in each
of the major metropolitan regions we enter. We believe that
clustering clubs allows us to achieve strategic operating
advantages that enhance our ability to achieve this goal. In
entering new regions, we develop these clusters by initially
opening or acquiring clubs located in the more central urban
markets of the region and then branching out from these urban
centers to suburbs and ancillary communities. Capitalizing on
this clustering of clubs, as of December 31, 2002,
approximately 47% of our members participated in a membership
plan that allows unlimited access to all of our clubs for a
higher membership fee.

We have executed this strategy successfully in the New York
region through the network of clubs we operate under our NYSC
brand name. We are the largest fitness club operator in
Manhattan with 37 locations and operate a total of
85 clubs under the NYSC name within a defined radius of New
York City. We operate 20 clubs in the Boston region,
15 clubs in the Washington D.C. region under our BSC
and WSC brand names respectively and have begun establishing a
similar cluster in the Philadelphia region with six clubs under
is PSC brand name. In addition we operate three clubs in
Switzerland. We employ localized brand names for our clubs to
create an image and atmosphere consistent with the local
community, and to foster the recognition as a local network of
quality fitness clubs rather than a national chain.

Our operating and selling expenses are comprised of both fixed
and variable costs. The fixed costs include salary expense,
rent, utilities, janitorial expenses and depreciation. Variable
costs are primarily related to sales commissions, advertising
and supplies. As clubs mature and increase their membership
base, fixed costs are typically spread over an increasing
revenue base and operating margins tend to improve.

During the last several years, we have increased revenues,
operating income, net income, cash flows provided by operating
activities, and EBITDA by expanding our club base in New York,
Boston, Washington, DC, and Philadelphia. As a result of
expanding our club base and the relatively fixed nature of our
operating costs, our operating income has increased from
$7.4 million for the year ended December 31, 1998 to
$38.1 million for the year ended December 31, 2002.
Net income (loss) improved from a loss of $283,000 in 1998 to
net income of $10.5 million for the year ended December 31,
2002. Cash flows provided by operating activities increased from
$15.9 million in 1998 to $50.8 million for the year ended
December 31, 2002. Similarly, EBITDA has increased from
$19.5 million in 1998 to $69.8 million for the year
ended December 31, 2002, and EBITDA as a percentage of
revenues has increased from 17.9% to 21.9% over the same period.
We expect growth in revenues and EBITDA to continue as the
46 clubs opened or acquired since the beginning of 2000
continue to mature. Based on our historical experience, a new
club tends to experience significant increase in revenues during
its first three years of operation as it reaches maturity.
Because there is relatively little incremental cost associated
with such increasing revenue, there is a greater proportionate
increase in profitability. We believe that the revenues, EBITDA
and operating income of these 46 clubs will increase as
they mature. As a result of our expansion, however, EBITDA and
operating income margins may be negatively impacted in the near
term, as further new clubs are added.

Mature Club Revenue

We define mature clubs as those clubs that were operated by us
for the entire period of the period presented and that same
entire period of the preceeding year. Under this definition,
mature clubs for periods shown are those clubs that were
operated for more than 24 months. Our mature club revenue
increased 16.0%, 18.6%, 12.3%, and 4.1%, for the years ended
December 31, 1999, 2000, 2001, and 2002, respectively. We
believe the decline in mature club revenue growth has been drive
primarily by general economic softness, particularly in the New
York metropolitan region, which has had an industry-wide effect.
In addition, we believe that the decline in mature club revenue
growth is also attributable to the increasing age of our mature
clubs.

22



---



##### 



Results of Operations

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

|                                                                                     |  |              |       |      |  |      |       |    |  |  |       |   
|------------------------------------------------------------------------------------ |  | ------------ | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                                                     |  |             
|                                                                                     |  | Year Ended  
|                                                                                     |  | December 31,
|                                                                                     |  |             
|                                                                                     |  | 2000         |       | 2001 |  | 2002
|                                                                                     |  |              |       |      |  |     
|Revenue                                                                              |  |              | 100.0 | %    |  |      | 100.0 | %  |  |  | 100.0 | % 
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Operating Expenses:                                                                  |  |              |       |      |  |      |       |    |  |  |       |   
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Payroll and related                                                                  |  |              | 40.6  |      |  |      | 40.0  |    |  |  | 40.4  |   
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Club operating                                                                       |  |              | 30.7  |      |  |      | 31.6  |    |  |  | 31.1  |   
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|General and administrative                                                           |  |              | 6.6   |      |  |      | 6.7   |    |  |  | 6.7   |   
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Depreciation and amortization                                                        |  |              | 11.7  |      |  |      | 11.4  |    |  |  | 9.9   |   
|                                                                                     |  |              |       |      |  |      |       |    |  |  |       |   
|Operating income                                                                     |  |              | 10.4  |      |  |      | 10.3  |    |  |  | 11.9  |   
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Interest expense                                                                     |  |              | 6.4   |      |  |      | 5.3   |    |  |  | 5.1   |   
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Interest income                                                                      |  |              | (0.6  | )    |  |      | (0.1  | )  |  |  |      |   
|                                                                                     |  |              |       |      |  |      |       |    |  |  |       |   
|Income from continuing operations before
    provision for corporate income taxes    |  |              | 4.6   |      |  |      | 5.1   |    |  |  | 6.8   |   
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Provision for corporate income taxes                                                 |  |              | 2.2   |      |  |      | 2.4   |    |  |  | 3.1   |   
|                                                                                     |  |              |       |      |  |      |       |    |  |  |       |   
|Income from continuing operations                                                    |  |              | 2.4   |      |  |      | 2.7   |    |  |  | 3.7   |   
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Loss from discontinued operations of closed
    clubs, net of income tax             |  |              | (0.2  | )    |  |      | (0.2  | )  |  |  | (0.2  | ) 
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Cumulative effect of a change in accounting
    principle, net of income tax benefit |  |              |      |      |  |      |      |    |  |  | (0.2  | ) 
|                                                                                     |  |              |       |      |  |      |       |    |  |  |       |   
|Net Income                                                                           |  |              | 2.2   |      |  |      | 2.5   |    |  |  | 3.3   |   
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Accreted dividends on preferred stock                                                |  |              | (4.0  | )    |  |      | (3.6  | )  |  |  | (3.6  | ) 
|                                                                                     |  |              |       |      |  |      |       |    |  |  |       |   
|Net attributable to common stockholders                                              |  |              | (1.8  | )%   |  |      | (1.1  | )% |  |  | (0.3  | )%
|                                                                                     |  |              |       |      |  |      |       |    |  |  |       |   

YEAR ENDED DECEMBER 31, 2002 COMPARED TO

THE YEAR ENDED DECEMBER 31, 2001


REVENUES.Revenues increased $37.8 million or 13.4%, to
$319.4 million during 2002 from $281.6 million in
2001. This increase resulted from the 14 clubs opened or
acquired in 2001 (approximately $17.0 million), and the
12 clubs opened or acquired in 2002 (approximately
$9.1 million). In addition, revenues increased during 2002
by approximately $11.1 million or 4.1% at our mature clubs
(clubs owned and operated for at least 24 months). The mature
club revenue increase is attributable to a 1.6% increase in
membership, a 2.2% increase in dues, and a 0.3% increase in
ancillary revenues.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our mature club revenue increased 18.6%, 12.3% and 4.1% for the
    years ended December 31, 2000, 2001 and 2002, respectively.
    We believe the decline in mature club revenue growth had been
    driven primarily by general economic softness, particularly in
    the New York metropolitan region, which has had an industry-wide
    effect. In addition, we believe that the decline in mature club
    revenue growth is also attributable to the increasing age of our
    mature clubs.

OPERATING EXPENSES. Operating expenses increased
$28.6 million, or 11.3% to $281.3 million in 2002,
from $252.7 million in 2001. This increase was due to a
13.9% increase in total months of club operations to 1,479 in
2002 from 1,298 in 2001. This increase was partially offset by a
$437,000 decrease in depreciation and amortization from 2001 to
2002. In accordance with SFAS 142 as of January 1,
2002 goodwill is no longer being amortized.



| |                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Payroll and related expenses increased by $16.3 million, or
    14.4% to $129.1 million in 2002, from $112.8 million
    in 2001. This increase was primarily attributable to the
    acquisition or opening of 12 clubs in 2002 and a full year
    of operating the 14 clubs opened or acquired in 2001. This
    increase was also

23



---



##### 



| |                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | attributable to an increase in health and workers
    compensation insurance, and payroll associated with
    fee-for-service programs.                                                                                                                                                                                                                                                                       
|
| | Club operating increased by $10.2 million, or 11.4% to
    $99.1 million in 2002, from $88.9 million in 2001.
    This increase is primarily attributable to the acquisition or
    opening of 12 clubs in 2002 and the additional expenses
    attributable to operating the 14 clubs opened or acquired
    in 2001.                                                                                         
|
| | General and administrative increased by $2.6 million, or
    13.8% to $21.4 million in 2002, from $18.8 million in 2001.
    This increase is principally attributable to a $1.3 million
    increase in liability and property insurance, and increases
    attributable to expenses associated with our expansion,
    including the enhancement of our management communication and
    information systems.
|
| | Depreciation and amortization decreased by $437,000, or 1.4% to
    $31.7 million in 2002, from $32.2 million in 2001. A
    $2.3 million and a $1.6 million increase in
    depreciation and amortization expense related to clubs opened or
    acquired in 2001 and 2002, respectively was offset by a
    $4.3 million decrease in goodwill amortization expense.                                          

INTEREST EXPENSE. Interest expense increased
$1.6 million to $16.6 million in 2002 from
$14.9 million in 2001, primarily as a result of an increase
in subordinated credit borrowings associated with our club base
expansion.

INTEREST INCOME. Interest income decreased $253,000 to
$138,000 in 2002 from $391,000 in 2001. This decrease is due to
lower interest rates earned on cash balances in 2002 as compared
to 2001.

PROVISION FOR INCOME TAX.The provision for income taxes
increased $2.8 million from $6.9 million in 2001 to
$9.7 million in 2002. Our effective tax rate decreased to
45% in 2002 from 48% in 2001. This decrease is due to a decrease
in goodwill amortization which was not deductible for taxes and
decreases in the effective New York State and City rates. With
the exception of deferred tax assets of $384,000 related to
certain state net operating loss carry-forwards which have been
reserved for, we expect future taxable income to be sufficient
to realize the $20.3 million of net deferred tax assets.

DISCONTINUED OPERATIONS.In the fourth quarter of 2002,
we closed two unprofitable, wholly-owned clubs. In connection
with the closure of one of the clubs we recorded club closure
costs of $996 related to the write-off of fixed assets. We have
accounted for these two clubs as discontinued operations and,
accordingly, the results of their operations have been
classified as discontinued in the Consolidated Statement of
Operations, and prior periods have been reclassified in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of.

Revenues and pre-tax losses for these discontinued clubs were
$1.7 million and $894,000 in 2001, and $1.6 million
and $322,000 in 2002, respectively.

CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. In
connection with the implementation of SFAS 142 we recorded
a goodwill write-off of $1.3 million in the first quarter
of 2002. A deferred tax benefit of $612,000 was recorded in
connection with this goodwill write-off, resulting in a net
cumulative effect of a change in accounting principle of
$689,000.

ACCRETED DIVIDENDS ON PREFERRED STOCK.Accreted dividends
on the Preferred Stock increased $1.3 million to $11.5 million
in 2002, from $10.2 million in 2001. This increase is due to the
compounding of accreted dividends.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO

THE YEAR ENDED DECEMBER 31, 2000


REVENUES. Revenues increased $57.8 million or 25.8%,
to $281.6 million during 2001 from $223.8 million in
2000. This increase resulted from the 20 clubs opened or
acquired in 2000 (approximately $27.4 million), and the
14 clubs opened or acquired in 2001 (approximately
$6.0 million). In addition, revenues increased during 2001
by approximately $24.9 million or 12.3% at the
Companys mature clubs

24



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##### 





OPERATING EXPENSES. Operating expenses increased
$52.2 million, or 26.0% to $252.6 million in 2001,
from $200.4 million in 2000. This increase was due to a
16.6% increase in total months of club operations to 1,298 in
2001 from 1,113 in 2000. The increase is also attributable to
the larger, multi purpose clubs opened or acquired in 2000.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Payroll and related increased by $22.0 million, or 24.2% to
    $112.8 million in 2001, from $90.8 million in 2000.
    This increase was primarily attributable to the acquisition or
    opening of 14 clubs in 2001 and a full year of operating
    the 20 clubs opened or acquired in 2000. This increase was
    also attributable to an increase in personal training payroll
    and increases in management information systems personnel.                                                             
|
| | Club operating increased by $20.1 million, or 29.3% to
    $88.9 million in 2001, from $68.8 million in 2000.
    This increase is primarily attributable to the acquisition or
    opening of 14 clubs in 2001 and the additional expenses
    attributable to operating the 20 clubs opened or acquired
    in 2000.                                                                                                                                                                                          
|
| | General and administrative increased by $4.2 million, or
    28.8% to $18.8 million in 2001, from $14.6 million in
    2000. This increase is principally attributable to a
    $1.4 million increase in liability and property insurance,
    increases attributable to expenses associated with the
    Companys expansion, including the enhancement of the
    Companys management communication and information systems,
    and a $300,000 increase in donations related to the
    September 11 events.
|
| | Depreciation and amortization increased by $6.0 million, or
    22.9% to $32.2 million in 2001, from $26.2 million in
    2000. This increase is attributable to the increased fixed
    assets placed in service and intangible assets and goodwill
    acquired arising out of acquisition or opening of new clubs.                                                                                                                                                                                           

INTEREST EXPENSE. Interest expense increased $618,000 to
$14.9 million in 2001 from $14.3 million in 2000,
primarily as a result of increased indebtedness under our line
of credit. The increase in line of credit borrowings is
principally due to capital expenditure associated with the
expansion of the Companys club base.

INTEREST INCOME. Interest income decreased $789,000 from
$1.2 million in 2000 to $391,000 in 2001. This decrease is
due to lower levels of cash on hand and lower interest rates
earned in 2001 when compared to 2000.

PROVISION FOR INCOME TAX. The provision for income taxes
increased $1.9 million from $5.0 million in 2000 to
$6.9 million in 2001. The Companys effective tax rate
decreased to 47.5% in 2001 from 49.2% in 2000. This decrease is
principally due to decreases in the effective New York State and
City rates. With the exception of deferred tax assets of
$284,000 related to certain state net operating loss
carry-forwards which have been reserved for, the Company expects
future taxable income to be sufficient to realize the
$19.1 million of net deferred tax assets.

DISCONTINUED OPERATIONS.In the fourth quarter of 2002,
we closed two unprofitable, wholly-owned clubs. We have
accounted for these two clubs as discontinued operations and,
accordingly, the results of their operations have been
classified as discontinued in the Consolidated Statement of
Operations, and prior periods have been reclassified in
accordance with SFAS No. 144.

Revenues and pre-tax losses for these discontinued clubs were
$1.2 million and $597,000 in 2000, $1.7 million and
$894,000 in 2001, respectively.

ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends
on the Preferred Stock increased $1.2 million to
$10.2 million in 2001, from $9.0 million in 2000. This
increase is due to the compounding of accreted dividends.

25



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##### 



Liquidity and Capital Resources

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

Operating Activities. Net cash provided by operating
activities for the year ended December 31, 2002 was
$50.8 million compared to $44.3 million during the
year ended December 31, 2001. Cash flows from operations
has improved as the profitability of our mature clubs and clubs
opened or acquired in 2001 continues to improve. These increases
are offset by recently opened or acquired clubs which may be
immature and not yet operating at normal operating margins.
Excluding cash and cash equivalents, we normally operate with a
working capital deficit because we receive dues or fee revenue
either (i) during the month services are rendered, or
(ii) when paid-in-full, in advance. As a result, we have no
material accounts receivable, and record a deferred revenue
liability for membership and ancillary services billed in
advance. We also record deferred revenue liability because
initiation fees are received at enrollment and are recognized
over the estimated average term of membership.

Investing Activities.We invested $40.2 million and
$58.4 million in capital expenditures and asset
acquisitions during the years ended December 31, 2002 and
2001, respectively, primarily as a result of our expansion
efforts. Our capital expenditures are net of landlord
contributions of $3.5 million and $725,000 respectively for
the years ended December 31, 2002 and 2001. We estimate
that for the year ended December 31, 2003, we will invest
an additional $40.0 million in capital expenditures, which
includes $10.3 million that management intends to invest to
expand and renovate certain existing clubs, $14.6 million
to maintain existing clubs and $2.0 million to further
upgrade our management information system. These expenditures
will be funded by cash flow generated from operations, available
cash and credit facilities.

Financing Activities.As of December 31, 2002, we
had $125.0 million of Senior Notes outstanding. The Senior Notes
bear interest at a rate of 9.75% and mature in 2004. Under the
provisions of the Senior Note Indenture, we may not issue
additional Senior Notes without modification of the indenture
with the bondholders consent. Our line of credit with our
principal bank provides for direct borrowings and letters of
credit of up to $25.0 million. The line of credit carries
interest at our option based upon the Eurodollar borrowing rate
plus 2.50% or the banks prime rate plus 1.50% as defined,
and we are required to pay a commitment fee of 0.375% per annum
on the daily unutilized amount. As of December 31, 2002,
$10.5 million of Eurodollar borrowings and
$4.0 million of prime rate borrowings were outstanding
under this line at interest rates of 4.0% and 6.25%,
respectively. As of December 31, 2002 outstanding letters
of credit totaled $1.9 million. As of December 31,
2002, we had approximately $8.6 million available under the
line of credit, which matures in July 2004, and has no
scheduled amortization requirements. We also have a $20.0
million subordinated credit facility which expires in December,
2004, under which there were $9.0 million of outstanding
borrowings as of December 31, 2002. The Subordinated Credit
Agreement was entered into with an affiliate of a director and
stockholder of the Company. Interest on principal borrowings
accrues at 12.75% per annum, 9.75% of which is payable on a
monthly basis and the remaining 3% is accruable, at our option,
through maturity. The total amount of accrued and unpaid
interest may not exceed $2.5 million. We are charged a fee
of 0.083% per month based on the portion of the facility not
utilized. In connection with this agreement, we paid a
commitment fee of $225,000 to the lender, approximately $73,000
of legal fees, and committed to issue 16,000 shares of
common stock to the lender. In December 2001, we issued an
additional 7,000 shares of restricted common stock to the
lender which would have been forfeited by the lender in the
event that the agreement was terminated prior to
November 30, 2002. As the Agreement was not terminated,
these shares became unrestricted in November 2002.

The line of credit contains restrictive covenants including a
leverage ratio and interest coverage ratio and dividend payment
restrictions and is collateralized by all the assets of the
Company. The subordinated credit facility contains similar, but
less restrictive covenants than those of the line of credit. As
of December 31, 2002 our Net Leverage Ratio, and Net
Interest Coverage Ratio as defined by the terms of the line of
credit agreement are 2.2 and 4.9 to 1.0, respectively. Our
ability to incur additional debt is limited by the terms of the
line of credit facility in that the Net Leverage Ratio, as
defined, cannot exceed 3.0 to 1.0 and the Net Interest

26



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##### 





Although we believe that we will be able to obtain or generate
sufficient funds to finance our current operating and growth
plans through the end of 2003, any material acceleration or
expansion of that plan through additional greenfields or
acquisitions (to the extent such acquisitions include cash
payments) may require us to pursue additional sources of
financing prior to the end of 2003. There can be no assurance
that such financing will be available, or that it will be
available on acceptable terms. The line of credit accrues
interest at variable rates based on market conditions,
accordingly, future increases in interest rates could have a
negative impact on net income.

The Senior Notes, the line of credit facility and the
subordinated credit facility mature in the second half of 2004.
We intend to refinance the long-term debt facilities prior to
their maturity. We will explore a variety of refinancing options
including: new borrowing facilities, private equity offerings,
initial public equity offerings, and strategic partnering, new
debt offerings, but at this time there are no definitive plans
in place. There can be no assurances that long-term financing
will be available to us on acceptable terms. Our inability to
obtain acceptable long-term financing may negatively impact our
competitive position and or materially adversely affect our
business, results of operations or financial condition.

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

In June 1999, we issued $40.0 million of Senior Notes
thereby increasing the total Senior Notes outstanding to $125.0
million. These notes were issued at a price of 98.75%, providing
us with $39.5 million of proceeds before expenses related
to the issuance. After payment of fees and expenses of $3.9
million, we received net proceeds of $35.6 million. Other cash
flow from financing activities during 1998 and 1999 included
borrowings under the line of credit facility, the repayment of
long-term debt, and the issuance of redeemable senior preferred
stock, Senior Stock.

In November 1998, we sold $40.0 million of Senior
Stock. After payment of fees and expenses of approximately
$400,000 we received net proceeds of $39.6 million. The Senior
Stock is redeemable in November 2008, and carries a
cumulative 12.0% annual dividend which is added to the
liquidation value of such preferred shares, if not paid in cash,
at our option.

In October 1997, we issued $85.0 million of Senior Notes
and entered into the line of credit facility. After payment of
fees and expenses of $3.3 million, we received net proceeds of
$81.7 million, of which $41.5 million was used for the repayment
of certain indebtedness. The Senior Notes contain restrictive
covenants and restrict the payment of dividends. The line of
credit facility notes contain restrictive covenants, including a
leverage ratio and interest coverage ratio and dividend payment
restrictions and is collaterlized by all the assets of the
Company.

