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SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




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FORM 10-K



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

For the fiscal year ended December 31, 2001




|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|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 III of this
Form 10-K or any amendment to this
Form 10-K.  x

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

As of March 6, 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 III 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  |  |  | 18 | 
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|7A.  |  | Quantitative and Qualitative Disclosures About
	Market Risks                            |  |  | 26 | 
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|8.   |  | Financial Statements and Supplementary Data                                             |  |  | 26 | 
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|9.   |  | Changes in and Disagreements with Accountants on
	Accounting and Financial   Disclosure |  |  | 26 | 
|     |  | PART III                                                                                |  |  |    | 
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|10.  |  | Directors and Executive Officers of the Registrant                                      |  |  | 27 | 
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|11.  |  | Executive Compensation                                                                  |  |  | 28 | 
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|12.  |  | Security Ownership of Certain Beneficial Owners
	and Management                         |  |  | 30 | 
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|13.  |  | Certain Relationships and Related Transactions                                          |  |  | 31 | 
|     |  | PART IV                                                                                 |  |  |    | 
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|14.  |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                       |  |  | 33 | 

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TOWN SPORTS INTERNATIONAL, INC.

PART I

Item 1.  Business

General

Town Sports International, Inc. (collectively with its
subsidiaries, the Company) 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, 2001, the Company owned and operated 117
fitness clubs and partly owned and operated two fitness clubs.
These 119 clubs collectively served approximately 317,000
members. The Company develops clusters of clubs to serve densely
populated major metropolitan regions in which a high percentage
of the population commutes to work. The Company services such
populations by clustering clubs near the highest concentrations
of its target members areas of both employment and
residence. The Companys target member is college-educated,
typically between the ages of 18 and 54 and earns an annual
income in excess of $50,000.

The Companys goal is to develop the premier fitness club
network in each of the major metropolitan regions in which it
operates. Management believes that clustering clubs allows the
Company to achieve strategic operating advantages that enhance
its ability to achieve this goal. When entering new regions, the
Company develops its 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, 2001, approximately 47% of the
Companys members participated in a membership plan that
allows unlimited access to all of the Companys clubs for a
higher membership fee.

The Company has executed this strategy successfully in the New
York region through the network of fitness clubs it operates
under its New York Sports Club (NYSC) brand name.
The Company is the largest fitness club operator in Manhattan
with 35 locations and operates a total of 78 clubs under
the NYSC name within a defined radius of New York City. The
Company operates 19 clubs in the Boston region and 14 clubs
in the Washington, DC region under its Boston Sports Club
(BSC) and Washington Sports Club (WSC)
brand names respectively and has begun establishing a similar
cluster in the Philadelphia region with five clubs under its
Philadelphia Sports Club (PSC) brand name. In
addition, the Company operates three clubs in Switzerland. The
Company employs localized brand names for its clubs to create an
image and atmosphere consistent with the local community and to
foster recognition as a local network of quality fitness clubs
rather than a national chain.

The Company principally sells month to month membership payment
plans that are generally cancelable by members at any time with
30 days notice. As of December 31, 2001, approximately
87% of our members had such a non-commit membership
plan. Management believes 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 the Company to
deliver high quality programs and services in order to retain
members.

In 1998, the Company changed its 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 Company has 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 constructed by
the Company). From June 1, 1996 to December 31, 2001,
the Company acquired 51 existing clubs, opened 33 greenfield
clubs, and relocated three clubs to increase its total clubs
under operation from 28 to 119. The Company has plans to acquire
or open nine more clubs prior to December 31, 2002. The
Company has achieved revenue growth over the five year and seven
month period ended December 31, 2001 at a compound annual
rate of approximately 42.1% from $56.6 million for the year
ended May 31, 1997 to $283.3 million for the year ended
December 31,





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Selected Financial
Data Selected Financial Data


The Companys model club ranges in size from approximately
15,000 to 25,000 square feet. Excluding a single large 200,000
square foot club, the Companys 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 aerobic class instruction
and other exercise programs as well as massage. Locker rooms
generally include a sauna and steam room. Management seeks to
provide a broad array of high quality exercise programs and
equipment that is both popular and effective, while reinforcing
the quality exercise experience the Company strives to make
available to its members. While the Company does not generally
build locations with amenities such as swimming pools or racquet
and basketball courts, the Company does strive to establish at
least one flagship club that has such amenities in each of its
markets. Management believes that it is generally more
economical to acquire clubs with such amenities than to develop
them as greenfield clubs.

Management engages in a detailed site analysis and selection
process based upon information provided by the Companys
proprietary development software to identify potential target
areas for additional clubs based upon population demographics,
traffic and commuting patterns, availability of sites and
competitive market information. In addition to the
Companys existing 119 clubs under operation and the
14 sites for which the Company has entered into lease
commitments, management has identified approximately
70 target areas in which it may add clubs under the brand
names NYSC, BSC, WSC, or PSC. Management estimates that it will
identify approximately 40 additional target areas in which it
may add clubs under these brand names. Once the Company begins
to approach saturation of these regions, management will explore
expansion opportunities in other markets in the United States
sharing similar demographic characteristics to those we are
currently in.

The Company possesses an experienced management team, the top
five executives of which have been working together at the
Company since 1990. Management believes that it has the depth,
experience and motivation to manage the Companys internal
and external growth, and that the Company has put in place the
infrastructure and systems to manage effectively the
Companys planned expansion. Management believes that the
presence of such infrastructure will enable the Company over
time to leverage certain fixed cost aspects of overhead to
realize increased EBITDA margins as the Company continues to
expand its club base. This operating leverage has already helped
the Company to increase its EBITDA margin by more than 120% to
approximately 21.4% for the year ended December 31, 2001
compared to approximately 9.7% in fiscal 1997.

Industry Overview

According to published industry sources, total fitness club
industry revenues have increased at a compound annual rate of
approximately 8.6% from $6.5 billion in 1993 to $11.6 billion in
2000. Over the same period of time, fitness club memberships
have increased at a compound annual rate of 4.5% from 22.9
million to 32.8 million and have increased over 89% since 1987.
These statistics imply that average revenue per member has grown
at a compound annual rate of 4.1% for the industry since 1993.
Industry revenue growth

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Management believes 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. Management believes
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. Management also believes 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.

According to industry sources, the five major trends that are
driving changes in the health and fitness industry include:
(i) an influx of institutional capital investment is
leading a transformation of club ownership from private to
institutionally sponsored; (ii) large operators are
beginning to build regional and national platforms to
consolidate the industry and, in turn, are providing liquidity
for many small operators; (iii) the aging of the American
population is creating an awareness of and a need for healthy
living and physical fitness; (iv) insurers are beginning to
partner with corporations to promote preventative healthcare
programs such as fitness clubs memberships, (v) Increases
in non-dues revenue is providing revenue diversification
opportunities and improving membership retention.

Management believes 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. The Company competes in the middle tier
in terms of pricing and is positioned toward the upper end of
this tier. Based upon the quality and service the Company
provides its members, management believes that the Company
provides an attractive value to its members at the monthly
membership dues it charges.

The fitness club industry is highly fragmented with only about
10% of the commercial clubs in the hands of companies that own
25 or more clubs. Based upon this data, management believes that
further consolidation will occur in the industry.

Marketing

The Companys marketing campaign is directed by its
in-house media department which is headed by the Chief Executive
Officer. This team develops advertising strategies to convey
each of the Companys regionally branded networks as the
premier network of fitness clubs in that region. Advertisements
are designed to highlight the consistent quality and high
value-to-price ratio management believes the Company provides
through a combination of its membership programs, club
facilities and personnel. The media teams goal is to
achieve broad awareness of the Companys regional brand
names primarily through radio, television, newspaper, billboard,
and direct mail advertising. Management believes that the
Companys clustering of clubs creates economies in its
marketing and advertising strategy that increase the efficiency
and effectiveness of these campaigns.

Advertisements generally feature creative slogans that
communicate the serious approach the Company takes toward
fitness in a provocative and/or humorous tone, rather than
pictures of the Companys 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, the Company will
also offer reduced initiation fees to encourage enrollment.
Additionally, the Company frequently sponsors member referral
incentive programs. At least 10% of the Companys new

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The Company also engages in public relations and special events
to promote its image in the local communities. Management
believes that these public relations efforts enhance the
Companys image and the image of its local brand names in
the communities in which it operates. The Company also seeks to
build its community image through co-operative advertising
campaigns with local retailers.

The Company maintains the following web site:
www.mysportsclubs.com that provides information about club
locations, program offerings and on-line promotions. The Company
also has multiple domain names including New yorksportsclub.com,
Bostonsportsclub.com, Philadelphiasportsclub.com,
Washingtonsportsclub.com and various other domain names related
to our business.

Sales

Sales of new memberships are generally handled at the club
level. The Company employs 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 the general manager of the club as well as to one of the
Companys 20 area sales managers, who in turn report to the
Companys Vice President Sales. Membership
consultants compensation consists of a base salary plus
commission. Sales commissions range from $45 to $65 per new
member enrolled. The Company provides 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 the Companys sales
strategy. In making a sales presentation, membership consultants
emphasize: (i) the proximity of its 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. Management believes
that providing employees with opportunities for career
advancement is essential to the Companys ability to
attract and retain qualified sales personnel. The Company also
employs full-time corporate sales managers whose responsibility
is to solicit group memberships through senior level corporate
contacts.

Management believes that clustering clubs allows the Company to
sell memberships based upon the opportunity for members to
utilize multiple club locations to differing degrees. The
Company has streamlined its membership structure to simplify the
sales process. In addition, the proprietary centralized computer
software utilized by the Company ensures consistency of pricing
and controls enrollment processing at the club level. The
Company generally offers three principal types of memberships:



| |                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Passport Membership, priced from $67 to $91 per month, is
	the Companys highest priced membership and entitles
	members to use any Town Sports club at any time. This membership
	is held by approximately 47% of members.                                                    
|
| | The Gold Membership, priced from $47 to $79 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 members.
|
| | The Off-peak Membership, priced from $47 to $72 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 members.                                                
|
| | The Company also offers 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 Company memberships is enhanced by the ability to offer
Passport Memberships, which allow the member to use any Company
club at any time.

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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 membership dues averaged approximately
$69 per month for the year ended December 31, 2001. During
that same period, initiation fees averaged $85 for EFT members.
The Company collects approximately 91.1% of all monthly
membership dues through EFT and EFT revenue constitutes over 70%
of consolidated revenue for the year ended December 31,
2001. Substantially all other membership dues are paid in
advance. EFT members can generally cancel memberships at any
time upon 30 days notice. Based upon detailed statistical
studies of the membership base at the Companys mature
clubs, however, the average length of the Companys
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. Management believes that its EFT program of monthly
dues collection provides a predictable and stable cash flow for
the Company, 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 the Company to increase its
dues in an efficient and consistent manner which it does
annually by between 1% and 3%, in line with cost of living
increases. During the first week of each month, the Company
receives the EFT dues for that month initiated by a third party
EFT processor. Discrepancies and insufficient funds incidents
are researched and resolved by an in-house staff. For the year
ended December 31, 2001, the Company experienced an average
of uncollected EFT dues of 1.2%.