The aggregate long-term debt, capital lease, operating lease,
and Redeemable Preferred Stock Obligations as of
December 31, 2002 were as follows:

|                                     |  |                        |         |           |  |           |        |           |  |         |         |  |  |   |        |  |  |   |         | 
|------------------------------------ |  | ---------------------- | ------- | --------- |  | --------- | ------ | --------- |  | ------- | ------- |  |  | - | ------ |  |  | - | ------- | 
|                                     |  |                       
|                                     |  | Payments Due by Period
|                                     |  |                       
|                                     |  |                        |         | Less than |  |           |        | After    
|Contractual Obligations              |  | Total                  |         | 1 year    |  | 1-3 years |        | 4-5 years |  | 5 years
|                                     |  |                        |         |           |  |           |        |           |  |        
|Long-Term Debt(1)                    |  | $                      | 153,466 |           |  | $         | 1,006  |           |  | $       | 150,125 |  |  | $ | 1,251  |  |  | $ | 1,084   | 
|                                    
|                                    
|                                    
|                                    
|Capital Lease Obligations(2)         |  | $                      | 7,477   |           |  | $         | 4,172  |           |  | $       | 3,305   |  |  | $ |       |  |  |   |        | 
|                                    
|                                    
|                                    
|                                    
|Operating Lease Obligations(3)       |  | $                      | 589,958 |           |  | $         | 46,276 |           |  | $       | 94,989  |  |  | $ | 92,753 |  |  | $ | 355,940 | 
|                                    
|                                    
|                                    
|                                    
|Redeemable Preferred Stock(4)        |  | $                      | 34,841  |           |  |           |       |           |  | $       | 34,841  |  |  |   |       |  |  |   |        | 
|                                    
|                                    
|                                    
|                                    
|Redeemable Senior Preferred Stock(5) |  | $                      | 128,525 |           |  |           |       |           |  |         |        |  |  |   |       |  |  | $ | 128,525 | 
|                                     |  |                        |         |           |  |           |        |           |  |         |         |  |  |   |        |  |  |   |         | 
|Total Contractual Cash Obligations   |  | $                      | 915,531 |           |  | $         | 86,295 |           |  | $       | 248,419 |  |  | $ | 94,004 |  |  | $ | 485,549 | 
|                                     |  |                        |         |           |  |           |        |           |  |         |         |  |  |   |        |  |  |   |         | 

27



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---

Notes:



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Long-term debt contractual cash obligations include
    principal payment requirements only. Interest on long-term debt
    with fixed rates amounts to $13.0 million annually. This
    represents a 9.75% interest rate charge on the
    $125.0 million of Senior Notes outstanding as of
    December 31, 2002, and a 12.75% interest rate charge on the
    $9.0 million of Subordinated Debt. Line of credit
    borrowings are not at fixed rates of interest. Line of credit
    borrowings are currently at 4.0% or approximately $580,000 per
    annum, but such rates may change widely with changes in market
    conditions.
|   
|(2) | Capital lease obligations represent principal and interest
    payments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(3) | Operating lease obligations include base rent only. Certain
    leases provide for additional rent based on increases in real
    estate tax indexation, utilities, and defined amounts based on
    the operating results of the lessee.                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(4) | The Redeemable Preferred stock is not redeemable on a specific
    date, but rather at our option or possibly upon sale of the
    Company. For purposes of this schedule we considered this to be
    redeemable in years one to three.                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(5) | The Redeemable Senior Preferred Stock is redeemable in
    November 2008. The Cash obligation above includes future
    accrual of dividends totalling $64.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

Legal Proceedings

On February 13, 2003, an individual filed suit against us
in the Supreme Court, New York County, alleging that on
January 14, 2003, he sustained an injury at one of our club
locations resulting in serious bodily injury. His complaint
seeks $250 million in damages for personal injuries, in addition
to $250 million of punitive damages. We have in force $51
million of insurance coverage to cover claims of this nature. We
intend to vigorously contest this lawsuit and presently
anticipate that these matters will be covered by insurance.

We are a party to various lawsuits arising in the normal course
of business. We believe that the ultimate outcome of these
matters will not have a material adverse effect on our business,
results of operations, cash flows, or financial condition.

Recent Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board
(FASB) issued Statement No. 145, Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections,
(SFAS 145). SFAS 145, rescinds SFAS
No. 4, Reporting Gains and Losses from Extinguishment of
Debt, and SFAS No. 64, Extinguishment of Debt Made
to Satisfy Sinking-Fund Requirements. The provisions of this
statement are effective January 1, 2003. This Statement
also amends SFAS No. 13, Accounting for Leases, to
require sale-leaseback accounting for certain lease
modifications that have economic impact similar to
sale-leaseback transactions and amends certain other
authoritative pronouncements. These provisions of SFAS
No. 145, adopted in May 2002, had no impact on our
consolidated financial position or results of operations. In the
event we extinguish our long-term debt obligations prior to
their original maturities, the related debt extinguishment costs
will be reported within operating income, rather than an
extraordinary item.

In July 2002, the FASB issued Statement No. 146,
(SFAS 146) Accounting for Costs Associated
with Exit or Disposal Activities, which we are required to
adopt on January 1, 2003. SFAS 146 requires companies
to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment
to an exit or disposal plan. We do not expect that adoption of
the standard will have a material adverse effect on our
consolidated financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others.Interpretation No. 45 requires the
disclosure of certain guarantees existing at December 31,
2002. In addition, Interpretation No. 45

28



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On December 31, 2002, the FASB issued Statement
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an
amendment of FASB Statement No. 123, which provided
alternative transition methods to the expensing of employee
stock-based compensation under SFAS No. 123. We are not
required to adopt the fair value method prescribed by SFAS
No. 123 and, accordingly, will continue to account for
stock-based compensation under the intrinsic value method in
accordance with APB No. 25.

September 11, 2001
Events

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

We carry business interruption insurance to mitigate certain
lost revenue and profits experienced with the September 11
events. In this regard in the third quarter of 2001 a $175,000
insurance receivable was recorded representing an estimate of
costs incurred in September 2001. Such costs included rent,
payroll benefits, and other club operating costs incurred during
period of closure. In 2002, we collected this $175,000
receivable and received additional on-account payments of
$1.0 million. These on-account payments were classified
with fees and other revenues.

Although we have business interruption insurance to cover
certain lost profits at all four clubs, we cannot predict with
any degree of certainty what future amounts will actually be
received from our insurance carriers. Furthermore we cannot, at
this time, determine whether the assets related to the fourth
club location have been permanently impaired. We will continue
to gather information to better assess whether or not the assets
of this club have been permanently impaired. We are
communicating with our insurance carriers on an ongoing basis in
order to better assess the relief we could expect to receive for
such coverage. In January 2003, we received and recorded an
additional $1.3 million on-account payment.

Use of Estimates and
Critical Accounting Policies

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could
differ from those estimates.

The most significant assumptions and estimates relate to the
allocation and fair value ascribed to assets acquired in
connection with the acquisition of clubs under the purchase
method of accounting, the useful lives, recoverability and
impairment of fixed and intangible assets, deferred income tax
valuation, valuation of, and expense incurred in, connection
with stock options and warrants, legal contingencies and the
estimated membership life.

Our one-time member initiation fees and related direct expenses
are deferred, and recognized, on a straight-line basis, in
operations over an estimated membership life of 24 months. This
estimated membership life has been derived from actual
membership retention experienced by us. Although the average
membership life approximated 24 months over each of the past
several years; this estimated life could increase or decrease in
future periods. Consequently the amount of initiation fees and
direct expenses deferred by us would increase or decrease in
similar proportion.

Long-lived assets, such as fixed assets, goodwill and intangible
assets are reviewed for impairment when events or circumstances
indicate that the carrying value may not be recoverable.
Estimated undiscounted expected future cash flows are used to
determine if an asset is impaired, in which case the
assets carrying

29



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##### 





Effective January 1, 2002 we implemented SFAS 142. There
were no changes to the estimated useful lives of amortizable
intangible assets due to the SFAS 142 implementation. In
connection with the SFAS 142 transition impairment test we
recorded a $1.3 million write-off of goodwill. A deferred
tax benefit of $612,000 was recorded as a result of this
goodwill write-off, resulting in a net cumulative effect of
change in accounting principle of $689,000, in the first quarter
of 2002. The write-off of goodwill related to four, remote
underperforming clubs. The impairment test was performed with
discounted estimated future cash flows as the criteria for
determining fair market value. Goodwill has been allocated to
reporting units that closely reflect the regions served by our
four trade names; New York Sports Club, Boston Sports Club,
Washington Sports Club and Philadelphia Sports Club, with
certain more remote clubs that do not benefit from a regional
cluster being considered single reporting units.

As of December 31, 2002 our net deferred tax assets totaled
$20.3 million. These net assets represent cumulative net
temporary differences that will result in tax
deductions in future years. The realizability of these assets
greatly depends on our ability to generate sufficient future
taxable income. Our pre tax profit was $9.6 million,
$13.5 million and $20.4 million, and current tax
liabilities were $8.1 million, $11.0 million and
$10.3 million for the years ended December 31, 2000,
2001 and 2002, respectively. Because there is currently no
evidence we will not continue to be profitable, the weight of
available evidence indicates we will be able to realize these
net deferred tax assets. If at some time in the future, the
weight of available evidence does not support the realizability
of a portion of, or the entire net deferred tax asset, the
write-down of this asset could have a significant impact on our
financial statements.

Inflation

We believe that inflation has not had a material impact on our
results of operations for the three year period ended
December 31, 2002.

Item 7A.  Quantitative and Qualitative
Disclosures About Market Risks

Not applicable

Item 8.  Financial Statements and
Supplementary Data

The Registrants financial statements and supplementary
data are listed in the index appearing under item 15(a)(1)
and 15(a)(2) .

Item 9.  Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure

None.

30



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##### 



PART III

Item 10.  Directors and Executive Officers
of the Registrant

The following table sets forth the names, ages and a brief
account of the business experience of each person who is
currently a director or executive officer of the Company.

|                        |  |     |    |          |  |                                                   
|----------------------- |  | --- | -- | -------- |  | --------------------------------------------------
|Name                    |  | Age |    | Position
|                        |  |     |    |         
|Mark Smith              |  |     | 43 |          |  | Chairman and Director                             
|                       
|                       
|                       
|                       
|Robert Giardina         |  |     | 45 |          |  | Chief Executive Officer, Office of the President  
|                       
|                       
|                       
|                       
|Alexander Alimanestianu |  |     | 44 |          |  | Chief Development Officer, Office of the President
|                       
|                       
|                       
|                       
|Richard Pyle            |  |     | 44 |          |  | Chief Financial Officer, Office of the President  
|                       
|                       
|                       
|                       
|Randy Stephen           |  |     | 46 |          |  | Chief Operating Officer                           
|                       
|                       
|                       
|                       
|Deborah Smith           |  |     | 43 |          |  | Senior Vice President, Operations                 
|                       
|                       
|                       
|                       
|Keith E. Alessi         |  |     | 48 |          |  | Director                                          
|                       
|                       
|                       
|                       
|Paul Arnold             |  |     | 56 |          |  | Director                                          
|                       
|                       
|                       
|                       
|Bruce Bruckmann         |  |     | 49 |          |  | Director                                          
|                       
|                       
|                       
|                       
|J. Rice Edmonds         |  |     | 32 |          |  | Director                                          
|                       
|                       
|                       
|                       
|Jason Fish              |  |     | 45 |          |  | Director                                          

Mark Smithjoined us in 1985 and served as Chief
Executive Officer from 1995 to 2001 and became Chairman in
January 2002. Prior to these appointments, he held the position
of Executive Vice President of Development and International
Operations. Mr. Smith has also served as a director since
September 1995. He was appointed to the Board of the
International Health, Racquet and Sportsclub Association (the
club industry trade association) in 2001. Before joining us,
Mr. Smith was a chartered accountant with Coopers &
Lybrand in New York City, London and New Zealand, and a
professional squash player.

Robert Giardinajoined us in 1981, served as President
and Chief Operating Officer from 1992 to 2001, and became Chief
Executive Officer in January 2002. With over 20 years of
experience in the club industry, Mr. Giardina has expertise
in virtually every aspect of facility management and club
operations. In addition to operations, Mr. Giardina has
primary responsibility for sales and marketing.

Alexander Alimanestianujoined us in 1990 and became
Executive Vice President, Development in 1995 and Chief
Development Officer in January 2002. From 1990 to 1995,
Mr. Alimanestianu served as Vice President and Senior Vice
President. Before joining us, he worked as a corporate attorney
for six years with one of our outside law firms.
Mr. Alimanestianu has been involved in the development or
acquisition of over 100 of our clubs.

Richard Pyle, a British chartered accountant, joined us
in 1987 and has been chiefly responsible for our financial
matters since that time, as a Vice President in 1988, Senior
Vice President and Chief Financial Officer in 1992 and Executive
Vice President and Chief Financial Officer in 1995,
successively. Before joining us, Mr. Pyle worked in public
accounting (in the United States, Bermuda, Spain and in England)
specializing in the hospitality industry, and as the corporate
controller for a British public company in the leisure industry.

Randy Stephenjoined us on September 4, 2002 as
Chief Operating Officer. Prior to joining us and since 1987,
Mr. Stephen held various positions with Circuit City
Stores, including Director of Human Resources and General
Manager. In 1995, he was appointed to Circuit City Stores
Vice President, Corporate Operations, focusing on marketing,
promotions and business process re-engineering and in 1996 he
became the Northeast Division President. Prior to 1987,
Mr. Stephen worked with several premier retailers including
Eastern Mountain Sports, Eddie Bauer, Keeger & Sons and
Britches of Georgetown.

Deborah Smith joined us in 1985, and served as Vice
President before her appointment as a Senior Vice President of
Operations in 1995. Ms. Smith has been responsible for the
startup and operation of our clubs in New York, Switzerland and
Washington, DC. She oversaw club operations in all U.S.
geographic areas, until she left Town Sports in December 2002.

31



---



##### 



Keith E. Alessihas served as a director of Town Sports
since April, 1997. Mr. Alessi is an adjunct professor of
Law at Washington and Lee University School of Law.
Mr. Alessi served as President, Chief Executive Officer and
a director of Telespectrum Worldwide, Inc. from March 1998
to April 2000. From May 1996 to March 1998,
Mr. Alessi served as Chairman, President and Chief
Executive Officer of Jackson Hewitt, Inc.

Paul Arnoldhas served as a director of Town Sports since
April 1997. Mr. Arnold has served as Chairman and Chief
Executive Officer of Cort Business Services, Inc., a Berkshire
Hathaway Company, since 2000. From 1992 to 2000, Mr. Arnold
served as President, Chief Executive Officer and Director of
Cort Business Services. Prior to 1992, Mr. Arnold held
various positions over a 24 year period within Cort
Furniture Rental, a division of Mohasco Industries.
Mr. Arnold is currently a Director of Relocation Central
Corp. and Penhall International, Inc.

Bruce Bruckmannhas served as a director of Town Sports
since December, 1996. Since 1994, Mr. Bruckmann has served
as Managing Director of BRS. From 1983 until 1994,
Mr. Bruckmann served as an officer and subsequently a
Managing Director of Citicorp Venture Capital, Ltd.
(CVC). Mr. Bruckmann is currently a director of
Penhall International, Inc., Mohawk Industries, Inc., H&E
Equipment Services L.L.C. and Anvil Knitwear Inc. and a director
of several private companies.

J. Rice Edmondshas served as a director of Town
Sports since July 16, 2002. Mr. Edmonds is a Principal
of BRS. Prior to joining BRS in 1996, Mr. Edmonds worked in
the high yield finance group of Bankers Trust Company.
Mr. Edmonds is currently a director of H&E Equipment
Services L.L.C., and several other private companies.

Jason Fishhas been a director of Town Sports since
December, 1996. Mr. Fish is the co-founder and President of
CapitalSource Holdings, L.L.C., a position he has held since
June, 2000. Prior to founding CapitalSource, Mr. Fish had
been a Managing Member of Farallon Capital Management, L.L.C.
(FCM) and Farallon Partners, L.L.C. Farallons
two management entities, since April 1996. Mr. Fish was a
General Partner of the Farallon investment partnerships and a
Managing Director of FCMs predecessor, Farallon Capital
Management, Inc., from 1991 to 1996.

Item 11.     Executive
Compensation

The following summarizes, for the year indicated, the principal
components of compensation for our Chief Executive Officer and
the other four highest compensated executive officers
(collectively, the named executive officers). The
compensation set forth below fully reflects compensation for
work performed on our behalf.

Summary Compensation Table

|                            |                          |        |      |        |  |          |         |              |  |                         |         |         |  |  |   |   |  |  |   |   | 
|--------------------------- | ------------------------ | ------ | ---- | ------ |  | -------- | ------- | ------------ |  | ----------------------- | ------- | ------- |  |  | - | - |  |  | - | - | 
|                            |                          |        |      |        |  |          |         |              |  | Long-Term              
|                            |                          |        |      |        |  |          |         |              |  | Compensation           
|                            |                          |        |      |        |  |          |         | Other Annual |  | Awards Common Stock    
|                            |                          |        |      | Salary |  | Bonus(1) |         | Compensation |  | Underlying Options/SARs
|Name and Principal Position |                          | Period |      | ($)    |  | ($)      |         | ($)          |  | (#)                    
|                            |                          |        |      |        |  |          |         |              |  |                        
|Mark Smith                  |                          |        | 2002 |        |  |          | 426,072 |              |  |                         | 429,224 |         |  |  |  |   |  |  |  |  
|                            | Chairman                 |        |      | 2001   |  |          |         | 413,662      |  |                         |         | 364,597 |  |  |   |  |  |  |   |  | 
|                            |                          |        | 2000 |        |  |          | 397,752 |              |  |                         | 540,000 |         |  |  |  |   |  |  |  |  
|                           
|                           
|                           
|                           
|                           
|Robert Giardina             |                          |        | 2002 |        |  |          | 404,097 |              |  |                         | 327,312 |         |  |  |  |   |  |  |  |  
|                            | Chief Executive Officer, |        |      | 2001   |  |          |         | 392,327      |  |                         |         | 276,678 |  |  |   |  |  |  |   |  | 
|                            | Office of the President  |        |      | 2000   |  |          |         | 377,237      |  |                         |         | 413,000 |  |  |   |  |  |  |   |  | 
|                           
|                           
|                           
|                           
|                           
|Richard Pyle                |                          |        | 2002 |        |  |          | 236,539 |              |  |                         | 252,815 |         |  |  |  |   |  |  |  |  
|                            | Chief Financial Officer, |        |      | 2001   |  |          |         | 215,035      |  |                         |         | 216,258 |  |  |   |  |  |  |   |  | 
|                            | Office of the President  |        |      | 2000   |  |          |         | 206,764      |  |                         |         | 317,000 |  |  |   |  |  |  |   |  | 

32



---



##### 



|                            |                            |        |      |        |  |          |         |              |  |                         |         |         |  |  |   |   |  |  |   |   | 
|--------------------------- | -------------------------- | ------ | ---- | ------ |  | -------- | ------- | ------------ |  | ----------------------- | ------- | ------- |  |  | - | - |  |  | - | - | 
|                            |                            |        |      |        |  |          |         |              |  | Long-Term              
|                            |                            |        |      |        |  |          |         |              |  | Compensation           
|                            |                            |        |      |        |  |          |         | Other Annual |  | Awards Common Stock    
|                            |                            |        |      | Salary |  | Bonus(1) |         | Compensation |  | Underlying Options/SARs
|Name and Principal Position |                            | Period |      | ($)    |  | ($)      |         | ($)          |  | (#)                    
|                            |                            |        |      |        |  |          |         |              |  |                        
|Alexander Alimanestianu     |                            |        | 2002 |        |  |          | 236,539 |              |  |                         | 252,815 |         |  |  |  |   |  |  |  |  
|                            | Chief Development Officer, |        |      | 2001   |  |          |         | 215,035      |  |                         |         | 216,258 |  |  |   |  |  |  |   |  | 
|                            | Office of the President    |        |      | 2000   |  |          |         | 206,764      |  |                         |         | 317,000 |  |  |   |  |  |  |   |  | 
|                           
|                           
|                           
|                           
|                           
|Deborah Smith               |                            |        | 2002 |        |  |          | 178,098 |              |  |                         | 171,690 |         |  |  |  |   |  |  |  |  
|                            | Senior Vice President,     |        |      | 2001   |  |          |         | 172,911      |  |                         |         | 145,839 |  |  |   |  |  |  |   |  | 
|                            | Operations                 |        |      | 2000   |  |          |         | 166,261      |  |                         |         | 216,000 |  |  |   |  |  |  |   |  | 



---

(1) Includes annual bonus payments under our Annual Bonus
Plan.

Option/SAR Grants During the Year Ended December 31,
2002

There were no options granted to named executive officers by us
during the year ended December 31, 2002.