The Companys total EFT revenue has increased by
$14.4 million per month from $3.5 million in December,
1996 to $17.9 million in December, 2001. While the
Company strongly encourages monthly EFT memberships,
approximately 8.6% of the Companys members (often
corporate group members) purchase paid-in-full memberships for a
one year term. Annually the Company raises its monthly dues by
between 1% and 3%.

Ancillary Revenue

Over the past four years the Company has expanded the level of
ancillary services provided to its members. Increases in
personal training revenue in particular have contributed to
$31.7 million of the increase in ancillary revenue from 1997 to
2001. 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 9.45% for the year ended
December 31, 1997 to 13.53% for the year ended
December 31, 2001. Private training revenue as a percentage
of sales increased from 6.1% of sales in 1997 to 9.0% of revenue
in 2001.

Club Format and Locations

The Companys 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. The
clubs generally have relatively high retail
visibility, and close proximity to transportation. In the New
York City, Boston and Washington, DC markets, the Company has
created clusters of clubs in urban areas and their commuter
suburbs in accordance with the Companys operating strategy
of offering its target members the convenience of multiple
locations close to where they live and work, reciprocal use
privileges and standardized facilities and services. The Company
has begun establishing a similar cluster in Philadelphia.

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Approximately half of the clubs operated by the Company are
urban clubs while half are suburban. The Companys urban
clubs generally range in size from 15,000 to 25,000 square feet
and averages approximately 20,000 square feet. The
Companys 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, the Companys target member is college
educated, between the ages of 18 and 54 and earns an annual
income of $50,000.

The Companys facilities include state-of-the-art
cardiovascular equipment, including Lifecycles, StairMasters,
treadmills, and elliptical motion machines; strength equipment
and free weights, including Cybex, Icarian, Nautilus, Ground
Zero, 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 massage, 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,
basketball, tennis, racquetball and/or squash courts and
climbing walls. Also, the Company is significantly expanding the
availability of fee-based programming at many of its clubs,
including programs targeted at children, members and non-member
adult customers.

As of December 31, 2001 over 75% of the Companys club
base had the Sportsclub Network personal entertainment units
installed. The Company expects to install the remainder of the
club base with equipment already on hand, by July of 2002. Over
4,500 of these entertainment units have been installed. The
units are typically mounted on cardiovascular equipment and are
equipped with a color screen for viewing a large selection of
television and video programs, a compact disk player and most
models have audio cassette players. The Sportsclub network also
provides the Company with a direct means of advertising products
and services to its membership base.

Club Operations

The Company emphasizes consistency and quality in all of its
club operations, including:

Management.The Company believes that its success is
largely dependent on the selection and training of its staff and
management. The Companys management structure is designed,
therefore, to support the professional development of highly
motivated managers who will execute the Companys
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 management
of each club, and directly report to area managers, who liaise
with senior operations management and other corporate staff
ensuring consistent service at all locations.

The Company provides performance-based incentives to its
management. Senior management compensation, for example, is tied
to overall Company 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. The Company offers its employees various benefits
including; health, dental, disability, insurance and a 401(k)
plan. Management believes the availability of employee benefits
provides the Company 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.

Personal Training.All of the Companys fitness
clubs offer one-on-one personal training, which is sold by the
single session or in multi-session packages. The Company has
implemented a comprehensive staff education curriculum which
progresses from basic knowledge and practical skills to advanced
concepts and training techniques. The Companys education
program provides professional standards to ensure that its

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Group Fitness.The Companys commitment to providing
a quality workout experience to its members extends to the
employment of program instructors, who teach aerobics, cycling,
strength conditioning, boxing, yoga and step aerobics classes,
among others. The Companys clustering strategy enables it
to staff program instructors and professional personal trainers
at more than one club. As a result, the Company 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 Senior Director
of Programs and Services who is responsible for overseeing
auditions and providing in-house training to keep instructors
current in the latest training techniques and program offerings.

Sports Clubs for Kids. During 2000, the Company began
offering programs for children under the Sports Club for Kids
(SCFK) brand in the NYSC and PSC regions. As of
December 2001, SCFK was operating in 16 locations throughout our
four major markets. In addition to extending fitness offerings
to a market not previously served by the Company, it is expected
that SCFK programming will help position the Companys
suburban clubs as family clubs, which should provide it 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 climbing walls and laser tag. The Company expects
to be operating Sports Clubs for Kids programs in more than 20
of its facilities by the end of 2002.

Proprietary Centralized Information Systems

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

Planned Information Systems Developments

The Company recognizes the value of enhancing and extending the
uses of information technology in virtually every area of the
company. After developing an information technology strategy to
support the business strategy, the Company has developed a
comprehensive multi-year plan to replace or upgrade key systems.

The Company expects to begin implementation of a new fully
integrated club management system in the second half of 2002.
The Company has been actively involved in the design of the
software and is currently testing the beta release. This system
incorporates contemporary browser-based, technology and open

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During 2001, the Company implemented a new employee time capture
system that will integrate with the new club management system
and the current payroll processing system. In addition, the
Company implemented a new budgeting and forecasting product that
will be expanded later in 2002 for enhanced managerial and
analytical reporting capabilities. Numerous infrastructure
changes were implemented to accommodate the Companys
growth, to provide network redundancy, efficiencies in
operations, and to improve management of all components of the
technical architecture.

The Companys website will be expanded after the
implementation of the above mentioned club management software
to incorporate e-business functionality such as sales of
products, services, and memberships, member self service and
reservations. The Company has built an intranet to provide the
portal for the newly implemented browser-based applications and
to provide for a variety of future development options in
corporate communications and training.

Coinciding with the implementation of the new club management
system, the Company 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. To
achieve those targets, six Strategic Objectives were formulated.
During 2002, the Company is giving a high priority to the
Strategic Initiatives that Senior Management believes will help
it accomplish those Objectives and, therefore, meet its
five-year goals.

Intellectual Property

The Company has registered, and is 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.

Competition

The fitness club industry is highly competitive. The Company
competes 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. The Company also competes with other
entertainment and retail businesses for the discretionary income
of its target markets. There can be no assurance that the
Company will be able to compete effectively in the future in the
markets in which it operates. Competitors, which may include
companies which are larger and have greater resources than the
Company, may enter these markets to the detriment of the
Company. These competitive conditions may limit the
Companys 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.

Management believes that its market leadership, experience and
operating efficiencies enable it to provide the consumer with a
superior product in terms of convenience, quality and
affordability. Management believes that there are significant
barriers to entry in its urban markets, including restrictive
zoning laws, lengthy permit processes and a shortage of
appropriate real estate, which could discourage any large
competitor from

8



---



##### 





Employees

At December 31, 2001, the Company had approximately 7,150
employees, of which approximately 2,620 were employed full-time.
Approximately 305 employees were corporate personnel working in
the Manhattan, Boston or Washington, DC offices. The Company is
not a party to any collective bargaining agreement with its
employees. The Company has never experienced any significant
labor shortages nor had any difficulty in obtaining adequate
replacements for departing employees and considers its relations
with its employees to be good. Management believes that it
offers its employees benefits (including health, dental,
disability insurance and a 401(k) plan) which are superior to
those generally offered by its competitors.

Government Regulation

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

Statutes and regulations affecting the fitness industry have
been enacted in states in which the Company conducts business;
many other states into which the Company 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, the Company
is 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. The
Company maintains internal review procedures in order to comply
with these requirements, and believes that its 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, the Companys 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, the canceling member is entitled to a refund of
prepaid amounts only. Furthermore, where permitted by law, a
cancellation fee is due to the Company upon cancellation and the
Company may offset such amount against any refunds owed.

9



---



##### 



FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K of
the Company for the year ended December 31, 2001 are
forward-looking statements, including, without limitation,
statements regarding future financial results and performance,
potential sales revenue and tax benefits. These statements are
subject to various risks and uncertainties, many of which are
outside the control of the Company, including the level of
market demand for the Companys services, competitive
pressures, the ability to achieve reductions in operating costs
and to continue to integrate acquisitions, 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 the Company.
The information contained herein represents managements
best judgement as of the date hereof based on information
currently available; however, the Company does not intend to
update this information except as required by law, to reflect
development or information obtained after the date hereof and
disclaims any legal obligation to the contrary.

Item 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 (temporarily closed) |  |            | Battery Park City        |                |  |  | May, 2000       | 
|                      
|                      
|                      
|                      
|29.                    |  | Manhattan                      |  |            | 14 West 44th Street      |                |  |  | August, 2000    | 
|                      
|                      
|                      
|                      
|30.                    |  | Manhattan                      |  |            | 128 Eighth Avenue        |                |  |  | December, 2000  | 
|                      
|                      
|                      
|                      
|31.                    |  | Manhattan                      |  |            | 2521-23 Broadway         |                |  |  | August, 2001    | 