Aggregated Option/SAR Exercises During the Years Ended
December 31, 2002 and 2002 Year-End Option/SAR Values

The following summarizes exercises of stock options (granted in
prior years) by the named executive officers during the year
ended December 31, 2002 as well as the number and value of
all unexercised options held by the named executive officers as
of December 31, 2002.

|                        |  |             |   |             |  |                           |   |                           |  |        |         |           |  |  |          |  |  |  |             |  |  |  |             | 
|----------------------- |  | ----------- | - | ----------- |  | ------------------------- | - | ------------------------- |  | ------ | ------- | --------- |  |  | -------- |  |  |  | ----------- |  |  |  | ----------- | 
|                        |  |             |   |             |  |                           |   |                          
|                        |  |             |   |             |  | Number of Securities      |   | Value of Unexercised     
|                        |  |             |   |             |  | Options/SARs              |   | In-the-Money Options/SARs
|                        |  | Shares      |   |             |  | at FY-End(#)              |   | at FY-End ($)(1)         
|                        |  | Acquired on |   | Value       |  | Exercisable/Unexercisable |   | Exercisable/Unexercisable
|                        |  | Exercise(#) |   | Realized($) |  |                           |   |                          
|Name                    |  | Common      |   | Common      |  | Common                    |   | Preferred                 |  | Common |         | Preferred
|                        |  |             |   |             |  |                           |   |                           |  |        |         |          
|Mark Smith              |  |             |  |             |  |                           |  |                           |  |        | 8,830/0 |           |  |  | 42,812/0 |  |  |  | 1,147,900/0 |  |  |  | 2,428,725/0 | 
|                       
|                       
|                       
|                       
|Robert Giardina         |  |             |  |             |  |                           |  |                           |  |        | 8,829/0 |           |  |  | 32,793/0 |  |  |  | 1,147,770/0 |  |  |  | 1,860,347/0 | 
|                       
|                       
|                       
|                       
|Richard Pyle            |  |             |  |             |  |                           |  |                           |  |        | 8,828/0 |           |  |  | 27,569/0 |  |  |  | 1,147,640/0 |  |  |  | 1,563,989/0 | 
|                       
|                       
|                       
|                       
|Alexander Alimanestianu |  |             |  |             |  |                           |  |                           |  |        | 8,828/0 |           |  |  | 27,199/0 |  |  |  | 1,147,640/0 |  |  |  | 1,542,999/0 | 
|                       
|                       
|                       
|                       
|Deborah Smith           |  |             |  |             |  |                           |  |                           |  |        | 5,750/0 |           |  |  | 9,530/0  |  |  |  | 740,900/0   |  |  |  | 540,637/0   | 




|    |                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Value realized is based upon the fair market value of the stock
    at the exercise date minus the exercise price. Fair market value
    was determined in good faith by the Board of Directors and was
    based upon our historical and projected financial performance.

Compensation Committee Interlocks and Insider
Participation

The current members of our compensation committee are Bruce
Bruckmann, Paul Arnold and Mark Smith. Bruce Bruckmann and Paul
Arnold are non-employee directors.

Management Equity Agreements

We have entered into executive stock agreements with our named
executive officers. Pursuant to these executive stock
agreements, our named executive officers each have purchased our
shares of common stock and/or shares of series B preferred
stock at a purchase price of $1.00 per share of common stock and
$35.00 per share of series B preferred stock.

33



---



##### 



Our Benefit Plans

We maintain a 401(k) defined contribution plan and are subject
to the provisions of the Employee Retirement Income Security Act
of 1974 (ERISA). The plan provides for us to make
discretionary contributions; however, we elected not to make
contributions for the years ended December 31, 1999 and
2000. The plan was amended, effective January 1, 2001, to
provide for an employer matching contribution in an amount equal
to 25% of the participants contribution with a limit of
five hundred dollars per annum. In February 2002 and 2003,
employer matching contributions totaling $200,000 were made for
each of the Plan years ended December 31, 2001 and 2002.

Item 12.  Security Ownership of Certain
Beneficial Owners and Management

The following table sets forth (as of December 31, 2002)
certain information with respect to the beneficial ownership of
the Common Stock and Preferred Stock by: (i) each person or
entity who owns of record or beneficially more than 5% or more
of any class of our voting securities; (ii) each named
executive officer and director of Town Sports; and
(iii) all directors and named executive officers of Town
Sports as a group.

|                                                                                                    |  |              |         |                |  |                 |      |                 |  |                 |        |  |  |  |         |  |  |  |        | 
|--------------------------------------------------------------------------------------------------- |  | ------------ | ------- | -------------- |  | --------------- | ---- | --------------- |  | --------------- | ------ |  |  |  | ------- |  |  |  | ------ | 
|                                                                                                    |  | Common       |         | Percentage of  |  |                 |      |                 |  |                
|                                                                                                    |  | Stock        |         | Common         |  | Redeemable      |      | Series A        |  |                
|                                                                                                    |  | Beneficially |         | Stock          |  | Senior          |      | Redeemable      |  | Series B       
|Name                                                                                                |  | Owned(1)     |         | Outstanding(1) |  | Preferred Stock |      | Preferred Stock |  | Preferred Stock
|                                                                                                    |  |              |         |                |  |                 |      |                 |  |                
|BRS(2)
    126 East 56th Street,
    29th Floor
    New York, New York 10022                        |  |              | 504,456 |                |  |                 | 37.6 | %               |  |                 |       |  |  |  | 104,330 |  |  |  |       | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|The Farallon Entities(3)
    One Maritime Plaza,
    Suite 1325
    San Francisco, California 94111 |  |              | 270,091 |                |  |                 | 20.1 | %               |  |                 | 20,000 |  |  |  | 41,045  |  |  |  |       | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|The Canterbury Entities
    600 Fifth Avenue,
    23rd Floor
    New York, New York 10020           |  |              | 139,437 |                |  |                 | 10.4 | %               |  |                 | 15,000 |  |  |  |        |  |  |  |       | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Capital Source Holdings L.L.C.
    4445 Willard Avenue
    Chevy Chase, MD 20815                    |  |              | 23,000  |                |  |                 | 1.7  | %               |  |                 |       |  |  |  |        |  |  |  |       | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Rosewood Capital L.P.
    One Maritime Plaza,
    Suite 1330
    San Francisco, California 94111    |  |              | 17,908  |                |  |                 | 1.3  | %               |  |                 | 5,000  |  |  |  |        |  |  |  |       | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Executive Officers and Directors:                                                                   |  |              |         |                |  |                 |      |                 |  |                 |        |  |  |  |         |  |  |  |        | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Mark Smith(4)                                                                                       |  |              | 74,955  |                |  |                 | 5.6  | %               |  |                 |       |  |  |  |        |  |  |  | 42,812 | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Robert Giardina(4)                                                                                  |  |              | 59,480  |                |  |                 | 4.4  | %               |  |                 |       |  |  |  |        |  |  |  | 32,793 | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Richard Pyle(4)                                                                                     |  |              | 51,410  |                |  |                 | 3.8  | %               |  |                 |       |  |  |  |        |  |  |  | 27,569 | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Alexander Alimanestianu(4)                                                                          |  |              | 50,839  |                |  |                 | 3.8  | %               |  |                 |       |  |  |  |        |  |  |  | 27,199 | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Deborah Smith(4)                                                                                    |  |              | 21,658  |                |  |                 | 1.6  | %               |  |                 |       |  |  |  |        |  |  |  | 10,080 | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Bruce C. Bruckmann(5)                                                                               |  |              | 517,642 |                |  |                 | 38.6 | %               |  |                 |       |  |  |  | 107,057 |  |  |  |       | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|J. Rice Edmonds(6)                                                                                  |  |              | 504,456 |                |  |                 | 37.6 | %               |  |                 |       |  |  |  | 104,330 |  |  |  |       | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Jason Fish(7)                                                                                       |  |              | 293,091 |                |  |                 | 21.9 | %               |  |                 | 20,000 |  |  |  | 41,045  |  |  |  |       | 

34



---



##### 



|                                                 |  |              |           |                |  |                 |      |                 |  |                 |        |  |  |  |         |  |  |  |         | 
|------------------------------------------------ |  | ------------ | --------- | -------------- |  | --------------- | ---- | --------------- |  | --------------- | ------ |  |  |  | ------- |  |  |  | ------- | 
|                                                 |  | Common       |           | Percentage of  |  |                 |      |                 |  |                
|                                                 |  | Stock        |           | Common         |  | Redeemable      |      | Series A        |  |                
|                                                 |  | Beneficially |           | Stock          |  | Senior          |      | Redeemable      |  | Series B       
|Name                                             |  | Owned(1)     |           | Outstanding(1) |  | Preferred Stock |      | Preferred Stock |  | Preferred Stock
|                                                 |  |              |           |                |  |                 |      |                 |  |                
|Paul Arnold                                      |  |              | *         |                |  |                 | *    |                 |  |                 |       |  |  |  | 591     |  |  |  |        | 
|                                                
|                                                
|                                                
|                                                
|Keith Alessi                                     |  |              | *         |                |  |                 | *    |                 |  |                 |       |  |  |  | 591     |  |  |  |        | 
|                                                
|                                                
|                                                
|                                                
|Executive Officers and Directors as a
    Group: |  |              |           |                |  |                 |      |                 |  |                 |        |  |  |  |         |  |  |  |         | 
|                                                
|                                                
|                                                
|                                                
|10 Persons(8)                                    |  |              | 1,074,789 |                |  |                 | 80.2 | %               |  |                 | 20,000 |  |  |  | 149,285 |  |  |  | 140,453 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Represents less than 1%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(1) | Beneficial ownership is determined in accordance with
    Rule 13d-3 under the Exchange Act. In computing the number
    of shares beneficially owned by a person and the percentage
    ownership of that person, shares of common stock subject to
    options held by that person that are currently exercisable or
    exercisable within 60 days of March 15, 2003 are
    deemed outstanding. Such shares, however, are not deemed
    outstanding for the purposes of computing the percentage
    ownership of any other person.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(2) | Excludes shares held individually by Mr. Bruckmann and
    other individuals (and affiliates and family members thereof),
    each of whom are employed by BRS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | Includes shares held by each of Farallon Capital Partners, L.P.,
    Farallon Capital Institution Partners, L.P., Farallon Capital
    Institutional Partners II, L.P. and R.R. Capital Partners, L.P.
    (the Farallon Entities). Farallon Partners, L.L.C.
    is the general partner of each of the Farallon Entities.
    Farallon Partners, L.L.C. disclaims beneficial ownership of such
    shares. Also includes warrants to purchase 71,630 shares of
    common stock with an exercise price of $.01 per share and an
    expiration date of November 30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(4) | Includes options to acquire, exercisable within 60 days,
    common stock, and series B preferred stock options,
    exercisable within 60 days, pursuant to the common and
    preferred option plans, respectively. Messrs. Smith,
    Giardina, Pyle, Alimanestianu and Ms. Smith each hold such
    options on 8,830, 8,829, 8,828, 8,828 and 5,750 shares of
    common stock, respectively. All shares of series B
    preferred stock beneficially owned by such persons are in the
    form of series B options, except with respect to
    Ms. Smith only, 9,530 shares are in the form of
    series B options. The address for each of these named
    executive officers is the same as the address of our principal
    executive offices. In January 2003 Ms. Smith exercised
    9,530 options to purchase Series B Preferred Stock. In
    February 2003 Messrs. Smith, Giardina, Pyle, and
    Alimanestianu exercised 42,812, 32,793, 27,569 and 27,199
    Series B Preferred Stock options, respectively. All
    Series B Preferred Stock issued in connection with these
    February exercises were sold to Rosewood Capital L.P.
|   
|(5) | Includes 504,456 shares held by BRS, and approximately
    2,276 shares held by certain other family members of
    Mr. Bruckmann. Mr. Bruckmann disclaims beneficial
    ownership of such shares held by BRS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(6) | Includes shares held by BRS. Mr. Edmonds disclaims
    beneficial ownership of such shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(7) | Includes shares held by each of the Farallon Entities and
    CapitalSource, L.L.C. Mr. Fish is the founder of
    CapitalSource L.L.C. an affiliate of the Farallon Entities.
    Mr. Fish disclaims beneficial ownership of such shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(8) | Includes (i) shares held by BRS, which may be deemed to be
    owned beneficially by Messrs. Bruckmann and Edmonds, and
    (ii) shares held by the Farallon Entities, which may be
    deemed to be owned beneficially by Mr. Fish.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Excluding the shares beneficially owned by BRS and the Farallon
Entities, the directors and named executive officers as a group
beneficially own (i) 264,056 shares of common stock
(which represents approximately 19.7% of the common stock on a
fully diluted basis), (ii) no shares of redeemable senior
preferred stock, (iii) 1,182 shares of series A
preferred stock, and (iv) 140,453 shares of
series B preferred stock.

35



---



##### 



Item 13.  Certain Relationships and Related
Transactions

Redeemable Senior Preferred Stock

In November 1998, we issued 40,000 shares of Redeemable
Senior Preferred Stock (Senior). After the payment
of fees and expenses of approximately $400,000 we received net
proceeds of approximately $39.6 million. The Senior stock
is redeemable in November 2008. The Senior stock may, at
the option of the holder, be converted into Common stock upon
the initial public offering of common stock of Town Sports.

Registration Rights Agreement

In connection with the Recapitalization, we, BRS, the Farallon
Entities, Canterbury Mezzanine Capital, L.P. (CMC),
certain members of management and other shareholders of the
Company entered into a Registration Rights Agreement, dated
December 10, 1996 (as amended on November 13, 1998, in
connection with the issuance of Senior Preferred Stock, the
Registration Rights Agreement). Pursuant to the
terms of the Registration Rights Agreement, BRS, the Farallon
Entities and CMC have the right to require us, at our expense of
and subject to certain limitations, to register under the
Securities Act all or part of the shares of Common Stock (the
Registrable Securities) held by them. BRS is
entitled to demand up to three long-form registrations at any
time and unlimited short-form registrations. Farallon is
entitled to demand one long-form registration (but only one year
after we have consummated an initial registered public offering
of our Common Stock) and up to three short-form registrations.
CMC is entitled to demand up to two short-form registrations.

All holders of Registrable Securities are entitled to an
unlimited number of piggyback registrations, with us
paying all expenses of the Offering, whenever we propose to
register its Common Stock under the Securities Act. Each such
holder is subject to certain pro rata limitations on its ability
to participate in such a piggyback registration. In
addition, pursuant to the Registration Rights Agreement, we have
agreed to indemnify all holders of Registrable Securities
against certain liabilities, including certain liabilities under
the Securities Act.

Professional Services Agreement

In connection with the Recapitalization, Bruckmann, Rosser,
Sherrill & Co., Inc. (BRS Co.), an affiliate of
BRS, and the Company entered into a Professional Services
Agreement, whereby BRS Co. agreed to provide us certain advisory
and consulting services. In exchange for such services, BRS Co.
receives an annual fee of $250,000 per calendar year while they
own at least 20.0% of our outstanding Common Stock.

Subordinated Credit Agreement

In November 2000, we entered into a Subordinated Credit
Agreement (the Subordinated Agreement) with
CapitalSource Holdings L.L.C., an affiliate of a director and
stockholder of the Company. This Subordinated Agreement provides
for up to $20.0 million of principal borrowings and expires
December 31, 2004. Interest on principal borrowings accrues
at 12.75% per annum; 9.75% of which is payable on a monthly
basis and the remaining 3% is accruable, at our option, through
maturity. The total amount of accrued and unpaid interest may
not exceed $2.5 million. We are charged a fee of 0.083% per
month based on the portion of the facility not utilized. In
connection with this agreement we paid a commitment fee of
$225,000 to the lender, approximately $73,000 of legal fees, and
committed to issue 16,000 shares of common stock to the lender.
Such shares were issued during December 2001, and had an
estimated fair value of $1.4 million as of the date the
lender committed to provide the financing. In December 2001 we
issued an additional 7,000 shares of restricted common stock to
the lender, which would had been forfeited by the lender in the
event that the agreement is terminated prior to
November 30, 2002. As the Agreement was not terminated,
these shares became unrestricted in November 2002. In 2002, an
additional commitment fee of $125,000 was paid to the lender,
pending an increase in the facility of $5.5 million.

36



---



##### 



Item 14.     Controls and
Procedures

(a) Within the 90 days prior to the date of filing
this Form 10-K, the Company carried out an evaluation,
under the supervision and with the participation of the
Companys management, including the Companys Chief
Executive Officer along with the Companys Chief Financial
Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the
Companys Chief Executive Officer along with the
Companys Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective
in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be
included in the Companys periodic SEC filings.

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

37



---



##### 



PART IV

Item 15.  Exhibits, Financial Statement
Schedules, and Reports on Form 8-K

(a) Document List

1.  Financial Statements

The following consolidated financial statements of Town Sports
International Inc. are included in Item 8:

|                                                                                                          |  |      |     | 
|--------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                          |  | Page
|                                                                                                          |  |     
|Report of independent accountants                                                                         |  |      | F-1 | 
|Consolidated balance sheets at December 31,
    2001 and 2002                                             |  |      | F-2 | 
|Consolidated statements of operations for the
    years ended December 31, 2000, 2001 and 2002            |  |      | F-3 | 
|Consolidated statements of stockholders
    deficit for the years ended December 31, 2000, 2001 and 2002 |  |      | F-4 | 
|Consolidated statements of cash flows for the
    years ended December 31, 2000, 2001 and 2002            |  |      | F-5 | 
|Notes to consolidated financial statements                                                                |  |      | F-6 | 

2.  Financial statement schedules

All schedules for which provision is made in the applicable
accounting requirements of the Securities and Exchange
Commission are not required or the required information has been
included within the financial statements or the notes thereto.

(b) Reports on Form 8-K

None

(c) Exhibits:

| |    |   |  |                                                                                                                                                                                                                                                                                             
| | -- | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | 1 |  | Certification of Chief Executive Officer.                                                                                                                                                                                                                                                   
| | 1. | 2 |  | Certification of Chairman.                                                                                                                                                                                                                                                                  
| | 1. | 3 |  | Certification of Chief Financial Officer.                                                                                                                                                                                                                                                   
| | 2. | 1 |  | Agreement and Plan of Merger dated as of
    November 8, 1996 by and among the Company, various Sellers
    and Option Holders and TSI Recapitalization Sub, Inc.                                                                                                                          
| | 2. | 2 |  | Amendment to Agreement and Plan of Merger dated
    as of December 10, 1996 among TSI Merger Sub, Inc., the
    Company and certain stockholders and option holders of the
    Company.                                                                                                    
| | 3. | 1 |  | Amended and Restated Certificate of Incorporation
    of the Company.                                                                                                                                                                                                                      
| | 3. | 2 |  | By-Laws of the Company.                                                                                                                                                                                                                                                                    
| | 3. | 3 |  | Certificate of Amendment of the Certificate of
    Incorporation of the Company, dated as of November 13,
    1998.***                                                                                                                                                                      
| | 3. | 4 |  | Certificate of Amendment of the Certificate of
    Incorporation of the Company dated February 24, 2003.                                                                                                                                                                                    
| | 4. | 1 |  | Indenture dated as of October 16, 1997
    between the Company and United States Trust Company of New
    York.                                                                                                                                                                            
| | 4. | 2 |  | Purchase Agreement dated as of October 9,
    1997 among the Company and BT Alex. Brown Incorporated.                                                                                                                                                                                      
| | 4. | 3 |  | Purchases Agreement dated as of June 10,
    1999 between the Company and Deutsche Bank Securities, Inc.**                                                                                                                                                                                  
| | 4. | 4 |  | Registration Rights Agreement dated as of
    October 16, 1997 among the Company, and BT Alex. Brown
    Incorporated.                                                                                                                                                                     
| | 4. | 5 |  | Registration Rights Agreement dated as of
    December 10, 1996 by and among the Company, BRS and various
    investors, the Farallon Entities, CMC, and certain Town Sports
    stockholders.                                                                                             
| | 4. | 6 |  | Registration Rights Agreement dated as of
    June 21, 1999 between Town Sports International, Inc., and
    Deutsche Bank Securities, Inc.**                                                                                                                                               
| | 4. | 7 |  | First Amendment to Registration Rights Agreement
    by and among the Company, BRS, CMC, Canterbury Detroit Partners
    L.P. CDP, Rosewood Capital Partners L.P.
    RC, the Farallon Entities and certain other
    stockholders of the Company, dated as of November 13,
    1998.***

38



---



##### 



| |     |    |  |                                                                                                                                                                                                                                                                            
| | --- | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.  | 8  |  | Second Amendment to Registration Rights Agreement
    by and among the Company,
    BRS,        , CMC, CDP, RC,
    the Farallon Entities, CapitalSource Holdings LLC
    (CapitalSource) and certain other stockholders of
    the Company, dated November 6, 2000.*****
| | 10. | 1  |  | Amended and Restated Credit Agreement among the
    Company, Various Lending Institutions and Bankers Trust Company,
    as Administrative Agent dated as of October 16, 1997.                                                                                            
| | 10. | 2  |  | First Amendment to the Amended and Restated
    Credit Agreement among the Company, Various Lending Institutions
    and Bankers Trust Company, as Administrative Agent dated as of
    August 6, 1998.*                                                                   
| | 10. | 3  |  | Second Amendment to the Amended and Restated
    Credit Agreement among the Company, Various Lending Institutions
    and Bankers Trust Company, as Administrative Agent dated as of
    January 28, 1999.****                                                             
| | 10. | 4  |  | Third Amendment to the Amended and Restated
    Credit Agreement, among the Company, Various Lending
    Institutions and Bankers Trust Company, as Administrative Agent,
    dated as of June 9, 1999.****                                                                
| | 10. | 5  |  | Fourth Amendment to the Amended and Restated
    Credit Agreement, among the Company, Various Lending
    Institutions and Bankers Trust Company as administrative Agent
    dated as of March 1, 2000.****                                                                
| | 10. | 6  |  | Fifth Amendment to the Amended and Restated
    Credit Agreement, among the Company, Various Lending
    Institutions and Bankers Trust Company, as Administrative Agent,
    dated as of November 3, 2000.*****                                                           
| | 10. | 7  |  | Sixth Amendment to the Amended and Restated
    Credit Agreement, among the Company, Various Lending
    Institutions and Bankers Trust Company, as Administrative Agent,
    dated as of May 15, 2001.******                                                              
| | 10. | 8  |  | Seventh Amendment to the Amended and Restated
    Credit Agreement, among the Company, Various Lending
    Institutions and Bankers Trust Company, as Administrative Agent,
    dated as of July 3, 2002.                                                                  
| | 10. | 9  |  | Subordinated Credit Agreement among the Company
    and CapitalSource dated November 6, 2000****                                                                                                                                                                           
| | 10. | 10 |  | Amendment No. 1. to the Subordinated Credit
    Agreement dated, November 6, 2000.                                                                                                                                                                                         
| | 10. | 11 |  | Amendment No. 2 to the Subordinated Credit
    Agreement dated February 28, 2002.                                                                                                                                                                                          
| | 10. | 12 |  | Stock Purchase Agreement among the Company, CMC
    and CDP, dated as of November 13, 1998.***                                                                                                                                                                             
| | 10. | 13 |  | Stock Purchase Agreement among the Company, the
    Farallon Entities and RC, dated as of November 30, 1998.***                                                                                                                                                            
| | 10. | 14 |  | Stock Purchase Agreement among the Company and
    CapitalSource dated as of November 6, 2000.****                                                                                                                                                                         
| | 10. | 15 |  | Shareholders Agreement dated as of
    December 10, 1996 by and among the Company, BRS, the
    Farallon Entities, CMC and certain other stockholders of the
    Company.                                                                                                
| | 10. | 16 |  | Amended and Restated Shareholders Agreement
    among the Company, BRS, the Farallon Entities, RC, CMC, and CDP,
    dated as of November 13, 1998.***                                                                                                                    
| | 21. | 1  |  | Subsidiaries of the Company.                                                                                                                                                                                                                                               




| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | Incorporated by reference to the Registrants Registration
    Statement on Form S-4, File No. 333-40907.



| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| | * | Incorporated by reference to the Registrants Registration
    Statement on Form S-1, File No. 333-61439.



| |    |                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------
| | ** | Incorporated by reference to the Registrants Registration
    Statement on Form S-4, File No. 333-82607.



| |     |                                                                               
| | --- | ------------------------------------------------------------------------------
| | *** | Incorporated by reference to the Registrants
    December 31, 1998 Form 10-K.



| |      |                                                                               
| | ---- | ------------------------------------------------------------------------------
| | **** | Incorporated by reference to the Registrants
    December 31, 1999 Form 10-K.



| |       |                                                                               
| | ----- | ------------------------------------------------------------------------------
| | ***** | Incorporated by reference to the Registrants
    December 31, 2000 Form 10-K.



|       |                                                                               
|------ | ------------------------------------------------------------------------------
|****** | Incorporated by reference to the Registrants
    December 31, 2001 Form 10-K.