10



---



##### 



|         |  |                      |  |            |                                   |                |  |  |                 | 
|-------- |  | -------------------- |  | ---------- | --------------------------------- | -------------- |  |  | --------------- | 
|         |  |                      |  |            |                                   | Date Opened or
|         |  |                      |  | Management
|Location |  | Address              |  | Assumed   
|         |  |                      |  |           
|         |  |                      |  |            |                                   |               
|        
|        
|        
|        
|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.      |  | Brooklyn, NY         |  |            | 110 Boerum Place                  |                |  |  | October, 1985   | 
|        
|        
|        
|        
|38.      |  | Brooklyn, NY         |  |            | 1736 Shore Parkway                |                |  |  | June, 1998      | 
|        
|        
|        
|        
|39.      |  | Brooklyn, NY         |  |            | 179 Remsen Street                 |                |  |  | May 2001        | 
|        
|        
|        
|        
|40.      |  | Brooklyn, NY*        |  |            | 453 Fifth Avenue                  |                |  |  | Opening 2002    | 
|        
|        
|        
|        
|41.      |  | Queens, NY           |  |            | 69-33 Austin Street, Forest Hills |                |  |  | April, 1997     | 
|        
|        
|        
|        
|42.      |  | Queens, NY           |  |            | 153-67 A Cross Island Parkway     |                |  |  | June, 1998      | 
|        
|        
|        
|        
|43.      |  | Staten Island, NY    |  |            | 300 West Service Road             |                |  |  | June, 1998      | 
|        
|        
|        
|        
|44.      |  | Scarsdale, NY        |  |            | 696 White Plains Road             |                |  |  | October, 1995   | 
|        
|        
|        
|        
|45.      |  | Mamaroneck, NY       |  |            | 124 Palmer Avenue                 |                |  |  | January, 1997   | 
|        
|        
|        
|        
|46.      |  | White Plains, NY     |  |            | 1 North Broadway                  |                |  |  | September, 1997 | 
|        
|        
|        
|        
|47.      |  | Croton-on-Hudson, NY |  |            | 420 South Riverside Drive         |                |  |  | January, 1998   | 
|        
|        
|        
|        
|48.      |  | Larchmont, NY        |  |            | 15 Madison Avenue                 |                |  |  | December, 1998  | 
|        
|        
|        
|        
|49.      |  | Nanuet, NY           |  |            | 58 Demarest Mill Road             |                |  |  | May, 1998       | 
|        
|        
|        
|        
|50.      |  | Great Neck, NY       |  |            | 15 Barstow Road                   |                |  |  | July, 1989      | 
|        
|        
|        
|        
|51.      |  | East Meadow, NY      |  |            | 625 Merrick Avenue                |                |  |  | January, 1999   | 
|        
|        
|        
|        
|52.      |  | Commack, NY          |  |            | 6136 Jericho Turnpike             |                |  |  | January, 1999   | 
|        
|        
|        
|        
|53.      |  | Oceanside, NY        |  |            | 2909 Lincoln Avenue               |                |  |  | May, 1999       | 
|        
|        
|        
|        
|54.      |  | Long Beach, NY       |  |            | 265 East Park Avenue              |                |  |  | July, 1999      | 
|        
|        
|        
|        
|55.      |  | Garden City, NY      |  |            | 833 Franklin Avenue               |                |  |  | May, 2000       | 
|        
|        
|        
|        
|56.      |  | Huntington, NY       |  |            | 350 New York Avenue               |                |  |  | February, 2001  | 
|        
|        
|        
|        
|57.      |  | Syosset, NY          |  |            | 49 Ira Road                       |                |  |  | March, 2001     | 
|        
|        
|        
|        
|58.      |  | Woodmere, NY         |  |            | 158 Irving Street                 |                |  |  | March 2002      | 
|        
|        
|        
|        
|59.      |  | West Nyack, NY       |  |            | 3656 Palisades Center Drive       |                |  |  | February, 2002  | 
|        
|        
|        
|        
|60.      |  | Stamford, CT         |  |            | 6 Landmark Square                 |                |  |  | December, 1997  | 
|        
|        
|        
|        
|61.      |  | Stamford, CT         |  |            | 106 Commerce Road                 |                |  |  | January, 1998   | 
|        
|        
|        
|        
|62.      |  | Danbury, CT          |  |            | 38 Mill Plain Road                |                |  |  | January, 1998   | 
|        
|        
|        
|        
|63.      |  | Stamford, CT         |  |            | 1063 Hope Street                  |                |  |  | November, 1998  | 
|        
|        
|        
|        
|64.      |  | Norwalk, CT          |  |            | 250 Westport Avenue               |                |  |  | March, 1999     | 
|        
|        
|        
|        
|65.      |  | Greenwich, CT        |  |            | 6 Liberty Way                     |                |  |  | May, 1999       | 
|        
|        
|        
|        
|66.      |  | Westport, CT         |  |            | 427 Post Road, East               |                |  |  | January, 2002   | 
|        
|        
|        
|        
|67.      |  | East Brunswick, NJ   |  |            | 8 Cornwall Court                  |                |  |  | January, 1990   | 
|        
|        
|        
|        
|68.      |  | Princeton, NJ        |  |            | 301 North Harrison Street         |                |  |  | May, 1997       | 
|        
|        
|        
|        
|69.      |  | Freehold, NJ         |  |            | 200 Daniels Way                   |                |  |  | April, 1998     | 
|        
|        
|        
|        
|70.      |  | Matawan, NJ          |  |            | 163 Route 34                      |                |  |  | April, 1998     | 
|        
|        
|        
|        
|71.      |  | Old Bridge, NJ       |  |            | Gaub Road and Route 516           |                |  |  | April, 1998     | 
|        
|        
|        
|        
|72.      |  | Marlboro, NJ         |  |            | 34 Route 9 North                  |                |  |  | April, 1998     | 
|        
|        
|        
|        
|73.      |  | Fort Lee, NJ         |  |            | 1355 15th Street                  |                |  |  | June, 1998      | 
|        
|        
|        
|        
|74.      |  | Ramsey, NJ           |  |            | 1100 Route 17 North               |                |  |  | June, 1998      | 
|        
|        
|        
|        
|75.      |  | Mahwah, NJ           |  |            | 7 Leighton Place                  |                |  |  | June, 1998      | 
|        
|        
|        
|        
|76.      |  | Parsippany, NJ       |  |            | 2651 Route 10                     |                |  |  | August, 1998    | 
|        
|        
|        
|        
|77.      |  | Springfield, NJ      |  |            | 215 Morris Avenue                 |                |  |  | August, 1998    | 