39



---



##### 





REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of



In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations,
stockholders deficit and cash flows present fairly, in all
material respects, the financial position of TOWN SPORTS
INTERNATIONAL, INC. and SUBSIDIARIES (the Company)
at December 31, 2001 and 2002, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Companys management; our responsibility is to express
an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

As discussed in Notes 2m and 4 to the financial statements,
the Company changed its method of accounting for goodwill and
other intangibles effective January 1, 2002. Additionally,
as discussed in Note 2r, the Company implemented the
guidance in EITF Topic No. D-98, Classification and
Measurement of Redeemable Securities.



| |                           
| | --------------------------
| | PricewaterhouseCoopers LLP

February 14, 2003, except as to Note 18,



F-1



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS


All figures $000, except share data


December 31, 2001 and 2002


|                                                                      |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |         |         |  
|--------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                                      |                                                                                                                                                                                                                                                      |                                                                            
|                                                                      |                                                                                                                                                                                                                                                      | December 31,                                                               
|                                                                      |                                                                                                                                                                                                                                                      |                                                                            
|                                                                      |                                                                                                                                                                                                                                                      | 2001                                                                        |         | 2002   
|                                                                      |                                                                                                                                                                                                                                                      |                                                                             |         |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Assets                                                               
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Current assets:                                                       |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Cash and cash equivalents                                                                                                                                                                                                                            |                                                                             | $       | 5,458   |         |   | $       | 5,551   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accounts receivable (less allowance for doubtful
    accounts of $120 in 2002)                                                                                                                                                                       |                                                                             |         | 1,355   |         |   |         | 1,333   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Inventory                                                                                                                                                                                                                                            |                                                                             |         | 1,326   |         |   |         | 1,132   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Prepaid corporate income taxes                                                                                                                                                                                                                       |                                                                             |         |        |         |   |         | 3,012   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Prepaid expenses and other current assets                                                                                                                                                                                                            |                                                                             |         | 3,113   |         |   |         | 4,430   |        
|                                                                      |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|                                                                      |                                                                                                                                                                                                                                                      | Total current assets                                                        |         |         | 11,252  |   |         |         | 15,458  |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Fixed assets, net                                                     |                                                                                                                                                                                                                                                      |                                                                             | 200,120 |         |         |   | 210,823 |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Goodwill, net                                                         |                                                                                                                                                                                                                                                      |                                                                             | 42,145  |         |         |   | 45,531  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Intangible assets, net                                                |                                                                                                                                                                                                                                                      |                                                                             | 1,294   |         |         |   | 1,675   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Deferred tax assets, net                                              |                                                                                                                                                                                                                                                      |                                                                             | 19,092  |         |         |   | 20,254  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Deferred membership costs                                             |                                                                                                                                                                                                                                                      |                                                                             | 14,748  |         |         |   | 14,408  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Other assets                                                          |                                                                                                                                                                                                                                                      |                                                                             | 7,354   |         |         |   | 6,101   |        
|                                                                      |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|                                                                      |                                                                                                                                                                                                                                                      | Total assets                                                                |         | $       | 296,005 |   |         | $       | 314,250 |  
|                                                                      |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Liabilities, Redeemable Preferred Stock and
    Stockholders Deficit
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Current liabilities:                                                  |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Current portion of long-term debt and capital
    lease obligations                                                                                                                                                                                  |                                                                             | $       | 4,015   |         |   | $       | 5,178   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accounts payable                                                                                                                                                                                                                                     |                                                                             |         | 7,615   |         |   |         | 5,328   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accrued expenses                                                                                                                                                                                                                                     |                                                                             |         | 18,918  |         |   |         | 21,634  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Deferred revenue                                                                                                                                                                                                                                     |                                                                             |         | 23,269  |         |   |         | 26,510  |        
|                                                                      |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|                                                                      |                                                                                                                                                                                                                                                      | Total current liabilities                                                   |         |         | 53,817  |   |         |         | 58,650  |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Long-term debt and capital lease obligations                          |                                                                                                                                                                                                                                                      |                                                                             | 159,964 |         |         |   | 155,765 |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Deferred lease liabilities                                            |                                                                                                                                                                                                                                                      |                                                                             | 21,510  |         |         |   | 23,644  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Deferred revenue                                                      |                                                                                                                                                                                                                                                      |                                                                             | 3,609   |         |         |   | 3,435   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Other liabilities                                                     |                                                                                                                                                                                                                                                      |                                                                             | 4,783   |         |         |   | 7,530   |        
|                                                                      |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|                                                                      |                                                                                                                                                                                                                                                      | Total liabilities                                                           |         |         | 243,683 |   |         |         | 249,024 |  
|                                                                      |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|Commitments and contingencies                                         |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Redeemable preferred stock:                                           |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Redeemable senior preferred stock, $1.00 par
    value; liquidation value $57,416 and $64,512 at
    December 31, 2001 and 2002, respectively; authorized
    100,000 shares; 40,000 shares issued and outstanding at
    December 31, 2001 and 2002 |                                                                             |         | 54,687  |         |   |         | 62,125  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Series A redeemable preferred stock, $1.00
    par value; at liquidation value; authorized 200,000 shares;
    153,637 shares issued and outstanding at December 31, 2001
    and 2002                                                               |                                                                             |         | 30,432  |         |   |         | 34,841  |        
|                                                                      |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|                                                                      |                                                                                                                                                                                                                                                      |                                                                             | 85,119  |         |         |   | 96,966  |        
|                                                                      |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|Stockholders deficit:                                                |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Series B preferred stock, at liquidation
    value                                                                                                                                                                                                   |                                                                             |         | 265     |         |   |         | 303     |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Class A voting common stock, $.001 par
    value; issued and outstanding 1,028,698 and 1,176,043 shares at
    December 31, 2001 and 2002, respectively                                                                                              |                                                                             |         | 1       |         |   |         | 1       |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Paid-in capital                                                                                                                                                                                                                                      |                                                                             |         | (22,245 | )       |   |         | (32,149 | )      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Unearned compensation                                                                                                                                                                                                                                |                                                                             |         | (422    | )       |   |         | (278    | )      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accumulated other comprehensive income (currency
    translation adjustment)                                                                                                                                                                         |                                                                             |         | 21      |         |   |         | 293     |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Retained earnings (accumulated deficit)                                                                                                                                                                                                              |                                                                             |         | (10,417 | )       |   |         | 90      |        
|                                                                      |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|                                                                      |                                                                                                                                                                                                                                                      | Total stockholders deficit                                                 |         |         | (32,797 | ) |         |         | (31,740 | )
|                                                                      |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        
|                                                                      |                                                                                                                                                                                                                                                      | Total liabilities, redeemable preferred stock
    and stockholders deficit |         | $       | 296,005 |   |         | $       | 314,250 |  
|                                                                      |                                                                                                                                                                                                                                                      |                                                                             |         |         |         |   |         |        

See notes to consolidated financial statements.

F-2



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS


All figures $000


For the years ended December 31, 2000, 2001 and 2002


|                                                                                                                                                                                  |                               |                                                                                   |         |         |        |      |         |         |        |   |         |         |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | --------------------------------------------------------------------------------- | ------- | ------- | ------ | ---- | ------- | ------- | ------ | - | ------- | ------- | ------ | -
|                                                                                                                                                                                  |                               |                                                                                  
|                                                                                                                                                                                  |                               | Years Ended December 31,                                                         
|                                                                                                                                                                                  |                               |                                                                                  
|                                                                                                                                                                                  |                               | 2000                                                                              |         | 2001    |        | 2002
|                                                                                                                                                                                  |                               |                                                                                   |         |         |        |     
|Revenues:                                                                                                                                                                         |                               |                                                                                   |         |         |        |      |         |         |        |   |         |        
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                  | Club operations               |                                                                                   | $       | 221,210 |        |      | $       | 278,200 |        |   | $       | 314,995 |       
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                  | Fees and other                |                                                                                   |         | 2,618   |        |      |         | 3,433   |        |   |         | 4,432   |       
|                                                                                                                                                                                  |                               |                                                                                   |         |         |        |      |         |         |        |   |         |        
|                                                                                                                                                                                  |                               |                                                                                   | 223,828 |         |        |      | 281,633 |         |        |   | 319,427 |        
|                                                                                                                                                                                  |                               |                                                                                   |         |         |        |      |         |         |        |   |         |        
|Operating expenses:                                                                                                                                                               |                               |                                                                                   |         |         |        |      |         |         |        |   |         |        
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                  | Payroll and related           |                                                                                   |         | 90,801  |        |      |         | 112,766 |        |   |         | 129,105 |       
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                  | Club operating                |                                                                                   |         | 68,806  |        |      |         | 88,941  |        |   |         | 99,113  |       
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                  | General and administrative    |                                                                                   |         | 14,626  |        |      |         | 18,785  |        |   |         | 21,368  |       
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                  | Depreciation and amortization |                                                                                   |         | 26,248  |        |      |         | 32,185  |        |   |         | 31,748  |       
|                                                                                                                                                                                  |                               |                                                                                   |         |         |        |      |         |         |        |   |         |        
|                                                                                                                                                                                  |                               |                                                                                   | 200,481 |         |        |      | 252,677 |         |        |   | 281,334 |        
|                                                                                                                                                                                  |                               |                                                                                   |         |         |        |      |         |         |        |   |         |        
|                                                                                                                                                                                  |                               | Operating income                                                                  |         |         | 23,347 |      |         |         | 28,956 |   |         |         | 38,093 |  
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|Interest expense                                                                                                                                                                  |                               |                                                                                   | 14,300  |         |        |      | 14,918  |         |        |   | 16,559  |        
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|Interest income                                                                                                                                                                   |                               |                                                                                   | (1,180  | )       |        |      | (391    | )       |        |   | (138    | )      
|                                                                                                                                                                                  |                               |                                                                                   |         |         |        |      |         |         |        |   |         |        
|                                                                                                                                                                                  |                               | Income from continuing operations before
    provision for corporate income taxes |         |         | 10,227 |      |         |         | 14,429 |   |         |         | 21,672 |  
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|Provision for corporate income taxes                                                                                                                                              |                               |                                                                                   | 5,031   |         |        |      | 6,853   |         |        |   | 9,709   |        
|                                                                                                                                                                                  |                               |                                                                                   |         |         |        |      |         |         |        |   |         |        
|                                                                                                                                                                                  |                               | Income from continuing operations                                                 |         |         | 5,196  |      |         |         | 7,576  |   |         |         | 11,963 |  
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|Loss on discontinued operations (including loss
    on club closure of $996 in 2002), net of income tax benefits of
    $232, $364 and $551 for 2000, 2001 and 2002, respectively |                               |                                                                                   | (365    | )       |        |      | (530    | )       |        |   | (767    | )      
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|Cumulative effect of a change in accounting
    principle, net of income tax benefit of $612                                                                                      |                               |                                                                                   |        |         |        |      |        |         |        |   | (689    | )      
|                                                                                                                                                                                  |                               |                                                                                   |         |         |        |      |         |         |        |   |         |        
|                                                                                                                                                                                  |                               | Net income                                                                        |         |         | 4,831  |      |         |         | 7,046  |   |         |         | 10,507 |  
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|Accreted dividends on preferred stock                                                                                                                                             |                               |                                                                                   | (9,016  | )       |        |      | (10,201 | )       |        |   | (11,543 | )      
|                                                                                                                                                                                  |                               |                                                                                   |         |         |        |      |         |         |        |   |         |        
|                                                                                                                                                                                  |                               | Net loss attributable to common
    stockholders                                  |         | $       | (4,185 | )    |         | $       | (3,155 | ) |         | $       | (1,036 | )
|                                                                                                                                                                                  |                               |                                                                                   |         |         |        |      |         |         |        |   |         |        

See notes to consolidated financial statements.

F-3



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT

All figures $000, except share data


For the years ended December 31, 2000, 2001 and 2002


|                                                                                                                        |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |     |     | 
|----------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | ---------------------------- | ------ | ------------------- | ----- | ------- | --- | -------- | --- | ----------- | --------- | ------------ | --------- | ---------- | - | - | - | - | ------ | - | ------- | - | ------ | - | ---- | - | - | --- | --- | 
|                                                                                                                        |                                         |                              |        |                     |       |         |     |          |     |            
|                                                                                                                        |                                         | Preferred Stock              |        | Common Stock        |       |         |     |          |     |            
|                                                                                                                        |                                         |                              |        |                     |       |         |     |          |     |            
|                                                                                                                        |                                         |                              |        |                     |       |         |     |          |     | Foreign    
|                                                                                                                        |                                         | Series B ($1.00 par)         |        | Class A ($.001 par) |       |         |     |          |     | Currency   
|                                                                                                                        |                                         |                              |        |                     |       | Paid-in |     | Unearned |     | Translation
|                                                                                                                        |                                         | Shares                       |        | Amount              |       | Shares  |     | Amount   |     | Capital     |           | Compensation |           | Adjustment
|                                                                                                                        |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |           
|Balance at January 1, 2000                                                                                              |                                         |                              | 3,855  |                     |       | $       | 204 |          |     |             | 1,014,086 |              |           | $          | 1 |   |   | $ | (5,484 | ) |         | $ | (1,240 | ) |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Stock commitment in connection with subordinated
    credit facility                                                    |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   | 1,360  |   |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Compensation expense incurred in connection with
    Series B Preferred stock options                                   |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   | 867    |   |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Amortization of unearned compensation                                                                                   |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   | 969    |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of Series B preferred stock
    dividend ($7.85 per share)                                                    |                                         |                              |        |                     |       |         | 30  |          |     |             |           |              |           |            |   |   |   |   | (30    | ) |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of Series A redeemable preferred
    stock dividend ($21.90 per share)                                        |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   | (3,364 | ) |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of redeemable senior preferred stock
    dividend ($140.55 per share plus accretion to liquidation value)     |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   | (5,963 | ) |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Forfeiture of unvested options                                                                                          |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   | (115   | ) |         |   | 115    |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Exercise of stock options                                                                                               |                                         |                              | 5,384  |                     |       |         |     |          |     |             | 3,757     |              |           |            |   |   |   |   | 61     |   |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Repurchase of shares                                                                                                    |                                         |                              | (5,417 | )                   |       |         | (2  | )        |     |             | (12,145   | )            |           |            |   |   |   |   | (449   | ) |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Other comprehensive income, net of taxes:                                                                               |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        | Net income                              |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |     |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        | Foreign currency translation adjustment |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   | $ | 12  |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        |                                         | Total comprehensive income   |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |     |     | 
|                                                                                                                        |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |    
|                                                                                                                        |                                         | Balance at December 31, 2000 |        |                     | 3,822 |         |     |          | 232 |             |           |              | 1,005,698 |            |   |   | 1 |   |        |   | (13,117 | ) |        |   | (156 | ) |   |     | 12  | 
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Common stock issued in connection with
    subordinated credit facility                                                 |                                         |                              |        |                     |       |         |     |          |     |             | 23,000    |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Compensation expense incurred in connection with
    Series B Preferred stock options                                   |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   | 993    |   |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Amortization of unearned compensation                                                                                   |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   | 156    |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of Series B preferred stock
    dividend ($8.63 per share)                                                    |                                         |                              |        |                     |       |         | 33  |          |     |             |           |              |           |            |   |   |   |   | (33    | ) |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of Series A redeemable preferred
    stock dividend ($25.07 per share)                                        |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   | (3,852 | ) |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of redeemable senior preferred stock
    dividend ($157.90 per share plus accretion to liquidation
    value) |                                         |                              |        |                     |       |         |    |          |     |             |           |              |           |            |   |   |   |   | (6,658 | ) |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Deferred compensation recorded in connection with
    the issuance of stock options                                     |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   | 422    |   |         |   | (422   | ) |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Other comprehensive income, net of taxes:                                                                               |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        | Net income                              |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |     |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        | Foreign currency translation adjustment |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   | 9   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        |                                         | Total comprehensive income   |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |     |     | 
|                                                                                                                        |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |    
|                                                                                                                        |                                         | Balance at December 31, 2001 |        |                     | 3,822 |         |     |          | 265 |             |           |              | 1,028,698 |            |   |   | 1 |   |        |   | (22,245 | ) |        |   | (422 | ) |   |     | 21  | 
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Common stock issued in connection with warrant
    exercises                                                            |                                         |                              |        |                     |       |         |     |          |     |             | 147,345   |              |           |            |   |   |   |   | 1      |   |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Vesting of restricted common stock issued in
    connection with subordinated credit facility                           |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   | 917    |   |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Compensation expense incurred in connection with
    Series B Preferred stock options                                   |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   | 1,137  |   |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Amortization of unearned compensation                                                                                   |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   | 70     |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of Series B preferred stock
    dividend ($10.20 per share)                                                   |                                         |                              |        |                     |       |         | 38  |          |     |             |           |              |           |            |   |   |   |   | (38    | ) |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of Series A redeemable preferred
    stock dividend ($28.71 per share)                                        |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   | (4,409 | ) |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of redeemable senior preferred stock
    dividend ($177.40 per share plus accretion to
    liquidation value) |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   | (7,438 | ) |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Forfeiture of unvested options                                                                                          |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   | (74    | ) |         |   | 74     |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Other comprehensive income, net of taxes:                                                                               |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        | Net income                              |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |     |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        | Foreign currency translation adjustment |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   | 272 |    
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        |                                         | Total comprehensive income   |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |     |     | 
|                                                                                                                        |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |    
|                                                                                                                        |                                         | Balance at December 31, 2002 |        |                     | 3,822 |         |     | $        | 303 |             |           |              | 1,176,043 |            |   | $ | 1 |   |        | $ | (32,149 | ) |        | $ | (278 | ) |   | $   | 293 | 
|                                                                                                                        |                                         |                              |        |                     |       |         |     |          |     |             |           |              |           |            |   |   |   |   |        |   |         |   |        |   |      |   |   |    

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                                        |                                         |                              |         |               |         |   |         |        |         |  
|----------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | ---------------------------- | ------- | ------------- | ------- | - | ------- | ------ | ------- | -
|                                                                                                                        |                                         | Accumulated                  |         | Total        
|                                                                                                                        |                                         | (Deficit)/Retained           |         | Stockholders
|                                                                                                                        |                                         | Earnings                     |         | Deficit      
|                                                                                                                        |                                         |                              |         |              
|Balance at January 1, 2000                                                                                              |                                         | $                            | (22,294 | )             |         | $ | (28,813 | )     
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Stock commitment in connection with subordinated
    credit facility                                                    |                                         |                              |         |               |         |   | 1,360   |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Compensation expense incurred in connection with
    Series B Preferred stock options                                   |                                         |                              |         |               |         |   | 867     |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Amortization of unearned compensation                                                                                   |                                         |                              |         |               |         |   | 969     |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of Series B preferred stock
    dividend ($7.85 per share)                                                    |                                         |                              |         |               |         |   |        |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of Series A redeemable preferred
    stock dividend ($21.90 per share)                                        |                                         |                              |         |               |         |   | (3,364  | )     
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of redeemable senior preferred stock
    dividend ($140.55 per share plus accretion to liquidation value)     |                                         |                              |         |               |         |   | (5,963  | )     
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Forfeiture of unvested options                                                                                          |                                         |                              |         |               |         |   |        |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Exercise of stock options                                                                                               |                                         |                              |         |               |         |   | 61      |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Repurchase of shares                                                                                                    |                                         |                              |         |               |         |   | (451    | )     
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Other comprehensive income, net of taxes:                                                                               |                                         |                              |         |               |         |   |         |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        | Net income                              |                              |         | 4,831         |         |   |         | 4,831  |        
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        | Foreign currency translation adjustment |                              |         |              |         |   |         | 12     |        
|                                                                                                                        |                                         |                              |         |               |         |   |         |       
|                                                                                                                        |                                         | Total comprehensive income   |         |               |         |   |         |        | 4,843   |  
|                                                                                                                        |                                         |                              |         |               |         |   |         |       
|                                                                                                                        |                                         | Balance at December 31, 2000 |         |               | (17,463 | ) |         |        | (30,491 | )
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Common stock issued in connection with
    subordinated credit facility                                                 |                                         |                              |         |               |         |   |        |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Compensation expense incurred in connection with
    Series B Preferred stock options                                   |                                         |                              |         |               |         |   | 993     |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Amortization of unearned compensation                                                                                   |                                         |                              |         |               |         |   | 156     |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of Series B preferred stock
    dividend ($8.63 per share)                                                    |                                         |                              |         |               |         |   |        |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of Series A redeemable preferred
    stock dividend ($25.07 per share)                                        |                                         |                              |         |               |         |   | (3,852  | )     
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of redeemable senior preferred stock
    dividend ($157.90 per share plus accretion to liquidation
    value) |                                         |                              |         |               |         |   | (6,658  | )     
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Deferred compensation recorded in connection with
    the issuance of stock options                                     |                                         |                              |         |               |         |   |        |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Other comprehensive income, net of taxes:                                                                               |                                         |                              |         |               |         |   |         |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        | Net income                              |                              |         | 7,046         |         |   |         | 7,046  |        
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        | Foreign currency translation adjustment |                              |         |               |         |   |         | 9      |        
|                                                                                                                        |                                         |                              |         |               |         |   |         |       
|                                                                                                                        |                                         | Total comprehensive income   |         |               |         |   |         |        | 7,055   |  
|                                                                                                                        |                                         |                              |         |               |         |   |         |       
|                                                                                                                        |                                         | Balance at December 31, 2001 |         |               | (10,417 | ) |         |        | (32,797 | )
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Common stock issued in connection with warrant
    exercises                                                            |                                         |                              |         |               |         |   | 1       |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Vesting of restricted common stock issued in
    connection with subordinated credit facility                           |                                         |                              |         |               |         |   | 917     |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Compensation expense incurred in connection with
    Series B Preferred stock options                                   |                                         |                              |         |               |         |   | 1,137   |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Amortization of unearned compensation                                                                                   |                                         |                              |         |               |         |   | 70      |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of Series B preferred stock
    dividend ($10.20 per share)                                                   |                                         |                              |         |               |         |   |        |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of Series A redeemable preferred
    stock dividend ($28.71 per share)                                        |                                         |                              |         |               |         |   | (4,409  | )     
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Accretion of redeemable senior preferred stock
    dividend ($177.40 per share plus accretion to
    liquidation value) |                                         |                              |         |               |         |   | (7,438  | )     
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Forfeiture of unvested options                                                                                          |                                         |                              |         |               |         |   |        |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|Other comprehensive income, net of taxes:                                                                               |                                         |                              |         |               |         |   |         |       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        | Net income                              |                              |         | 10,507        |         |   |         | 10,507 |        
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                        | Foreign currency translation adjustment |                              |         |               |         |   |         | 272    |        
|                                                                                                                        |                                         |                              |         |               |         |   |         |       
|                                                                                                                        |                                         | Total comprehensive income   |         |               |         |   |         |        | 10,779  |  
|                                                                                                                        |                                         |                              |         |               |         |   |         |       
|                                                                                                                        |                                         | Balance at December 31, 2002 |         | $             | 90      |   |         | $      | (31,740 | )
|                                                                                                                        |                                         |                              |         |               |         |   |         |       

See notes to consolidated financial statements.

F-4



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


All figures $000


For the years ended December 31, 2000, 2001 and 2002


Increase (decrease) in Cash and Cash Equivalents


|                                                                                                        |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |         |        |         |  
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | -------------------------------------------------------- | ------- | ------ | ------- | ----- | ------- | ------ | ------- | ----- | ------- | ------ | ------- | -
|                                                                                                        |                                                                                       |                                                                   
|                                                                                                        |                                                                                       | Years Ended December 31,                                          
|                                                                                                        |                                                                                       |                                                                   
|                                                                                                        |                                                                                       | 2000                                                               |                                                          | 2001    |        | 2002   
|                                                                                                        |                                                                                       |                                                                    |                                                          |         |        |        
|Cash flows from operating activities:                                                                   |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Net income                                                                            |                                                                    | $                                                        | 4,831   |        |         | $     | 7,046   |        |         | $     | 10,507  |       
|                                                                                                        |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|                                                                                                        | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                    |                                                          |         |        |         |       |         |        |         |       |         |       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                                                                       | Compensation expense incurred in connection with
    stock options |                                                          |         | 1,836  |         |       |         | 1,149  |         |       |         | 1,207  |        
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                                                                       | Depreciation and amortization                                      |                                                          |         | 26,642 |         |       |         | 32,667 |         |       |         | 32,025 |        
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                                                                       | Goodwill impairment write-off                                      |                                                          |         |       |         |       |         |       |         |       |         | 1,301  |        
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                                                                       | Club closure costs                                                 |                                                          |         |       |         |       |         |       |         |       |         | 996    |        
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                                                                       | Amortization of debt issuance costs                                |                                                          |         | 1,531  |         |       |         | 1,882  |         |       |         | 1,928  |        
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                                                                       | Noncash rental expense, net of noncash rental
    income           |                                                          |         | 2,976  |         |       |         | 4,224  |         |       |         | 1,670  |        
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                                                                       | Net change in certain working capital components                   |                                                          |         | 9,392  |         |       |         | 3,475  |         |       |         | 2,413  |        
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                                                                       | Increase in deferred tax asset                                     |                                                          |         | (3,326 | )       |       |         | (4,526 | )       |       |         | (1,162 | )      
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                                                                       | (Decrease) increase in deferred membership costs                   |                                                          |         | (2,745 | )       |       |         | (1,162 | )       |       |         | 340    |        
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                                                                       | Other                                                              |                                                          |         | (564   | )       |       |         | (407   | )       |       |         | (420   | )      
|                                                                                                        |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|                                                                                                        |                                                                                       |                                                                    | Total adjustments                                        |         |        | 35,742  |       |         |        | 37,302  |       |         |        | 40,298  |  
|                                                                                                        |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|                                                                                                        |                                                                                       |                                                                    | Net cash provided by operating
    activities            |         |        | 40,573  |       |         |        | 44,348  |       |         |        | 50,805  |  
|                                                                                                        |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|Cash flows from investing activities:                                                                   |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Capital expenditures, net of effect of acquired
    businesses                        |                                                                    |                                                          | (47,454 | )      |         |       | (57,811 | )      |         |       | (41,393 | )     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Acquisition of businesses, net of cash acquired                                       |                                                                    |                                                          | (24,053 | )      |         |       | (1,272  | )      |         |       | (2,322  | )     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Investment in affiliate                                                               |                                                                    |                                                          | (210    | )      |         |       |        |        |         |       |        |       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Intangible and other assets                                                           |                                                                    |                                                          | (359    | )      |         |       |        |        |         |       |        |       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Landlord contributions                                                                |                                                                    |                                                          | 2,028   |        |         |       | 725     |        |         |       | 3,533   |       
|                                                                                                        |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|                                                                                                        |                                                                                       |                                                                    | Net cash used in investing
    activities                |         |        | (70,048 | )     |         |        | (58,358 | )     |         |        | (40,182 | )
|                                                                                                        |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|Cash flows from financing activities:                                                                   |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Redemption and liquidation of stock, including
    expenses                           |                                                                    |                                                          | (390    | )      |         |       |        |        |         |       |        |       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Net credit line borrowings (repayments)                                               |                                                                    |                                                          | 9,000   |        |         |       | 13,745  |        |         |       | (8,245  | )     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Subordinated credit borrowings, net of expenses                                       |                                                                    |                                                          |        |        |         |       | 5,762   |        |         |       | 2,810   |       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Repayments of borrowings                                                              |                                                                    |                                                          | (2,895  | )      |         |       | (3,404  | )      |         |       | (5,095  | )     
|                                                                                                        |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|                                                                                                        |                                                                                       |                                                                    | Net cash provided by (used in) financing
    activities  |         |        | 5,715   |       |         |        | 16,103  |       |         |        | (10,530 | )
|                                                                                                        |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|                                                                                                        |                                                                                       |                                                                    | Net increase (decrease) in cash and cash
    equivalents |         |        | (23,760 | )     |         |        | 2,093   |       |         |        | 93      |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Cash and cash equivalents at beginning of period                                                        |                                                                                       |                                                                    | 27,125                                                   |         |        |         | 3,365 |         |        |         | 5,458 |        
|                                                                                                        |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|                                                                                                        |                                                                                       |                                                                    | Cash and cash equivalents at end of
    period           |         | $      | 3,365   |       |         | $      | 5,458   |       |         | $      | 5,551   |  
|                                                                                                        |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|Summary of the change in certain working capital
    components, net of effects of acquired businesses: |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Decrease (increase) in accounts receivable                                            |                                                                    | $                                                        | 151     |        |         | $     | (304    | )      |         | $     | (443    | )     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Decrease (increase) in inventory                                                      |                                                                    |                                                          | 213     |        |         |       | (433    | )      |         |       | 194     |       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Decrease (increase) in prepaid expenses and
    other current assets                  |                                                                    |                                                          | 392     |        |         |       | (514    | )      |         |       | (527    | )     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Increase in accounts payable and accrued expenses                                     |                                                                    |                                                          | 4,990   |        |         |       | 1,745   |        |         |       | 3,751   |       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | (Increase) decrease in prepaid corporate income
    taxes                             |                                                                    |                                                          | (624    | )      |         |       | 1,828   |        |         |       | (3,012  | )     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Increase in deferred revenue                                                          |                                                                    |                                                          | 4,270   |        |         |       | 1,153   |        |         |       | 2,450   |       
|                                                                                                        |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        
|                                                                                                        |                                                                                       |                                                                    | Net change in certain working capital
    components     |         | $      | 9,392   |       |         | $      | 3,475   |       |         | $      | 2,413   |  
|                                                                                                        |                                                                                       |                                                                    |                                                          |         |        |         |       |         |        |         |       |        

See notes to consolidated financial statements.

F-5



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


All figures $000, except share data


1.     Nature of Business

Town Sports International, Inc. and Subsidiaries (the
Company) owns and operates 127 fitness clubs
(clubs) and partly owns and operates two additional
clubs as of December 31, 2002. The Company operates in a
single segment. The Company operates 85 clubs in the New York
metropolitan market, 20 clubs in the Boston market, 15 clubs in
the Washington, D.C. market, six in the Philadelphia market and
three clubs in Switzerland. The Companys geographic
concentration in the New York metropolitan market may expose the
Company to adverse developments related to competition,
demographic changes, real estate costs, acts of terrorism and
economic down turns. The Companys Swiss operations are
immaterial to the Companys financial position, results of
operations, and cash flows.

2.     Summary of Significant
Accounting Policies

a.     Principles of
Consolidation

The accompanying consolidated financial statements include the
accounts of Town Sports International, Inc. (TSI)
and all wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

Certain reclassifications were made to the reported amounts at
December 31, 2000 and 2001 to conform to the presentation
at December 31, 2002.

b.     Revenue Recognition

The Company receives a one-time non-refundable initiation fee
and monthly dues from its members. Substantially all of the
Companys members join on a month-to-month basis and can
therefore cancel their membership at any time with 30 days
notice. Initiation fees and related direct expenses, primarily
salaries and sales commissions payable to membership
consultants, are deferred and recognized, on a straight-line
basis, in operations over an estimated membership life of twenty
four (24) months. The amount of costs deferred do not
exceed the related deferred revenue for the periods presented.
Dues that are received in advance are recognized on a pro-rata
basis over the periods in which services are to be provided.
Revenues from ancillary services are recognized as services are
performed. Management fees earned for services rendered are
recognized at the time the related services are performed.

The Company recognizes revenue from merchandise sales upon
delivery to the member.

In connection with advance receipts of fees or dues, the Company
is required to maintain surety bonds totaling $3,317 pursuant to
various state consumer protection laws.

c.     Inventory

Inventory consists of athletic equipment, supplies, headsets for
the club entertainment system and clothing for sale to members.
Inventories are valued at the lower of cost or market by the
first-in, first-out method.

d.     Fixed Assets

Fixed assets are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the
assets, which are thirty years for building and improvements,
five years for club equipment, furniture, fixtures and computer
equipment, and three years for computer software. Leasehold
improvements are amortized over the shorter of their estimated
useful lives or the remaining period of the lease. Expenditures
for maintenance and repairs are charged to operations as
incurred. The cost and related accumulated depreciation or
amortization of assets retired or sold are removed from the
respective accounts and any gain or loss is

F-6



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

recognized in operations. The costs related to developing web
applications, developing HTML web pages and installing developed
applications on the web servers are capitalized and classified
as computer software. Web site hosting fees and maintenance
costs are expensed as incurred.

e.     Advertising and Club
Preopening Costs

Advertising costs and club preopening costs are charged to
operations during the period in which they are incurred except
for production costs related to television and radio
advertisements, which are expensed when the related commercials
are first aired. Total advertising costs incurred by the Company
during the years ended December 31, 2000, 2001 and 2002
totaled $7,387, $9,327, and $8,888, respectively.

f.     Use of Estimates

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could
differ from those estimates.

The most significant assumptions and estimates relate to the
allocation and fair value ascribed to assets acquired in
connection with the acquisition of clubs under the purchase
method of accounting, the useful lives, recoverability and
impairment of fixed and intangible assets, deferred income tax
valuation, valuation of and expense incurred in connection with
stock options and warrants, legal contingencies and the
estimated membership life.

g.     Corporate Income Taxes

Deferred tax liabilities and assets are recognized for the
expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined on
the basis of the difference between the financial statement and
tax bases of assets and liabilities (temporary
differences) at enacted tax rates in effect for the years
in which the temporary differences are expected to reverse. A
valuation allowance is recorded to reduce deferred tax assets to
the amount that is more likely than not to be realized.

h.     Statements of Cash Flows

Supplemental disclosure of cash flow information:

|                                                                                        |                                                                                   |                          |   |        |  |      |   |        |  |  |   |        | 
|--------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------ | - | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|                                                                                        |                                                                                   |                         
|                                                                                        |                                                                                   | Years Ended December 31,
|                                                                                        |                                                                                   |                         
|                                                                                        |                                                                                   | 2000                     |   | 2001   |  | 2002
|                                                                                        |                                                                                   |                          |   |        |  |     
|Cash paid:                                                                              |                                                                                   |                          |   |        |  |      |   |        |  |  |   |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Interest (net of amounts capitalized)                                             |                          | $ | 13,353 |  |      | $ | 13,887 |  |  | $ | 15,035 | 
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Income taxes                                                                      |                          |   | 9,054  |  |      |   | 10,087 |  |  |   | 13,187 | 
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Noncash investing and financing activities:                                             |                                                                                   |                          |   |        |  |      |   |        |  |  |   |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Acquisition of fixed assets included in accounts
    payable and accrued expenses |                          |   | 3,757  |  |      |   | 7,538  |  |  |   | 3,901  | 
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Acquisition of equipment and software financed by
    lessors                     |                          |   | 3,951  |  |      |   | 2,853  |  |  |   | 2,575  | 
|See Notes 6, 9, 10 and 11 for additional noncash
    investing and financing activities |                                                                                   |                          |   |        |  |      |   |        |  |  |   |       

F-7



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

i.     Cash and Cash Equivalents

The Company considers all highly liquid debt instruments which
have original maturities of three months or less when acquired
to be cash equivalents. The carrying amounts reported in the
balance sheets for cash and cash equivalents approximate fair
value.

j.     Deferred Lease Liabilities
and Noncash Rental Expense

The Company recognizes rental expense for leases with scheduled
rent increases on the straight-line basis over the life of the
lease.

k.     Foreign Currency

Transactions denominated in a foreign currency have been
translated into U.S. dollars at the rates of exchange at the
transaction dates. Assets and liabilities have been translated
at the respective year-end exchange rates. For all periods
presented foreign exchange gains and losses were not material.

In March 2000, the Company acquired two Swiss clubs that were
previously managed by the Company. In December 2001, the Company
opened a third Swiss club. These clubs use the local currency as
their functional currency and, accordingly, their assets and
liabilities are translated into U.S. dollars at year-end
exchange rates while their income and expense items are
translated into U.S. dollars at the average exchange rate for
the period. Adjustments resulting from the translation of
foreign functional currency financial statements into U.S.
dollars are included in the currency translation adjustment in
stockholders deficit. Comprehensive income represents
changes to stockholders deficit except those resulting
from investments from, and distributions to, stockholders. The
difference between the Companys net income and
comprehensive income is the effect of foreign exchange
translation adjustments, which was immaterial for 2000 and 2001,
and was $272 for 2002.

l.     Investments in Affiliated
Companies

The Company has investments in Capitol Hill Squash Club
Associates (CHSCA) and Kalorama Sports Management
Associates (KSMA) (collectively referred to as the
Affiliates). The Company has a limited partnership
interest in CHSCA, which provides the Company with approximately
20% of the CHSCA profits, as defined. The Company has a
co-general partnership and limited partnership interest in KSMA,
which entitles it to receive approximately 45% of the KSMA
profits, as defined. The Affiliates have operations, which are
similar, or related to, those of the Company. The Company
accounts for these Affiliates in accordance with the equity
method. The assets, liabilities, equity and operating results of
the Affiliates and the Companys pro rata share of the
Affiliates net assets and operating results were not
material for all periods presented.

m.     Intangible Assets, Goodwill
and Debt Issuance Costs

Intangible assets consist of membership lists, a beneficial
lease and covenants-not-to- compete. Such intangibles are stated
at cost and are being amortized by the straight-line method over
their estimated lives. Membership lists are amortized over 24
months and covenants-not-to-compete are amortized over the
contractual life, generally five years. The beneficial lease is
being amortized over the remaining life of the underlying club
lease.

In accordance with the Statement on Financial Accounting
Standards (SFAS) No. 142
(SFAS 142), Goodwill and Other Intangible
Assets, goodwill has not been amortized subsequent to
December 31, 2001. For the years ended December 31,
2000 and December 31, 2001 goodwill was amortized by the
straight-line method over the remaining lives of the underlying
club leases, five to fifteen years. See also Note 4 for further
discussion on Goodwill and Other Intangible Assets.

F-8



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Debt issuance costs are classified within other assets and are
being amortized as additional interest expense over the life of
the underlying debt, four to seven years, using the interest
method. Amortization of debt issue costs was $1,531, $1,882, and
$1,928 for December 31, 2000, 2001 and 2002, respectively.

n.     Accounting for the Impairment
of Long-Lived Assets

Long-lived assets, such as fixed assets and intangible assets
are reviewed for impairment when events or circumstances
indicate that their carrying value may not be recoverable.
Estimated undiscounted expected future cash flows are used to
determine if an asset is impaired, in which case the
assets carrying value would be reduced to fair value.

Effective January 1, 2002, the Company adopted SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets, which replaces SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of. SFAS No. 144
provides updated guidance concerning the recognition and
measurement of an impairment loss for certain types of
long-lived assets, expands the scope of discontinued operation
to include a component of an entity and eliminates the exemption
to consolidation when control over a subsidiary is likely to be
temporary. In 2002, the Company discontinued operations at two
wholly-owned clubs. As a result of the adoption of SFAS
No. 144 the Company has accounted for these two clubs as
discontinued operations. See Note 17 for further discussion on
discontinued operations.

o.     Concentrations of Credit
Risk

Financial instruments which potentially subject the Company to
concentrations of credit risk are cash and cash equivalents.
Such amounts are held, primarily, in a single commercial bank.
The Company holds no collateral for these financial instruments.

p.     Stock-Based Employee
Compensation

For financial reporting purposes, the Company accounts for
stock-based compensation in accordance with the intrinsic value
method (APB No. 25). In accordance with this
method, no compensation expense is recognized in the
accompanying financial statements in connection with the
awarding of stock option grants to employees provided that, as
of the grant date, all terms associated with the award are fixed
and the fair value of the Companys stock is not greater
than the amount an employee must pay to acquire the stock as
defined; however, to the extent that stock options are granted
to employees with variable terms or if the fair value of the
Companys stock as of the measurement date is greater than
the amount an employee must pay to acquire the stock, then the
Company will recognize compensation expense. The fair value of
options or warrants granted to nonemployees for financing are
recorded as deferred financing costs and amortized into interest
expense using the interest method. See Note 10 for further
discussion on stock options and warrants.

F-9



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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

|                                                            |                                                                                                                                                                   |                          |        |      |   |      |        |     |  |   |        |     | 
|----------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------ | ---- | - | ---- | ------ | --- |  | - | ------ | --- | 
|                                                            |                                                                                                                                                                   |                         
|                                                            |                                                                                                                                                                   | Years Ended December 31,
|                                                            |                                                                                                                                                                   |                         
|                                                            |                                                                                                                                                                   | 2000                     |        | 2001 |   | 2002
|                                                            |                                                                                                                                                                   |                          |        |      |   |     
|Net loss attributed to common stockholders, as
    reported |                                                                                                                                                                   | $                        | (4,185 | )    |   | $    | (3,155 | )   |  | $ | (1,036 | )  
|                                                           
|                                                           
|                                                           
|                                                           
|Deduct:                                                     |                                                                                                                                                                   |                          |        |      |   |      |        |     |  |   |        |    
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Total stock-based employee compensation expense
    (income) determined under fair value based method for all
    stock option awards, net of related tax effects |                          |        | (235 | ) |      |        | 145 |  |   |        | 104 | 
|                                                            |                                                                                                                                                                   |                          |        |      |   |      |        |     |  |   |        |    
|Pro forma net loss attributed to common
    stock-holders   |                                                                                                                                                                   | $                        | (3,950 | )    |   | $    | (3,300 | )   |  | $ | (1,140 | )  
|                                                            |                                                                                                                                                                   |                          |        |      |   |      |        |     |  |   |        |    

Since option grants vest over several years and additional
grants are expected in the future, the pro forma results noted
above are not likely to be representative of the effects on
future years of the application of the fair value based method.