11



---



##### 



|                         |  |                      |  |            |                                  |                |  |  |                 | 
|------------------------ |  | -------------------- |  | ---------- | -------------------------------- | -------------- |  |  | --------------- | 
|                         |  |                      |  |            |                                  | Date Opened or
|                         |  |                      |  | Management
|Location                 |  | Address              |  | Assumed   
|                         |  |                      |  |           
|                         |  |                      |  |            |                                  |               
|                        
|                        
|                        
|                        
|78.                      |  | Colonia, NJ          |  |            | 1250 Route 27                    |                |  |  | August, 1998    | 
|                        
|                        
|                        
|                        
|79.                      |  | Franklin Park, NJ    |  |            | 3911 Route 27                    |                |  |  | August, 1998    | 
|                        
|                        
|                        
|                        
|80.                      |  | Plainsboro, NJ       |  |            | 10 Schalks Crossing              |                |  |  | August, 1998    | 
|                        
|                        
|                        
|                        
|81.                      |  | Somerset, NJ         |  |            | 120 Cedar Grove Lane             |                |  |  | August, 1998    | 
|                        
|                        
|                        
|                        
|82.                      |  | Hoboken, NJ          |  |            | 221 Washington Street            |                |  |  | October, 1998   | 
|                        
|                        
|                        
|                        
|83.                      |  | West Caldwell, NJ    |  |            | 913 Bloomfield Avenue            |                |  |  | April, 1999     | 
|                        
|                        
|                        
|                        
|84.                      |  | Ridgewood, NJ*       |  |            | 129 S. Broad Street              |                |  |  | Opening 2003    | 
|                        
|                        
|                        
|                        
|85.                      |  | Westwood, NJ*        |  |            | 35 Jefferson Avenue              |                |  |  | Opening 2003    | 
|                        
|                        
|                        
|                        
|86.                      |  | Montclair, NJ*       |  |            | 56 Church Street                 |                |  |  | Opening 2003    | 
|                        
|                        
|                        
|                        
|Washington Sports Clubs: |  |                      |  |            |                                  |                |  | 
|                        
|                        
|                        
|                        
|87.                      |  | Washington, DC       |  |            | 214 D Street, S.E.               |                |  |  | January, 1980   | 
|                        
|                        
|                        
|                        
|88.                      |  | Washington, DC       |  |            | 1835 Connecticut Avenue, N.W.    |                |  |  | January, 1990   | 
|                        
|                        
|                        
|                        
|89.                      |  | Washington, DC       |  |            | 1990 M Street, N.W.              |                |  |  | February, 1993  | 
|                        
|                        
|                        
|                        
|90.                      |  | Washington, DC       |  |            | 2251 Wisconsin Avenue, N.W.      |                |  |  | May, 1994       | 
|                        
|                        
|                        
|                        
|91.                      |  | Washington, DC       |  |            | 1211 Connecticut Avenue          |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|92.                      |  | Washington, DC      |  |            | 1345 F Street, NW                |                |  |  | Opening 2002    | 
|                        
|                        
|                        
|                        
|93.                      |  | Washington, DC*      |  |            | Gallery Place, 7th, H Street     |                |  |  | Opening 2003    | 
|                        
|                        
|                        
|                        
|94.                      |  | Bethesda, MD         |  |            | 4903 Elm Street                  |                |  |  | May, 1994       | 
|                        
|                        
|                        
|                        
|95.                      |  | North Bethesda, MD   |  |            | 10400 Old Georgetown Road        |                |  |  | June, 1998      | 
|                        
|                        
|                        
|                        
|96.                      |  | Germantown, MD       |  |            | 12623 Wisteria Drive             |                |  |  | July, 1998      | 
|                        
|                        
|                        
|                        
|97.                      |  | Chevy Chase, MD      |  |            | 5346 Wisconsin Ave., NW          |                |  |  | February 2002   | 
|                        
|                        
|                        
|                        
|98.                      |  | Silver Spring, MD*   |  |            | Wayne Avenue                     |                |  |  | Opening 2003    | 
|                        
|                        
|                        
|                        
|99.                      |  | Centreville, VA      |  |            | Old Centreville Crossing         |                |  |  | December, 1997  | 
|                        
|                        
|                        
|                        
|100.                     |  | Alexandria, VA       |  |            | 3654 King Street                 |                |  |  | June, 1999      | 
|                        
|                        
|                        
|                        
|101.                     |  | Sterling, VA         |  |            | 21800 Town Center Plaza          |                |  |  | October, 1999   | 
|                        
|                        
|                        
|                        
|102.                     |  | Fairfax, VA          |  |            | 11001 Lee Highway                |                |  |  | October, 1999   | 
|                        
|                        
|                        
|                        
|103.                     |  | West Springfield, VA |  |            | 8430 Old Keene Mill              |                |  |  | September, 2000 | 
|                        
|                        
|                        
|                        
|104.                     |  | Clarendon, VA        |  |            | 2700 Clarendon Boulevard         |                |  |  | November, 2001  | 
|                        
|                        
|                        
|                        
|Boston Sports Clubs:     |  |                      |  |            |                                  |                |  | 
|                        
|                        
|                        
|                        
|105.                     |  | Boston, MA           |  |            | 561 Boylston Street              |                |  |  | November, 1991  | 
|                        
|                        
|                        
|                        
|106.                     |  | Allston, MA          |  |            | 15 Gorham Street                 |                |  |  | July, 1997      | 
|                        
|                        
|                        
|                        
|107.                     |  | Boston, MA           |  |            | 1 Bulfinch Place                 |                |  |  | August, 1998    | 
|                        
|                        
|                        
|                        
|108.                     |  | Natick, MA           |  |            | Sherwood Plaza, 124 Worcester Rd |                |  |  | September, 1998 | 
|                        
|                        
|                        
|                        
|109.                     |  | Weymouth, MA         |  |            | 553 Washington Street            |                |  |  | May, 1999       | 
|                        
|                        
|                        
|                        
|110.                     |  | Boston, MA           |  |            | 201 Brookline Avenue             |                |  |  | June, 2000      | 
|                        
|                        
|                        
|                        
|111.                     |  | Wellesley, MA        |  |            | 140 Great Plain Avenue           |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|112.                     |  | Boston, MA           |  |            | One Devonshire Place             |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|113.                     |  | Andover, MA          |  |            | 307 Lowell Street                |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|114.                     |  | Lynnfield, MA        |  |            | 425 Walnut Street                |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|115.                     |  | Lexington, MA        |  |            | 475 Bedford Avenue               |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|116.                     |  | Franklin, MA         |  |            | 750 Union Street                 |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|117.                     |  | Framingham, MA       |  |            | 1657 Worcester Street            |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|118.                     |  | Danvers, MA          |  |            | 50 Ferncroft Road                |                |  |  | July, 2000      | 
|                        
|                        
|                        
|                        
|119.                     |  | Cambridge, MA        |  |            | 625 Massachusetts Avenue         |                |  |  | January, 2001   | 
|                        
|                        
|                        
|                        
|120.                     |  | East Cambridge, MA   |  |            | 6 Museum Way                     |                |  |  | January, 2001   | 
|                        
|                        
|                        
|                        
|121.                     |  | Boston, MA           |  |            | 361 Newbury Street               |                |  |  | November, 2001  | 