For the purposes of the above pro forma information, the fair
value of each option granted was estimated on the date of grant
using the Black-Scholes option pricing model. For the years
ended December 31, 2000 and 2001, the weighted-average fair
value of the option grants was approximately $47.11 and $111.89,
respectively. The following weighted-average assumptions were
used in computing the fair value of options grants: expected
volatility of 69% for the year ended December 31, 2000 and
72% for the year ended December 31, 2001, risk-free
interest rate of approximately 6.6% and 4.6% for
December 31, 2000 and 2001, respectively, expected lives of
five years for December 31, 2000 and 2001, and a zero
divided yield for all periods.

q.     Recent Accounting
Pronouncements

In April 2002, the Financial Accounting Standards Board
(FASB) issued Statement No. 145, Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS
145). SFAS 145 rescinds SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and SFAS
No. 64, Extinguishment of Debt Made to Satisfy
Sinking  Fund Requirements. The provisions of
this statement are effective January 1, 2003. This
Statement also amends SFAS No. 13, Accounting for
Leases, to require sale-leaseback accounting for certain
lease modifications that have economic impact similar to
sale-leaseback transactions and amends certain other
authoritative pronouncements. These provisions of SFAS
No. 145, adopted in May 2002, had no impact on our
consolidated financial position or results of operations. In the
event we extinguish our long-term debt obligations prior to
their original maturities, the related debt extinguishment costs
will be reported within operating income, rather than an
extraordinary item.

In July 2002, the FASB issued Statement No. 146,
(SFAS 146) Accounting for Costs Associated with
Exit or Disposal Activities, which we are required to adopt
on January 1, 2003. SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an
exit or disposal plan. We do not expect that adoption of the
standard will have a material adverse effect on our consolidated
financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. Interpretation No. 45 requires the disclosure
of certain guarantees existing at December 31, 2002. In
addition, Interpretation No. 45 requires the recognition of
a liability for the fair value of the obligation of qualifying
guarantee activities that

F-10



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

are initiated or modified after December 31, 2002.
Accordingly, the Company will apply the recognition provisions
of Interpretation No. 45 prospectively to guarantee
activities initiated after December 31, 2002.

In December, 2002, the FASB issued Statement No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure, an amendment of SFAS 123,
which provided alternative transition methods to the expensing
of employee stock-based compensation under SFAS 123. The
Company is not required to adopt the fair value method
prescribed by SFAS 123 and, accordingly, will continue to
account for stock-based compensation under the intrinsic value
method in accordance with APB No. 25.

r.     Series A Redeemable
Preferred Stock

As described in Note 9, the Company has issued 153,637 shares of
Series A Redeemable Preferred Stock
(Series A). The Company has reclassified its
2001 financial statements to account for a redemption feature
included in the Series A stock in accordance with the
guidance in EITF Topic No. D-98: Classification and
Measurement of Redeemable Securities (EITF Topic
No. D-98). EITF Topic No. D-98 provided
additional guidance on the appropriate classification of
redeemable preferred stock upon the occurrence of an event that
is not solely within the control of an issuer. EITF Topic
No. D-98 requires retroactive application in the first
fiscal quarter ending after December 15, 2001 by
reclassifying financial statements of prior periods. The
carrying value of the Series A stock, which was previously
presented as a component of stockholders deficit, has been
reclassified as redeemable preferred stock outside of
stockholders deficit. The reclassification of the 2001
financial statements for the Series A stock had no effect
on the Companys net income, net loss attributable to
common stockholders or total assets. The following sets forth
the overall effect of the reclassification on the Companys
stockholders deficit at December 31, 2001:

|                                                     |  |   |         |  
|---------------------------------------------------- |  | - | ------- | -
|                                                    
|                                                    
|                                                    
|                                                    
|Stockholders deficit prior to
    reclassification  |  | $ | (2,365  | )
|                                                    
|                                                    
|                                                    
|                                                    
|Reclassification of Series A stock                   |  | $ | (30,432 | )
|                                                    
|                                                    
|                                                    
|                                                    
|Stockholders deficit after the
    reclassification |  | $ | (32,797 | )

3.     Fixed Assets

Fixed assets as of December 31, 2001 and 2002, are shown at
cost, less accumulated depreciation and amortization, and are
summarized below:

|                                           |                                                 |              |         |        |  |   |         |         | 
|------------------------------------------ | ----------------------------------------------- | ------------ | ------- | ------ |  | - | ------- | ------- | 
|                                           |                                                 |             
|                                           |                                                 | December 31,
|                                           |                                                 |             
|                                           |                                                 | 2001         |         | 2002  
|                                           |                                                 |              |         |       
|Leasehold improvements                     |                                                 | $            | 177,315 |        |  | $ | 211,480 |        
|                                          
|                                          
|                                          
|                                          
|Club equipment                             |                                                 |              | 45,547  |        |  |   | 50,937  |        
|                                          
|                                          
|                                          
|                                          
|Furniture, fixtures and computer equipment |                                                 |              | 27,717  |        |  |   | 33,779  |        
|                                          
|                                          
|                                          
|                                          
|Computer software                          |                                                 |              | 3,769   |        |  |   | 4,503   |        
|                                          
|                                          
|                                          
|                                          
|Building and improvements                  |                                                 |              | 4,995   |        |  |   | 4,995   |        
|                                          
|                                          
|                                          
|                                          
|Land                                       |                                                 |              | 986     |        |  |   | 986     |        
|                                          
|                                          
|                                          
|                                          
|Construction in progress                   |                                                 |              | 18,471  |        |  |   | 8,631   |        
|                                           |                                                 |              |         |        |  |   |         |        
|                                           |                                                 |              | 278,800 |        |  |   | 315,311 |        
|                                          
|                                          
|                                          
|                                          
|                                           | Less, Accumulated depreciation and amortization |              |         | 78,680 |  |   |         | 104,488 | 
|                                           |                                                 |              |         |        |  |   |         |        
|                                           |                                                 | $            | 200,120 |        |  | $ | 210,823 |        
|                                           |                                                 |              |         |        |  |   |         |        

Depreciation and leasehold amortization expense for the years
ended December 31, 2000, 2001 and 2002, was $20,484,
$25,780 and $30,645, respectively.

F-11



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

4.     Goodwill and Intangible
Assets

Effective January 1, 2002 we implemented SFAS 142.
There were no changes to the estimated useful lives of
amortizable intangible assets due to the SFAS 142
implementation. In connection with the SFAS 142 transitional
impairment test the Company recorded a $1,301 write-off of
goodwill. A deferred tax benefit of $612 was recorded as a
result of this goodwill write-off, resulting in a net cumulative
effect of change in accounting principle of $689, in the first
quarter of 2002. The write-off of goodwill related to four,
remote underperforming clubs. The impairment test was performed
with discounted estimated future cash flows as the criteria for
determining fair market value. Goodwill has been allocated to
reporting units that closely reflect the regions served by our
four trade names; New York Sports Club, Boston Sports Club,
Washington Sports Club and Philadelphia Sports Club, with
certain more remote clubs that do not benefit from a regional
cluster being considered single reporting units.

A reconciliation of reported net income for the years ended
December 31, 2000 and 2001 to net income adjusted for the impact
of SFAS 142 over that same period is as follows:

|                       |                        |                     |        |       |  |   |        |        | 
|---------------------- | ---------------------- | ------------------- | ------ | ----- |  | - | ------ | ------ | 
|                       |                        |                    
|                       |                        | For the years ended
|                       |                        | December 31,       
|                       |                        |                    
|                       |                        | 2000                |        | 2001 
|                       |                        |                     |        |      
|Net income as reported |                        | $                   | 4,831  |       |  | $ | 7,046  |       
|                      
|                      
|                      
|                      
|Goodwill amortization  |                        |                     | 3,545  |       |  |   | 4,436  |       
|                      
|                      
|                      
|                      
|Deferred tax benefit   |                        |                     | (1,064 | )     |  |   | (1,344 | )     
|                       |                        |                     |        |       |  |   |        |       
|                       | Net income as adjusted |                     | $      | 7,312 |  |   | $      | 10,138 | 
|                       |                        |                     |        |       |  |   |        |       

A summary of our acquired amortizable intangible assets and
goodwill as of December 31, 2001 and 2002 is as follows:

|                            |                          |                   |        |              |  |             |         |        |   |   |        |     | 
|--------------------------- | ------------------------ | ----------------- | ------ | ------------ |  | ----------- | ------- | ------ | - | - | ------ | --- | 
|                            |                          |                  
|                            |                          | December 31, 2001
|                            |                          |                  
|                            |                          | Gross             |        |             
|                            |                          | Carrying          |        | Accumulated  |  | Net        
|                            |                          | Amount            |        | Amortization |  | Intangibles
|                            |                          |                   |        |              |  |            
|Acquired intangible assets: |                          |                   |        |              |  |             |         |        |   |   |        |    
|                           
|                           
|                           
|                           
|                            | Membership lists         |                   | $      | 9,753        |  |             | $       | (8,906 | ) |   | $      | 847 | 
|                           
|                           
|                           
|                           
|                            | Covenants-not-to-compete |                   |        | 1,276        |  |             |         | (901   | ) |   |        | 375 | 
|                           
|                           
|                           
|                           
|                            | Beneficial lease         |                   |        | 223          |  |             |         | (151   | ) |   |        | 72  | 
|                            |                          |                   |        |              |  |             |         |        |   |   |        |    
|                            |                          | $                 | 11,252 |              |  | $           | (9,958  | )      |   | $ | 1,294  |    
|                            |                          |                   |        |              |  |             |         |        |   |   |        |    
|Goodwill                    |                          | $                 | 55,702 |              |  | $           | (13,557 | )      |   | $ | 42,145 |    
|                            |                          |                   |        |              |  |             |         |        |   |   |        |    

|                            |                          |                   |        |              |  |             |         |        |   |   |        |       | 
|--------------------------- | ------------------------ | ----------------- | ------ | ------------ |  | ----------- | ------- | ------ | - | - | ------ | ----- | 
|                            |                          |                  
|                            |                          | December 31, 2002
|                            |                          |                  
|                            |                          | Gross             |        |             
|                            |                          | Carrying          |        | Accumulated  |  | Net        
|                            |                          | Amount            |        | Amortization |  | Intangibles
|                            |                          |                   |        |              |  |            
|Acquired intangible assets: |                          |                   |        |              |  |             |         |        |   |   |        |      
|                           
|                           
|                           
|                           
|                            | Membership lists         |                   | $      | 11,054       |  |             | $       | (9,605 | ) |   | $      | 1,449 | 
|                           
|                           
|                           
|                           
|                            | Covenants-not-to-compete |                   |        | 876          |  |             |         | (711   | ) |   |        | 165   | 
|                           
|                           
|                           
|                           
|                            | Beneficial lease         |                   |        | 223          |  |             |         | (162   | ) |   |        | 61    | 
|                            |                          |                   |        |              |  |             |         |        |   |   |        |      
|                            |                          | $                 | 12,153 |              |  | $           | (10,478 | )      |   | $ | 1,675  |      
|                            |                          |                   |        |              |  |             |         |        |   |   |        |      
|Goodwill                    |                          | $                 | 58,557 |              |  | $           | (13,026 | )      |   | $ | 45,531 |      
|                            |                          |                   |        |              |  |             |         |        |   |   |        |      

F-12



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The amortization expense of the above acquired intangible assets
for each of the five years ending December 31, 2007 will be
as follows:

|                         |  |              |       | 
|------------------------ |  | ------------ | ----- | 
|                         |  | Amortization
|Year Ending December 31, |  | Expense     
|                         |  |             
|2003                     |  | $            | 1,045 | 
|                        
|                        
|                        
|                        
|2004                     |  |              | 590   | 
|                        
|                        
|                        
|                        
|2005                     |  |              | 11    | 
|                        
|                        
|                        
|                        
|2006                     |  |              | 11    | 
|                        
|                        
|                        
|                        
|2007                     |  |              | 11    | 
|                        
|                        
|                        
|                        
|Thereafter               |  |              | 7     | 
|                         |  |              |       | 
|                         |  | $            | 1,675 | 
|                         |  |              |       | 

Amortization expense of intangible assets for the years ended
December 31, 2000, 2001 and 2002, was $5,765, $6,403 and
$1,103, respectively.

5.     Accrued Expenses

Accrued expenses consist of the following:

|                                               |  |              |        |      |  |   |        | 
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2001         |        | 2002
|                                               |  |              |        |     
|Accrued payroll                                |  | $            | 6,334  |      |  | $ | 7,817  | 
|                                              
|                                              
|                                              
|                                              
|Accrued interest                               |  |              | 2,782  |      |  |   | 2,731  | 
|                                              
|                                              
|                                              
|                                              
|Accrued construction in progress and equipment |  |              | 3,845  |      |  |   | 2,650  | 
|                                              
|                                              
|                                              
|                                              
|Accrued occupancy costs                        |  |              | 3,324  |      |  |   | 3,514  | 
|                                              
|                                              
|                                              
|                                              
|Accrued other                                  |  |              | 2,633  |      |  |   | 4,922  | 
|                                               |  |              |        |      |  |   |        | 
|                                               |  | $            | 18,918 |      |  | $ | 21,634 | 
|                                               |  |              |        |      |  |   |        | 

6.     Long-Term Debt and Capital
Lease Obligations

Long-term debt and capital lease obligations consist of the
following:

|                                       |                                           |                   |         |       |         |   |         |       |         | 
|-------------------------------------- | ----------------------------------------- | ----------------- | ------- | ----- | ------- | - | ------- | ----- | ------- | 
|                                       |                                           |                  
|                                       |                                           | December 31,     
|                                       |                                           |                  
|                                       |                                           | 2001              |         | 2002 
|                                       |                                           |                   |         |      
|Series B 9 3/4% Senior Notes, due 2004 |                                           | $                 | 125,000 |       |         | $ | 125,000 |      
|                                      
|                                      
|                                      
|                                      
|Line of credit borrowings              |                                           |                   | 22,745  |       |         |   | 14,500  |      
|                                      
|                                      
|                                      
|                                      
|Subordinated credit borrowings         |                                           |                   | 6,000   |       |         |   | 9,000   |      
|                                      
|                                      
|                                      
|                                      
|Notes payable for acquired businesses  |                                           |                   | 2,931   |       |         |   | 6,230   |      
|                                      
|                                      
|                                      
|                                      
|Capital lease obligations              |                                           |                   | 7,303   |       |         |   | 6,213   |      
|                                       |                                           |                   |         |       |         |   |         |      
|                                       |                                           |                   | 163,979 |       |         |   | 160,943 |      
|                                      
|                                      
|                                      
|                                      
|                                       | Less, Current portion due within one year |                   |         | 4,015 |         |   |         | 5,178 |        
|                                       |                                           |                   |         |       |         |   |         |      
|                                       |                                           | Long-term portion |         | $     | 159,964 |   |         | $     | 155,765 | 
|                                       |                                           |                   |         |       |         |   |         |      

F-13



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The aggregate long-term debt and capital lease obligations
maturing during the next five years and thereafter is as follows:

|                         |  |            |         | 
|------------------------ |  | ---------- | ------- | 
|Year Ending December 31, |  | Amount Due
|                         |  |           
|2003                     |  | $          | 5,178   | 
|                        
|                        
|                        
|                        
|2004                     |  |            | 152,242 | 
|                        
|                        
|                        
|                        
|2005                     |  |            | 1,188   | 
|                        
|                        
|                        
|                        
|2006                     |  |            | 619     | 
|                        
|                        
|                        
|                        
|2007                     |  |            | 632     | 
|                        
|                        
|                        
|                        
|Thereafter               |  |            | 1,084   | 
|                         |  |            |         | 
|                         |  | $          | 160,943 | 
|                         |  |            |         | 

In October 1997, the Company issued $85,000 of Series B
9 3/4% Senior Notes (Senior Notes), due October
2004. The net proceeds from the Senior Notes totaled
approximately $81,700. The transaction fees of approximately
$3,300, were accounted for as deferred financing costs. In June
1999, the Company issued $40,000 of Senior Notes at a price of
98.75%, providing the Company with $39,500 of proceeds before
expenses relating to the issuance. The transaction fees of
approximately $3,900 were accounted for as deferred financing
costs. The Senior Notes bear interest at an annual rate of
9 3/4%, payable semi-annually. The Senior Notes are
redeemable at the option of the Company on or after October 15,
2001. For redemption prior to October 15, 2004, the Company
would be required to pay a premium as defined. The Senior Notes
are non-collateralized and rank pari passu
with all unsubordinated debt and senior in right of payment with
all subordinated indebtedness of the Company. The note indenture
under which the Senior Notes were issued contains certain
covenants that, among other things, limit the Companys
ability to incur additional indebtedness, pay dividends or make
certain other restricted payments, engage in transactions with
affiliates, incur liens and engage in asset sales.

The Company has a line of credit with its principal bank for
direct borrowings and letters of credit of up to $25,000. The
line of credit carries interest at the Companys option
based upon the Eurodollar borrowing rate plus 2.50% or the
banks prime rate plus 1.50%, as defined and the Company is
required to pay a commitment commission of 0.375% per annum
based upon the daily unutilized amount. There were $10,500 of
Eurodollar and $4,000 of prime rate based borrowings outstanding
against this line as of December 31, 2002. The amount
available for borrowing has been further reduced by outstanding
letters of credit totaling $1,900 (see Note 8). Amounts
available for future borrowings as of December 31, 2002
were $8,600. The interest rate charged on the Eurodollar
borrowings and prime rate based borrowings outstanding at
December 31, 2002 were 4.0% and 6.25%, respectively. In May
2001, the Credit Agreement was amended to extend the maturity
date to July 15, 2004. The Company paid $188 in bank
structuring fees and $50 in legal fees related to this
amendment. The line, as amended, contains various covenants
including interest coverage and a leverage ratio as well as
restrictions on the payment of dividends. The line is
collateralized by a mortgage on land, building and equipment,
which, as of December 31, 2002, had an aggregate book value
of approximately $3,848, and by all other assets of the Company.

In November 2000, the Company entered into a Subordinated Credit
Agreement (the Subordinated Agreement) with an
affiliate of a stockholder of the Company. This Subordinated
Agreement provides for up to $20,000 of principal borrowings and
expires December 31, 2004. Interest on principal borrowings
accrues at 12.75% per annum; 9.75% of which is payable on a
monthly basis and the remaining 3% is accruable and payable, at
the option of the Company, through maturity. The total amount of
accrued and unpaid interest may not exceed $2,500. The Company
is charged a fee of 0.083% per month based on the portion of the
facility not utilized. In connection with this agreement the
Company paid a commitment fee of $225 to the lender,
approximately $73 of legal fees, and committed to issue 16,000
shares of common stock to the lender.

F-14



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Such shares were issued during December 2001 and had an
estimated fair value of $1,360 as of the date the lender
committed to provide the financing. The aforementioned legal
fees and fair value of the common stock were accounted for as
deferred financing costs at the time the agreement was entered
into. In December 2001 the Company issued an additional 7,000
shares of restricted common stock to the lender, which would
have been forfeited by the lender in the event that the
agreement was terminated prior to November 30, 2002. As the
agreement was not terminated, these restricted shares became
unrestricted in November 2002. The Agreement contains similar,
but less restrictive covenants than those with the line of
credit, as amended. There were $9,000 of Subordinated credit
borrowings outstanding as of December 31, 2002. In 2002, an
additional commitment fee of $125 was paid to the lender pending
an increase in the facility of $5,500.

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

The carrying value of long-term debt, other than the Senior
Notes, approximates fair market value as of December 31,
2001 and 2002 as the debt is generally short-term in nature. The
Senior Notes have a fair value of approximately $128,125 and
$125,000, based on the quoted market price as of
December 31, 2001 and 2002, respectively.

The Companys interest expense and capitalized interest
related to funds borrowed to finance club facilities under
construction for the years ended December 31, 2000, 2001
and 2002 are as follows:

|                           |  |                          |        |      |  |      |        |  |  |   |        | 
|-------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                           |  |                         
|                           |  | Years Ended December 31,
|                           |  |                         
|                           |  | 2000                     |        | 2001 |  | 2002
|                           |  |                          |        |      |  |     
|Interest costs expensed    |  | $                        | 14,300 |      |  | $    | 14,918 |  |  | $ | 16,559 | 
|                          
|                          
|                          
|                          
|Interest costs capitalized |  |                          | 660    |      |  |      | 907    |  |  |   | 354    | 
|                           |  |                          |        |      |  |      |        |  |  |   |        | 
|                           |  | $                        | 14,960 |      |  | $    | 15,825 |  |  | $ | 16,913 | 
|                           |  |                          |        |      |  |      |        |  |  |   |        | 

The Company leases equipment under noncancelable capital leases.
The initial lease terms range from three to five years, after
which the Company has the right to purchase the equipment at
amounts defined by the agreements.