12



---



##### 



|                           |  |                     |  |            |                            |                |  |  |                | 
|-------------------------- |  | ------------------- |  | ---------- | -------------------------- | -------------- |  |  | -------------- | 
|                           |  |                     |  |            |                            | Date Opened or
|                           |  |                     |  | Management
|Location                   |  | Address             |  | Assumed   
|                           |  |                     |  |           
|                           |  |                     |  |            |                            |               
|                          
|                          
|                          
|                          
|122.                       |  | West Newton, MA     |  |            | 1359 Washington Street     |                |  |  | November, 2001 | 
|                          
|                          
|                          
|                          
|123.                       |  | Boston, MA          |  |            | 350 Washington Street      |                |  |  | February, 2002 | 
|                          
|                          
|                          
|                          
|124.                       |  | Nashua, NH          |  |            | 11 Tara Boulevard          |                |  |  | July, 2000     | 
|                          
|                          
|                          
|                          
|Philadelphia Sports Clubs: |  |                     |  |            |                            |                |  | 
|                          
|                          
|                          
|                          
|125.                       |  | Philadelphia, PA    |  |            | 220 South 5th Street       |                |  |  | January, 1999  | 
|                          
|                          
|                          
|                          
|126.                       |  | Philadelphia, PA    |  |            | 2000 Hamilton Street       |                |  |  | July, 1999     | 
|                          
|                          
|                          
|                          
|127.                       |  | Chalfont, PA        |  |            | One Highpoint Drive        |                |  |  | January, 2000  | 
|                          
|                          
|                          
|                          
|128.                       |  | Cherry Hill, NJ     |  |            | Route 70 and Kings Highway |                |  |  | April, 2000    | 
|                          
|                          
|                          
|                          
|129.                       |  | Philadelphia, PA    |  |            | 1735 Market Street         |                |  |  | October, 2000  | 
|                          
|                          
|                          
|                          
|130.                       |  | Ardmore, PA         |  |            | 34 W. Lancaster Avenue     |                |  |  | March, 2002    | 
|                          
|                          
|                          
|                          
|131.                       |  | Philadelphia, PA*   |  |            | Rittenhouse Square         |                |  |  | Opening 2003   | 
|                          
|                          
|                          
|                          
|Swiss Sports Clubs:        |  |                     |  |            |                            |                |  | 
|                          
|                          
|                          
|                          
|132.                       |  | Basel, Switzerland  |  |            | St. Johanns-Vorstadt 41    |                |  |  | August, 1987   | 
|                          
|                          
|                          
|                          
|133.                       |  | Zurich, Switzerland |  |            | Glarnischstrasse 35        |                |  |  | August, 1987   | 
|                          
|                          
|                          
|                          
|134.                       |  | Basel, Switzerland  |  |            | Basel FC Soccer Stadium    |                |  |  | August, 2001   | 




|  |                                         
|- | ----------------------------------------
| | Under construction, club in pre-sales.



|  |                                               
|- | ----------------------------------------------
|* | Signed leases for greenfield club development.

13



---



##### 



The Company owns the 151 East 86th Street location, which
houses a Company fitness club and a retail tenant that generated
approximately $540,000 of rental income for the Company during
twelve months ended December 31, 2001. One of our fitness
clubs operates under a month to month lease; all other fitness
clubs occupy leased space pursuant to long-term leases
(generally 15 to 25 years, including options). In the next five
years (ending December 31, 2006), only one of the
Companys fitness club leases will expire without any
renewal option. A new club has been constructed and opened
nearby.

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

As of December 31, 2001, 117 of the existing fitness clubs
were wholly owned by the Company and two were managed and partly
owned (the Partly Owned Clubs).

In addition, the Company provided management services at three
fitness clubs in which the Company had no equity interest.