As of December 31, 2002, minimum rental payments, under all
capital leases, including payments to acquire leased equipment,
are as follows:

|                         |                                     |                                                     |       |       |       | 
|------------------------ | ----------------------------------- | --------------------------------------------------- | ----- | ----- | ----- | 
|                         |                                     | Minimum                                            
|Year Ending December 31, |                                     | Annual Rental                                      
|                         |                                     |                                                    
|2003                     |                                     | $                                                   | 4,172 |      
|                        
|                        
|                        
|                        
|2004                     |                                     |                                                     | 2,827 |      
|                        
|                        
|                        
|                        
|2005                     |                                     |                                                     | 478   |      
|                         |                                     |                                                     |       |      
|                         |                                     |                                                     | 7,477 |      
|                        
|                        
|                        
|                        
|                         | Less, Amounts representing interest |                                                     |       | 1,264 |      
|                         |                                     |                                                     |       |      
|                         |                                     | Present value of minimum capital lease
    payments |       | $     | 6,213 | 
|                         |                                     |                                                     |       |      

The cost of leased equipment included in club equipment was
approximately $10,083 and $12,658 at December 31, 2001 and
2002, respectively; and the related accumulated depreciation was
$3,421 and $5,686, respectively.

F-15



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

7.     Related Party Transactions

The Company entered into a professional service agreement with
Bruckmann, Rosser, Sherrill & Co., Inc. (BRS), a
stockholder of the Company for strategic and financial advisory
services on December 10, 1996. Fees for such services are
$250 per annum, and are payable while BRS owns 20% or more of
the outstanding Common stock of the Company. No amounts were due
BRS at December 31, 2001 and 2002.

The Companys Subordinated Agreement was entered into with
an affiliate of a stockholder of the Company.

8.     Leases

The Company leases office, warehouse and multi-recreational
facilities and certain equipment under noncancelable operating
leases. In addition to base rent, the facility leases generally
provide for additional rent based on increases in real estate
taxes and other costs. Certain leases give the Company the right
to acquire the leased facility at defined prices based on fair
value and provide for additional rent based upon defined
formulas of revenue, cash flow or operating results of the
respective facilities. Under the provisions of certain of these
leases, the Company is required to maintain irrevocable letters
of credit, which total $1,900 as of December 31, 2002.

The leases expire at various times through December 31,
2027, and certain leases may be extended at the Companys
option.

Future minimum rental payments under noncancelable operating
leases are as follows:

|                         |  |               |         | 
|------------------------ |  | ------------- | ------- | 
|                         |  | Minimum      
|Year Ending December 31, |  | Annual Rental
|                         |  |              
|2003                     |  | $             | 46,276  | 
|                        
|                        
|                        
|                        
|2004                     |  |               | 47,527  | 
|                        
|                        
|                        
|                        
|2005                     |  |               | 47,462  | 
|                        
|                        
|                        
|                        
|2006                     |  |               | 47,328  | 
|                        
|                        
|                        
|                        
|2007                     |  |               | 45,425  | 
|                        
|                        
|                        
|                        
|Aggregate thereafter     |  |               | 355,940 | 
|                         |  |               |         | 
|                         |  | $             | 589,958 | 
|                         |  |               |         | 

Rent expense, including the effect of deferred lease
liabilities, for the years ended December 31, 2000, 2001
and 2002 was $33,293, $42,341 and $52,085, respectively. Such
amounts include additional rent of $4,962, $7,119 and $8,368,
respectively.

The Company, as landlord, leases space to third party tenants
under noncancelable operating leases and licenses. In addition
to base rent, certain leases provide for additional rent based
on increases in real estate taxes, indexation, utilities and
defined amounts based on the operating results of the lessee.
The leases expire

F-16



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

at various times through December 31, 2008. Future minimum
rentals receivable under noncancelable leases are as follows:

|                         |  |               |       | 
|------------------------ |  | ------------- | ----- | 
|                         |  | Minimum      
|Year Ending December 31, |  | Annual Rental
|                         |  |              
|2003                     |  | $             | 1,383 | 
|                        
|                        
|                        
|                        
|2004                     |  |               | 1,014 | 
|                        
|                        
|                        
|                        
|2005                     |  |               | 619   | 
|                        
|                        
|                        
|                        
|2006                     |  |               | 480   | 
|                        
|                        
|                        
|                        
|2007                     |  |               | 284   | 
|                        
|                        
|                        
|                        
|Aggregate thereafter     |  |               | 116   | 
|                         |  |               |       | 
|                         |  | $             | 3,896 | 
|                         |  |               |       | 

Rental income, including noncash rental income, for the years
ended December 31, 2000, 2001 and 2002 was $1,706, $1,879
and $2,132, respectively. Such amounts include additional rental
charges above the base rent of $630, $775 and $807, respectively.

9.     Redeemable Preferred Stock

Redeemable Senior Preferred
Stock

During November 1998, the Company issued 40,000 shares of
mandatorily redeemable Senior stock (Senior) and
143,261 warrants. During 2002, 71,630 of these warrants were
exercised. The Senior stock has no voting rights except as
required by law. The warrants have an exercise price of $0.01,
expire in November 2008 and are exercisable into an equal number
of shares of Class A Common Stock. After payment of fees
and expenses of approximately $365, the Company received net
proceeds of $39,635. Upon issuance, a $3,416 value was ascribed
to the warrants. The initial fair value of the Senior stock
($36,219) is being accreted to its liquidation value using the
interest method. The Senior stock is redeemable in November
2008. In the event that certain defined events occur, the number
of warrants exercisable will be reduced. The Company, at its
option, can redeem the Senior stock at any time without premium.

The Senior stock has liquidation preferences over Series A,
Series B and Common Stock. The Senior stock may, at the
option of the holder, be converted into Common Stock upon the
initial public offering (IPO) of the Companys
common stock at a conversion rate equal to the IPO price.

The Senior stock has a liquidation value of $1,000 per share
plus cumulative unpaid dividends of $24,512, as of
December 31, 2002. The Senior stockholders are entitled to
a cumulative 12% annual dividend, based upon the per share price
of $1,000.

F-17



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

A summary of transactions related to the Senior stock is as
follows:

|                                                                                                 |                                           |          |        |             |  |   |        |        | 
|------------------------------------------------------------------------------------------------ | ----------------------------------------- | -------- | ------ | ----------- |  | - | ------ | ------ | 
|                                                                                                 |                                           | Carrying |        | Liquidation
|                                                                                                 |                                           | Value    |        | Value      
|                                                                                                 |                                           |          |        |            
|Proceeds received in connection with the November
    1998 issuance of Senior stock and warrants |                                           | $        | 40,000 |             |  | $ | 40,000 |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Expenses incurred in connection with issuance                                                    |                                           |          | (365   | )           |  |   |       |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Fair value ascribed to warrants at issuance                                                      |                                           |          | (3,416 | )           |  |   |       |       
|                                                                                                 |                                           |          |        |             |  |   |        |       
|                                                                                                 | Value of senior stock at date of issuance |          |        | 36,219      |  |   |        | 40,000 | 
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Accretion to Senior stock liquidation value                                                      |                                           |          | 369    |             |  |   |       |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Accretion of Senior stock dividends                                                              |                                           |          | 5,478  |             |  |   | 5,478  |       
|                                                                                                 |                                           |          |        |             |  |   |        |       
|January 1, 2000 Senior stock                                                                     |                                           |          | 42,066 |             |  |   | 45,478 |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Accretion to Senior stock liquidation value                                                      |                                           |          | 341    |             |  |   |       |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Accretion of Senior stock dividends                                                              |                                           |          | 5,622  |             |  |   | 5,622  |       
|                                                                                                 |                                           |          |        |             |  |   |        |       
|December 31, 2000 Senior stock                                                                   |                                           |          | 48,029 |             |  |   | 51,100 |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Accretion to Senior stock liquidation value                                                      |                                           |          | 342    |             |  |   |       |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Accretion of Senior stock dividends                                                              |                                           |          | 6,316  |             |  |   | 6,316  |       
|                                                                                                 |                                           |          |        |             |  |   |        |       
|December 31, 2001 Senior stock                                                                   |                                           |          | 54,687 |             |  |   | 57,416 |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Accretion to Senior stock liquidation value                                                      |                                           |          | 342    |             |  |   |       |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Accretion of Senior stock dividends                                                              |                                           |          | 7,096  |             |  |   | 7,096  |       
|                                                                                                 |                                           |          |        |             |  |   |        |       
|December 31, 2002 Senior stock                                                                   |                                           | $        | 62,125 |             |  | $ | 64,512 |       
|                                                                                                 |                                           |          |        |             |  |   |        |       

Cumulative unpaid dividends on Senior stock are payable upon
certain defined events which include: the dissolution,
liquidation or winding up of the Company; the redemption of such
shares; or the sale of substantially all of the assets of the
Company.

Series A Redeemable
Preferred Stock

During fiscal years 1997 and 1998, the Company issued 152,455
and 1,182 shares, respectively, of Series A redeemable
preferred stock. As of December 31, 2001 and 2002, 153,637
shares of Series A stock were outstanding. Series A
stock has liquidation preferences over Common Stock in the event
of a liquidation, dissolution or winding up of the Company.
Series A stock has no conversion features or voting rights
except as required by law, and rank pari passu.
Series A stock has a liquidation value of $100 per share
plus cumulative unpaid dividends of $19,479 as of
December 31, 2002. Series A stockholders are entitled
to a cumulative 14% annual dividend based upon the per share
price of $100. The Company may, at its sole discretion, pay any
dividends by cash or by the issuance of additional Series A
shares. The Company may at any time redeem all or any portion of
the Series A stock at a price equal to the liquidation
value plus cumulative unpaid dividends.

F-18



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

A summary of transactions related to Series A stock is as
follows:

|                                                                        |  |        |         |          |  |   |        | 
|----------------------------------------------------------------------- |  | ------ | ------- | -------- |  | - | ------ | 
|                                                                        |  |        |         | Carrying
|                                                                        |  | Shares |         | Value   
|                                                                        |  |        |         |         
|Proceeds received in connection with the issuance
    of Series A stock |  |        | 153,637 |          |  | $ | 15,364 | 
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Accretion of Series A stock dividends                                   |  |        |        |          |  |   | 7,852  | 
|                                                                        |  |        |         |          |  |   |        | 
|January 1, 2000 Series A stock                                          |  |        | 153,637 |          |  |   | 23,216 | 
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Accretion of Series A stock dividends                                   |  |        |        |          |  |   | 3,364  | 
|                                                                        |  |        |         |          |  |   |        | 
|December 31, 2000 Series A stock                                        |  |        | 153,637 |          |  |   | 26,580 | 
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Accretion to Series A stock dividends                                   |  |        |        |          |  |   | 3,852  | 
|                                                                        |  |        |         |          |  |   |        | 
|December 31, 2001 Series A stock                                        |  |        | 153,637 |          |  |   | 30,432 | 
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Accretion to Series A stock dividends                                   |  |        |        |          |  |   | 4,409  | 
|                                                                        |  |        |         |          |  |   |        | 
|December 31, 2002 Series A stock                                        |  |        | 153,637 |          |  | $ | 34,841 | 
|                                                                        |  |        |         |          |  |   |        | 

In the event of a change in control as defined, each holder of
Series A stock then outstanding may require the
Corporation, and the Corporation shall be obligated, to redeem
all or any portion of the Series A stock owned by such
holder.

10.     Stockholders
Deficit

a.     Capitalization

The Companys certificate of incorporation, as amended,
provides for the issuance of up to 3,500,000 shares of capital
stock, consisting of 2,500,000 shares of Class A Voting
Common Stock (Class A), par value $0.001 per
share; 500,000 shares of Class B Non-voting Common Stock
(Class B), par value of $0.001 per share,
(Class A and Class B are collectively referred to
herein as Common Stock); and 200,000 shares of
Series B Preferred Stock (Series B) par
value $1.00 per share.

All stockholders have preemptive rights to purchase a pro-rata
share of any future sales of securities, as defined.

Common Stock

Class A stock and Class B stock each have identical
terms with the exception that Class A stock is entitled to
one vote per share, while Class B stock has no voting
rights, except as required by law. In addition, Class B
stock is convertible into an equal number of Class A
shares, at the option of the holder of the majority of the
Class B stock. To date, the Company has not issued
Class B stock.

Series B Preferred
Stock

During December 1996, the Company issued 3,857 shares of
Series B preferred stock, 3,822 shares of which are
outstanding as of December 31, 2001 and 2002. Series B
stock has liquidation preferences over Common Stock in the event
of a liquidation, dissolution or winding up of the Company.
Series B stock has no voting rights except as required by
law, and rank pari passu. Upon consummation
of an IPO, at the option of the holder, each Series B stock
is convertible into Class A Common Stock at prices, at
which the Class A Common Stock is sold in such IPO. The
Company may at any time redeem all or any portion of the
Series B stock at a price equal to the liquidation value
plus cumulative unpaid dividends. Series B stock has a
liquidation value of $35 per share plus cumulative unpaid
dividends of $170 as of December 31, 2002. Series B
stockholders are entitled to a cumulative 14% annual dividend
based upon the per share price of $35. The

F-19



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Company may, at its sole discretion, pay any dividends by cash
or by the issuance of additional Series B shares.

In the event of a change in control, as defined, each holder of
Series B stock then outstanding may require the
Corporation, and the Corporation shall be obligated, to redeem
all or any portion of the Series B stock owned by such
holder. The Series B preferred stockholders do not control
a majority of the votes of the board of directors through direct
representation or other rights.

b.     Stock Options and Warrants

Class A Common
Stock Options

During the year ended May 31, 1997, the Company adopted the
Town Sports International Inc. Common Stock Option Plan (the
Plan). The provisions of the Plan, as amended and
restated, provide for the Companys Board of Directors to
grant to executives and key employees options to acquire 107,274
shares of Class A stock.

Grants vest in full at various dates between December 2007 and
2010. The vesting of these grants will be accelerated in the
event that certain defined events occur including the
achievement of annual equity values or the sale of the Company.
The term of each of these grants is ten or eleven years.

In accordance with APB No. 25, Accounting for Stock Issued
to Employees, the Company recorded unearned compensation in
connection with the 1998 Grants and the 2001 Grants. Such amount
is included within stockholders deficit and represented
the difference between the estimated fair value of the
Class A stock on the date of amendment or grant,
respectively, and the exercise price. Unearned compensation will
be amortized as compensation expense over the vesting period.
During the years ended December 31, 2000, 2001 and 2002,
amortization of unearned compensation totaled $969, $156 and
$70, respectively.

As of December 31, 2002, there were 13,729 shares reserved
for future option awards.

As of December 31, 2000, 2001 and 2002, a total of 68,279,
76,474 and 75,819 Class A Common stock options were
exercisable, respectively.

Series B Preferred
Stock Options

During the year ended May 31, 1997, the Company granted
164,783 options (Series B Options) to certain
employees which entitle the holders to purchase an equal number
of shares of Series B stock at an exercise price of $10.00
per share. Series B Options were fully vested on the date
of grant and expire on December 31, 2021. The terms of the
Series B Options also contain provisions whereby the
exercise price will be reduced, or in certain cases, the option
holder will receive cash in accordance with a formula as
defined. The aggregate value of, either a reduction in exercise
price, or the distribution of cash is deemed compensatory and,
accordingly, is recorded as a compensation expense. For the
years ended December 31, 2000, 2001 and 2002 compensation
expense recognized in connection with Series B Options
totaled $867, $993 and $1,137, respectively. There are no shares
of Series B Preferred Stock reserved for future option
grants.

All Series B Preferred stock options were exercisable upon
grant.

F-20



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The following table summarizes the stock option activity for the
years ended December 31, 2000, 2001 and 2002:

|                             |           |         |        |          |   |           |       |          |      |  |         |        |   |   |       |       | 
|---------------------------- | --------- | ------- | ------ | -------- | - | --------- | ----- | -------- | ---- |  | ------- | ------ | - | - | ----- | ----- | 
|                             |           |         |        | Weighted |   |           |       | Weighted
|                             |           |         |        | Average  |   |           |       | Average 
|                             |           | Class A |        | Exercise |   | Series B  |       | Exercise
|                             |           | Common  |        | Price    |   | Preferred |       | Price   
|                             |           |         |        |          |   |           |       |         
|Balance at January 1, 2000   |           |         | 81,562 |          |   | $         | 11.42 |          |      |  | 163,690 |        |   | $ | 10.00 |      
|                            
|                            
|                            
|                            
|                             | Granted   |         |        | 17,446   |   |           | $     | 75.00    | (i)  |  |         |       |   |   |       |       | 
|                            
|                            
|                            
|                            
|                             | Exercised |         |        | (4,035   | ) |           | $     | 3.42     |      |  |         | (5,384 | ) |   | $     | 10.00 | 
|                            
|                            
|                            
|                            
|                             | Forfeited |         |        | (2,291   | ) |           | $     | 14.58    |      |  |         |       |   |   |       |       | 
|                             |           |         |        |          |   |           |       |          |      |  |         |        |   |   |       |      
|Balance at December 31, 2000 |           |         | 92,682 |          |   | $         | 23.88 |          |      |  | 158,306 |        |   | $ | 10.00 |      
|                            
|                            
|                            
|                            
|                             | Granted   |         |        | 7,400    |   |           | $     | 100.00   | (ii) |  |         |       |   |   |       |       | 
|                            
|                            
|                            
|                            
|                             | Exercised |         |        | (788     | ) |           | $     | 32.53    |      |  |         |       |   |   |       |       | 
|                            
|                            
|                            
|                            
|                             | Forfeited |         |        | (512     | ) |           | $     | 25.76    |      |  |         |       |   |   |       |       | 
|                             |           |         |        |          |   |           |       |          |      |  |         |        |   |   |       |      
|Balance at December 31, 2001 |           |         | 98,782 |          |   | $         | 29.32 |          |      |  | 158,306 |        |   | $ | 10.00 |      
|                            
|                            
|                            
|                            
|                             | Exercised |         |        | (3,100   | ) |           | $     | 22.93    |      |  |         |       |   |   |       |       | 
|                            
|                            
|                            
|                            
|                             | Forfeited |         |        | (2,200   | ) |           | $     | 84.57    |      |  |         |       |   |   |       |       | 
|                             |           |         |        |          |   |           |       |          |      |  |         |        |   |   |       |      
|Balance at December 31, 2002 |           |         | 93,482 |          |   | $         | 28.23 |          |      |  | 158,306 |        |   | $ | 10.00 |      
|                             |           |         |        |          |   |           |       |          |      |  |         |        |   |   |       |      



---



|     |                                                                                                      
|---- | -----------------------------------------------------------------------------------------------------
|(i)  | Option exercise price was equal to market price on the grant date                                    
|    
|(ii) | Option exercise price of these options were less than the
    estimated fair value on the grant date.

The following table summarizes stock option information as of
December 31, 2002:

|                   |             |                     |         |                     |  |           |            |             |  |           |       |        |  |  |         |        |  |   |       |        | 
|------------------ | ----------- | ------------------- | ------- | ------------------- |  | --------- | ---------- | ----------- |  | --------- | ----- | ------ |  |  | ------- | ------ |  | - | ----- | ------ | 
|                   |             |                     |         |                    
|                   |             | Options Outstanding |         | Options Exercisable
|                   |             |                     |         |                    
|                   |             |                     |         | Weighted-           |  |           |            |            
|                   |             |                     |         | Average             |  | Weighted- |            |             |  | Weighted-
|                   |             |                     |         | Remaining           |  | Average   |            |             |  | Average  
|                   |             | Number              |         | Contractual         |  | Exercise  |            | Number      |  | Exercise 
|                   |             | Outstanding         |         | Life                |  | Price     |            | Exercisable |  | Price    
|                   |             |                     |         |                     |  |           |            |             |  |          
|Class A Common:    |             |                     |         |                     |  |           |            |             |  |           |       |        |  |  |         |        |  |   |       |       
|                  
|                  
|                  
|                  
|                   | 1997 Grants |                     |         | 50,936              |  |           |            | 48 months   |  |           | $     | 1.00   |  |  |         | 50,936 |  |   | $     | 1.00   | 
|                  
|                  
|                  
|                  
|                   | 1998 Grants |                     |         | 9,200               |  |           |            | 64 months   |  |           | $     | 17.50  |  |  |         | 9,200  |  |   | $     | 17.50  | 
|                  
|                  
|                  
|                  
|                   | 1999 Grants |                     |         | 10,300              |  |           |            | 72 months   |  |           | $     | 53.00  |  |  |         | 7,210  |  |   | $     | 53.00  | 
|                  
|                  
|                  
|                  
|                   | 2000 Grants |                     |         | 16,946              |  |           |            | 84 months   |  |           | $     | 75.00  |  |  |         | 8,473  |  |   | $     | 75.00  | 
|                  
|                  
|                  
|                  
|                   | 2001 Grants |                     |         | 6,100               |  |           |            | 103 months  |  |           | $     | 100.00 |  |  |         |       |  |   | $     | 100.00 | 
|                   |             |                     |         |                     |  |           |            |             |  |           |       |        |  |  |         |        |  |   |       |       
|Total Grants       |             |                     | 93,482  |                     |  |           |            |             |  |           |       |        |  |  | 75,819  |        |  |   |      |       
|                   |             |                     |         |                     |  |           |            |             |  |           |       |        |  |  |         |        |  |   |       |       
|Series B Preferred |             |                     | 158,306 |                     |  |           | 239 months |             |  | $         | 10.00 |        |  |  | 158,306 |        |  | $ | 10.00 |       
|                   |             |                     |         |                     |  |           |            |             |  |           |       |        |  |  |         |        |  |   |       |       

Warrants to buy Common Stock

In connection with the issuance of a Subordinated note (which
has subsequently been repaid) on December 10, 1996,
warrants to buy 124,022 Class A Common Shares were issued
at an exercise price of $0.01 per share. Original issue discount
arising upon this issue totaled approximately $123. 10,000
warrants were exercised on December 10, 1996. The amount of
warrants outstanding was reduced in November 1998 by 38,308 to
75,714 in connection with the issuance of the Senior stock.
During 2002, these warrants were fully exercised.

F-21



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

11.     Asset Acquisitions

During the period from January 1, 2000 through
December 31, 2002, the Company completed the acquisition of
19 fitness clubs. With the exception of the Health Development
Corporation (HDC) acquisition discussed below, the
individual acquisitions were not material to the financial
position, results of operations or cash flows of the Company.
The table below summarizes the aggregate purchase price and the
purchase price allocation to assets acquired:

|                                           |                                |                                     |        |        |        |      |       |       |       |   |       |       |       | 
|------------------------------------------ | ------------------------------ | ----------------------------------- | ------ | ------ | ------ | ---- | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                                           |                                |                                    
|                                           |                                | Years Ended December 31,           
|                                           |                                |                                    
|                                           |                                | 2000                                |        | 2001   |        | 2002
|                                           |                                |                                     |        |        |        |     
|Number of clubs acquired                   |                                |                                     | 13     |        |        |      | 2     |       |       |   | 4     |      
|                                           |                                |                                     |        |        |        |      |       |       |       |   |       |      
|Purchase prices payable in cash at closing |                                | $                                   | 24,053 |        |        | $    | 1,272 |       |       | $ | 2,322 |      
|                                          
|                                          
|                                          
|                                          
|Issuance and assumption of notes payable   |                                |                                     | 2,238  |        |        |      | 250   |       |       |   | 4,725 |      
|                                           |                                |                                     |        |        |        |      |       |       |       |   |       |      
|                                           |                                | Total purchase prices               |        | $      | 26,291 |      |       | $     | 1,522 |   |       | $     | 7,047 | 
|                                           |                                |                                     |        |        |        |      |       |       |       |   |       |      
|Allocation of purchase prices:             |                                |                                     |        |        |        |      |       |       |       |   |       |      
|                                          
|                                          
|                                          
|                                          
|                                           | Goodwill                       |                                     | $      | 19,926 |        |      | $     | 1,316 |       |   | $     | 4,479 |      
|                                          
|                                          
|                                          
|                                          
|                                           | Fixed assets                   |                                     |        | 6,809  |        |      |       | 235   |       |   |       | 1,955 |      
|                                          
|                                          
|                                          
|                                          
|                                           | Membership lists               |                                     |        | 3,548  |        |      |       | 181   |       |   |       | 1,432 |      
|                                          
|                                          
|                                          
|                                          
|                                           | Covenants-not-to-compete       |                                     |        | 25     |        |      |       |      |       |   |       |      |      
|                                          
|                                          
|                                          
|                                          
|                                           | Other net liabilities acquired |                                     |        | (372   | )      |      |       | (172  | )     |   |       | (108  | )    
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred revenue               |                                     |        | (3,645 | )      |      |       | (38   | )     |   |       | (711  | )    
|                                           |                                |                                     |        |        |        |      |       |       |       |   |       |      
|                                           |                                | Total allocation of purchase prices |        | $      | 6,365  |      |       | $     | 1,522 |   |       | $     | 7,047 | 
|                                           |                                |                                     |        |        |        |      |       |       |       |   |       |      

For financial reporting purposes, these acquisitions have been
accounted for under the purchase method and, accordingly, the
purchase prices have been assigned to the assets and liabilities
acquired on the basis of their respective fair values on the
date of acquisition. The excess of purchase prices over the net
tangible assets acquired has been allocated to membership lists
acquired, covenants-not-to-compete and goodwill. The results of
operations of the clubs have been included in the Companys
consolidated financial statements from the respective dates of
acquisition and with the exception of HDC, the impact of these
acquisitions on the consolidated financial statements of the
Company was not material.

In July 2000, the Company acquired HDC, a Massachusetts
Corporation. HDCs operations included eight clubs in
Massachusetts and one club in New Hampshire. HDC also provided
management services at three facilities in the greater Boston
area. HDC was purchased for $18,700 in cash. Including
approximately $525 of transaction costs, the aggregate purchase
price amounted to $19,200.

Assuming the acquisition of HDC occurred at the beginning of
2000, unaudited pro forma revenues would have been $234,771,
unaudited pro forma net income would have been $4,179 and
unaudited pro forma net loss to common shareholders would have
been $4,837. This unaudited pro forma information has been
prepared assuming the HDC acquisition had taken place at the
beginning of the respective periods reported herein. The pro
forma adjustments give effect in amortization of goodwill,
amortization of membership lists, interest expense on
acquisition debt, adjustment to rent expense and the related
income tax effects. Immediately prior to the acquisition HDC
sold the land and buildings related to two of its fitness clubs
and entered into leases with the new landlords of these clubs.
Rent expense, interest on mortgages and building depreciation
related to those two clubs have also been adjusted. The
unaudited pro forma financial information for HDC is presented
for information purposes only and may not be indicative of the
results of operations as they would have been had the Company
completed the acquisition as of and for the periods noted above,
nor is it indicative of the results of operations which may
occur in the future. Anticipated efficiencies form the

F-22



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

consolidation of HDC and the Company have been excluded from the
amounts included in the pro forma summaries presented above.

12.     Revenue from Club
Operations

Revenues from club operations for the years ended
December 31, 2000, 2001 and 2002 are summarized below:

|                    |  |                          |         |      |  |      |         |  |  |   |         | 
|------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                    |  |                         
|                    |  | Years Ended December 31,
|                    |  |                         
|                    |  | 2000                     |         | 2001 |  | 2002
|                    |  |                          |         |      |  |     
|Membership dues     |  | $                        | 181,415 |      |  | $    | 227,073 |  |  | $ | 257,917 | 
|                   
|                   
|                   
|                   
|Initiation Fees     |  |                          | 10,969  |      |  |      | 13,287  |  |  |   | 14,361  | 
|                   
|                   
|                   
|                   
|Other club revenues |  |                          | 28,826  |      |  |      | 37,840  |  |  |   | 42,717  | 
|                    |  |                          |         |      |  |      |         |  |  |   |         | 
|                    |  | $                        | 221,210 |      |  | $    | 278,200 |  |  | $ | 314,995 | 
|                    |  |                          |         |      |  |      |         |  |  |   |         | 

13.     Corporate Income Taxes

The provision (benefit) for income taxes for the year ended
December 31, 2000, 2001 and 2002 consists of the following:

|         |  |                              |        |           |  |       |       |   |  |   |        |  
|-------- |  | ---------------------------- | ------ | --------- |  | ----- | ----- | - |  | - | ------ | -
|         |  |                             
|         |  | Year Ended December 31, 2000
|         |  |                             
|         |  |                              |        | State     |  |      
|         |  | Federal                      |        | and Local |  | Total
|         |  |                              |        |           |  |      
|Current  |  | $                            | 5,875  |           |  | $     | 2,482 |   |  | $ | 8,357  |  
|        
|        
|        
|        
|Deferred |  |                              | (3,170 | )         |  |       | (156  | ) |  |   | (3,326 | )
|         |  |                              |        |           |  |       |       |   |  |   |        |  
|         |  | $                            | 2,705  |           |  | $     | 2,326 |   |  | $ | 5,031  |  
|         |  |                              |        |           |  |       |       |   |  |   |        |  

|         |  |                              |        |           |  |       |        |   |  |   |        |  
|-------- |  | ---------------------------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|         |  |                             
|         |  | Year Ended December 31, 2001
|         |  |                             
|         |  |                              |        | State     |  |      
|         |  | Federal                      |        | and Local |  | Total
|         |  |                              |        |           |  |      
|Current  |  | $                            | 7,964  |           |  | $     | 3,415  |   |  | $ | 11,379 |  
|        
|        
|        
|        
|Deferred |  |                              | (3,357 | )         |  |       | (1,169 | ) |  |   | (4,526 | )
|         |  |                              |        |           |  |       |        |   |  |   |        |  
|         |  | $                            | 4,607  |           |  | $     | 2,246  |   |  | $ | 6,853  |  
|         |  |                              |        |           |  |       |        |   |  |   |        |  

|         |  |                              |       |           |  |       |       |   |  |   |        |  
|-------- |  | ---------------------------- | ----- | --------- |  | ----- | ----- | - |  | - | ------ | -
|         |  |                             
|         |  | Year Ended December 31, 2002
|         |  |                             
|         |  |                              |       | State     |  |      
|         |  | Federal                      |       | and Local |  | Total
|         |  |                              |       |           |  |      
|Current  |  | $                            | 6,483 |           |  | $     | 4,388 |   |  | $ | 10,871 |  
|        
|        
|        
|        
|Deferred |  |                              | (536  | )         |  |       | (626  | ) |  |   | (1,162 | )
|         |  |                              |       |           |  |       |       |   |  |   |        |  
|         |  | $                            | 5,947 |           |  | $     | 3,762 |   |  | $ | 9,709  |  
|         |  |                              |       |           |  |       |       |   |  |   |        |  

F-23



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The components of the net deferred tax asset as of,
December 31, 2001 and 2002 are summarized below:

|                          |                                                                    |                                                           |        |        |        |  |        |        |        | 
|------------------------- | ------------------------------------------------------------------ | --------------------------------------------------------- | ------ | ------ | ------ |  | ------ | ------ | ------ | 
|                          |                                                                    |                                                          
|                          |                                                                    | December 31,                                             
|                          |                                                                    |                                                          
|                          |                                                                    | 2001                                                      |        | 2002  
|                          |                                                                    |                                                           |        |       
|Deferred tax assets:      |                                                                    |                                                           |        |        |        |  |        |       
|                         
|                         
|                         
|                         
|                          | Deferred lease liabilities                                         |                                                           | $      | 9,129  |        |  | $      | 9,821  |       
|                         
|                         
|                         
|                         
|                          | Deferred revenue                                                   |                                                           |        | 6,013  |        |  |        | 5,954  |       
|                         
|                         
|                         
|                         
|                          | Fixed assets and intangible assets                                 |                                                           |        | 5,993  |        |  |        | 5,032  |       
|                         
|                         
|                         
|                         
|                          | Compensation expense incurred in connection with
    stock options |                                                           |        | 4,444  |        |  |        | 4,855  |       
|                         
|                         
|                         
|                         
|                          | State net operating loss carry-forwards                            |                                                           |        | 411    |        |  |        | 1,151  |       
|                         
|                         
|                         
|                         
|                          | Other                                                              |                                                           |        | 47     |        |  |        | (1     | )     
|                          |                                                                    |                                                           |        |        |        |  |        |       
|                          |                                                                    |                                                           | 26,037 |        |        |  | 26,812 |       
|                          |                                                                    |                                                           |        |        |        |  |        |       
|Deferred tax liabilities: |                                                                    |                                                           |        |        |        |  |        |       
|                         
|                         
|                         
|                         
|                          | Deferred costs                                                     |                                                           |        | (6,387 | )      |  |        | (6,174 | )     
|                         
|                         
|                         
|                         
|                          | Acquired membership liabilities                                    |                                                           |        | (274   | )      |  |        |       |       
|                          |                                                                    |                                                           |        |        |        |  |        |       
|                          |                                                                    |                                                           | (6,661 | )      |        |  | (6,174 | )     
|                          |                                                                    |                                                           |        |        |        |  |        |       
|                          |                                                                    | Net deferred tax assets, prior to valuation
    allowance |        |        | 19,376 |  |        |        | 20,638 | 
|                         
|                         
|                         
|                         
|Valuation allowance       |                                                                    |                                                           | (284   | )      |        |  | (384   | )     
|                          |                                                                    |                                                           |        |        |        |  |        |       
|                          |                                                                    | Net deferred tax assets                                   |        | $      | 19,092 |  |        | $      | 20,254 | 
|                          |                                                                    |                                                           |        |        |        |  |        |       

As of December 31, 2002, the Company has state net
operating loss (NOL) carry-forwards of approximately
$12,525. Such amounts expire between December 31, 2003 and
December 31, 2021. The Companys $384,000 valuation
allowance has been maintained for NOL carryforwards in Virginia,
where the Company is not generating taxable income.

Foreign income and the effect of foreign income taxes was
immaterial.

The following table accounts for the differences between the
actual provision and the amounts obtained by applying the
statutory U.S. Federal income tax rate of 35% to the income
before provision for corporate income taxes:

|                                                                                               |  |                          |     |      |  |      |    |   |  |  |    |  
|---------------------------------------------------------------------------------------------- |  | ------------------------ | --- | ---- |  | ---- | -- | - |  |  | -- | -
|                                                                                               |  |                         
|                                                                                               |  | Years Ended December 31,
|                                                                                               |  |                         
|                                                                                               |  | 2000                     |     | 2001 |  | 2002
|                                                                                               |  |                          |     |      |  |     
|Federal statutory tax rate                                                                     |  |                          | 35  | %    |  |      | 35 | % |  |  | 35 | %
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|State and local income taxes, net of federal tax
    benefit and change of valuation allowance |  |                          | 8   |      |  |      | 8  |   |  |  | 9  |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Change in state effective income tax rate                                                      |  |                          | 3   |      |  |      | 1  |   |  |  |   |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Non-deductible goodwill and other permanent
    differences                                    |  |                          | 4   |      |  |      | 3  |   |  |  | 1  |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Other                                                                                          |  |                          | (1) |      |  |      |   |   |  |  |   |  
|                                                                                               |  |                          |     |      |  |      |    |   |  |  |    |  
|                                                                                               |  |                          | 49  | %    |  |      | 47 | % |  |  | 45 | %
|                                                                                               |  |                          |     |      |  |      |    |   |  |  |    |  

14.     September 11, 2001
Events

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

F-24



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The Company carries business interruption insurance to mitigate
certain lost revenue and profits experienced with the
September 11 events. In this regard in the third quarter of
2001 a $175 insurance receivable was recorded representing an
estimate of costs incurred in September 2001. Such costs
included rent, payroll benefits, and other club operating costs
incurred during period of closure. In 2002, we collected this
$175 receivable and received additional on account payments of
$1,025. These on account payments were classified with fees and
other revenues.

Although we have business interruption insurance to cover
certain lost profits at all four clubs, we cannot predict with
any degree of certainty what future amounts will actually be
received from the insurance carriers. Furthermore we cannot, at
this time, determine whether the assets related to the fourth
club location have been permanently impaired. We will continue
to gather information to better assess whether or not the assets
of this club have been permanently impaired. We are
communicating with our insurance carrier on an ongoing basis in
order to better assess the relief we could expect to receive for
such coverage. In January 2003, we received and recorded an
additional $1,300 on account payment.

15.     Contingencies

On February 13, 2003, an individual filed suit against the
Company in the Supreme Court, New York County, alleging
that on January 14, 2003, he sustained an injury at one of
our club locations resulting in serious bodily injury. His
complaint seeks $250 million in damages for personal
injuries, in addition to $250 million of punitive damages.
The Company has in force $51 million of insurance coverage
to cover claims of this nature. The Company intends to
vigorously contest this lawsuit and presently anticipates that
these matters will be covered by insurance.

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

16.     Employee Benefit Plan

The Company maintains a 401(k) defined contribution plan and is
subject to the provisions of the Employee Retirement Income
Security Act of 1974 (ERISA). The Plan provides for
the Company to make discretionary contributions; however, the
Company elected not to make contributions for the year ended
December 31, 2000. The Plan was amended, effective
January 1, 2001, to provide for an employer matching
contribution in an amount equal to 25% of the participants
contribution with a limit of five hundred dollars per
individual, per annum. Employer matching contributions totaling
$200 were made in February 2002 and 2003 for the Plan years
ended December 31, 2001 and 2002, respectively.

17.     Discontinued Operations

In the fourth quarter of 2002, the Company closed two remote
underperforming, wholly-owned clubs. In connection with the
closure of one of the clubs the Company recorded club closure
costs of $996 related to the write-off of fixed assets. The
Company has accounted for these two clubs as discontinued
operations and, accordingly, the results of their operations
have been classified as discontinued in the consolidated
statement of operations and prior periods have been reclassified
in accordance with SFAS No. 144.

Revenues and pre-tax losses for these discontinued clubs were
$1,221 and $597 in 2000, $1,659 and $894 in 2001, and $1,606 and
$322 in 2002, respectively.

18.     Subsequent Events

In January 2003, an executive officer of the Company exercised
9,530 Series B options to purchase Series B stock. On
February 24, 2003, several officers of the Company
exercised 148,775 Series B options. All Series B stock issued in
connection with these February exercises were sold to Rosewood
Capital L.P., a stockholder of the Company.

F-25



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized on March 14, 2003.



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



| |     |                    
| | --- | -------------------
| | By: | /s/ ROBERT GIARDINA

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

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.



|    |               
|--- | --------------
|By: | /s/ MARK SMITH






Chairman






|    |                    
|--- | -------------------
|By: | /s/ ROBERT GIARDINA






Chief Executive Officer


(principal executive officer)




|    |                 
|--- | ----------------
|By: | /s/ RICHARD PYLE






Chief Financial Officer and office of the President


(principal financial and accounting officer)




|    |                 
|--- | ----------------
|By: | /s/ KEITH ALESSI






Director




|    |                
|--- | ---------------
|By: | /s/ PAUL ARNOLD






Director




|    |                    
|--- | -------------------
|By: | /s/ BRUCE BRUCKMANN






Director




|    |                 
|--- | ----------------
|By: | /s/ RICE EDMONDS






Director




|    |               
|--- | --------------
|By: | /s/ JASON FISH






Director




---



##### 



Exhibit 1.1


I, Robert Giardina, Chief Executive Officer of Town Sports
International, Inc., certify that:



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on Form 10-K of
    Town Sports International, Inc.;                                                                                                                                                                                                                                                     
|
| | 2. Based on my knowledge, this annual report does not
    contain any untrue statement of a material fact or omit to state
    a material fact necessary to make the statements made, in light
    of the circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3. Based on my knowledge, the financial statements, and
    other financial information included in this quarterly report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                    
|
| | 4. The registrants other certifying officers and I
    are responsible for establishing and maintaining disclosure
    controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Designed such disclosure controls and procedures to
    ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | (b) Evaluated the effectiveness of the registrants
    disclosure controls and procedures as of a date within
    90 days prior to the filing date of this annual report (the
    Evaluation Date); and                                                                                                      
|
| | (c) Presented in this annual report our conclusions about
    the effectiveness of the disclosure controls and procedures
    based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying officers and I
    have disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of the
    registrants board of directors:



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All significant deficiencies in the design or operation
    of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) Any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The registrants other certifying officers and I
    have indicated in this annual report whether or not there were
    significant changes in internal controls or in other factors
    that could significantly affect internal controls subsequent to
    the date of our most recent evaluation, including any corrective
    actions with regard to significant deficiencies and material
    weaknesses.

Date: March 14, 2003



|    |                    
|--- | -------------------
|By: | /s/ ROBERT GIARDINA






Chief Executive Officer




---



##### 



Exhibit 1.2


I, Mark Smith, Chairman of Town Sports International, Inc.,
certify that:



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on Form 10-K of
    Town Sports International, Inc.;                                                                                                                                                                                                                                                     
|
| | 2. Based on my knowledge, this annual report does not
    contain any untrue statement of a material fact or omit to state
    a material fact necessary to make the statements made, in light
    of the circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3. Based on my knowledge, the financial statements, and
    other financial information included in this quarterly report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                    
|
| | 4. The registrants other certifying officers and I
    are responsible for establishing and maintaining disclosure
    controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Designed such disclosure controls and procedures to
    ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | (b) Evaluated the effectiveness of the registrants
    disclosure controls and procedures as of a date within
    90 days prior to the filing date of this annual report (the
    Evaluation Date); and                                                                                                      
|
| | (c) Presented in this annual report our conclusions about
    the effectiveness of the disclosure controls and procedures
    based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying officers and I
    have disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of the
    registrants board of directors:



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All significant deficiencies in the design or operation
    of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) Any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The registrants other certifying officers and I
    have indicated in this annual report whether or not there were
    significant changes in internal controls or in other factors
    that could significantly affect internal controls subsequent to
    the date of our most recent evaluation, including any corrective
    actions with regard to significant deficiencies and material
    weaknesses.

Date: March 14, 2003



|    |               
|--- | --------------
|By: | /s/ MARK SMITH






Chairman




---



##### 



I, Richard Pyle, Chief Financial Officer of Town Sports
International, Inc., certify that:



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on Form 10-K of
    Town Sports International, Inc.;                                                                                                                                                                                                                                                     
|
| | 2. Based on my knowledge, this annual report does not
    contain any untrue statement of a material fact or omit to state
    a material fact necessary to make the statements made, in light
    of the circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3. Based on my knowledge, the financial statements, and
    other financial information included in this quarterly report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                    
|
| | 4. The registrants other certifying officers and I
    are responsible for establishing and maintaining disclosure
    controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Designed such disclosure controls and procedures to
    ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | (b) Evaluated the effectiveness of the registrants
    disclosure controls and procedures as of a date within
    90 days prior to the filing date of this annual report (the
    Evaluation Date); and                                                                                                      
|
| | (c) Presented in this annual report our conclusions about
    the effectiveness of the disclosure controls and procedures
    based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying officers and I
    have disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of the
    registrants board of directors:



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All significant deficiencies in the design or operation
    of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) Any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The registrants other certifying officers and I
    have indicated in this annual report whether or not there were
    significant changes in internal controls or in other factors
    that could significantly affect internal controls subsequent to
    the date of our most recent evaluation, including any corrective
    actions with regard to significant deficiencies and material
    weaknesses.

Date: March 14, 2003



|    |                 
|--- | ----------------
|By: | /s/ RICHARD PYLE






Chief Financial Officer