Item 3.  Legal Proceedings

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 adverse effect
on the Companys 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 are selected historical consolidated financial,
other operating data and club and membership data of the Company
as of the dates and for the periods presented. The selected
historical consolidated statement of operations data for the
years ended December 31, 1999, 2000, and 2001 and the
selected historical consolidated balance sheet data as of
December 31, 2000 and 2001, were derived from the audited
Consolidated Financial Statements of the Company, 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 May 31,
1997 and 1998 and December 31, 1998 and 1999 were derived
from the 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 the unaudited
consolidated financial statements of the Company which are not
included herein. In 1998, the Company changed its 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 |                    |   | $    | 82,350 |         |   | $ | 42,990 |         |   | $ | 71,662 |        
|                                                        
|                                                        
|                                                        
|                                                        
|Operating expenses:                                      |                                                                    |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Payroll and related                                                |                    |        | 23,321             |   |      |        | 33,309  |   |   |        | 17,621  |   |   |        | 28,001  |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Club operating                                                     |                    |        | 18,044             |   |      |        | 25,858  |   |   |        | 13,258  |   |   |        | 24,261  |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | General and administrative                                         |                    |        | 3,774              |   |      |        | 5,825   |   |   |        | 2,742   |   |   |        | 5,828   |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Depreciation and amortization                                      |                    |        | 4,219              |   |      |        | 7,736   |   |   |        | 3,944   |   |   |        | 8,818   |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Compensation expense incurred in connection with
	stock options(1) |                    |        | 5,933              |   |      |        | 1,442   |   |   |        | 397     |   |   |        | 434     |  
|                                                         |                                                                    |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |        
|Operating income                                         |                                                                    |                    | 1,276  |                    |   |      | 8,180  |         |   |   | 5,028  |         |   |   | 4,320  |        
|                                                        
|                                                        
|                                                        
|                                                        
|Interest expense, net of interest income                 |                                                                    |                    | 2,455  |                    |   |      | 5,902  |         |   |   | 3,270  |         |   |   | 5,279  |        
|                                                         |                                                                    |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |        
|Income (loss) before provision
	(benefit) for income tax |                                                                    |                    | (1,179 | )                  |   |      | 2,278  |         |   |   | 1,758  |         |   |   | (959   | )      
|                                                        
|                                                        
|                                                        
|                                                        
|Provision (benefit) for income tax                       |                                                                    |                    | (243   | )                  |   |      | 1,131  |         |   |   | 888    |         |   |   | (399   | )      
|                                                        
|                                                        
|                                                        
|                                                        
|Extraordinary item(2)                                    |                                                                    |                    |       |                    |   |      | (782   | )       |   |   | (782   | )       |   |   |       |        
|                                                        
|                                                        
|                                                        
|                                                        
|Cumulative effect of change in accounting
	policy(3)     |                                                                    |                    |       |                    |   |      | (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:                                              |                                                                    |                    |        |                    |   |      |        |         |   |   |        |         |   |   |        |        
|                                                        
|                                                        
|                                                        
|                                                        
|EBITDA(4)                                                |                                                                    | $                  | 5,495  |                    |   | $    | 15,916 |         |   | $ | 8,972  |         |   | $ | 13,138 |        
|                                                        
|                                                        
|                                                        
|                                                        
|EBITDA margin(4)                                         |                                                                    |                    | 9.7    | %                  |   |      | 19.3   | %       |   |   | 20.9   | %       |   |   | 18.3   | %      
|                                                        
|                                                        
|                                                        
|                                                        
|Deferred lease expense                                   |                                                                    | $                  | 1,620  |                    |   | $    | 2,671  |         |   | $ | 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
|                                                     |  |                    |        |                    |  |      |         |     
|Club and Membership Data:                            |  |                    |        |                    |  |      |         |      |  |   |        |   |  |   |         |  
|                                                    
|                                                    
|                                                    
|                                                    
|New clubs opened(5)                                  |  |                    | 3      |                    |  |      | 1       |      |  |   |       |   |  |   | 4       |  
|                                                    
|                                                    
|                                                    
|                                                    
|Clubs acquired(5)                                    |  |                    | 5      |                    |  |      | 13      |      |  |   | 5      |   |  |   | 16      |  
|                                                    
|                                                    
|                                                    
|                                                    
|Wholly owned clubs operated at end of period(5)      |  |                    | 28     |                    |  |      | 45      |      |  |   | 35     |   |  |   | 65      |  
|                                                    
|                                                    
|                                                    
|                                                    
|Total clubs operated at end of period(6)             |  |                    | 35     |                    |  |      | 49      |      |  |   | 40     |   |  |   | 69      |  
|                                                    
|                                                    
|                                                    
|                                                    
|Members at end of period(7)                          |  |                    | 78,600 |                    |  |      | 125,100 |      |  |   | 99,900 |   |  |   | 178,700 |  
|                                                    
|                                                    
|                                                    
|                                                    
|Mature club revenue increase(8)                      |  |                    | 9.9    | %                  |  |      | 12.6    | %    |  |   | 12.6   | % |  |   | 16.8    | %
|                                                    
|                                                    
|                                                    
|                                                    
|Revenue per weighted average club (in
	thousands)(9) |  | $                  | 2,267  |                    |  | $    | 2,287   |      |  | $ | 1,289  |   |  | $ | 1,184   |  

|                                                         |                                                                    |              |         |         |   |      |         |         |   |   |         |         |   |   |         |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------ | ------------ | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                                         |                                                                    |             
|                                                         |                                                                    | Year Ended  
|                                                         |                                                                    | December 31,
|                                                         |                                                                    |             
|                                                         |                                                                    | 1998         |         | 1999    |   | 2000 |         | 2001   
|                                                         |                                                                    |              |         |         |   |      |         |        
|Statement of Operations Data:                            |                                                                    |              |         |         |   |      |         |         |   |   |         |         |   |   |         |        
|                                                        
|                                                        
|                                                        
|                                                        
|Revenues                                                 |                                                                    | $            | 111,022 |         |   | $    | 159,779 |         |   | $ | 225,049 |         |   | $ | 283,292 |        
|                                                        
|                                                        
|                                                        
|                                                        
|Operating expenses:                                      |                                                                    |              |         |         |   |      |         |         |   |   |         |         |   |   |         |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Payroll and related                                                |              |         | 43,689  |   |      |         | 62,412  |   |   |         | 89,677  |   |   |         | 112,586 |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Club operating                                                     |              |         | 36,861  |   |      |         | 52,619  |   |   |         | 69,390  |   |   |         | 89,842  |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | General and administrative                                         |              |         | 8,911   |   |      |         | 10,908  |   |   |         | 14,754  |   |   |         | 18,986  |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Depreciation and amortization                                      |              |         | 12,610  |   |      |         | 20,935  |   |   |         | 26,642  |   |   |         | 32,667  |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Compensation expense incurred in connection with
	stock options(1) |              |         | 1,479   |   |      |         | 2,042   |   |   |         | 1,836   |   |   |         | 1,149   |  
|                                                         |                                                                    |              |         |         |   |      |         |         |   |   |         |         |   |   |         |        
|Operating income                                         |                                                                    |              | 7,472   |         |   |      | 10,863  |         |   |   | 22,750  |         |   |   | 28,062  |        
|                                                        
|                                                        
|                                                        
|                                                        
|Interest expense, net of interest income                 |                                                                    |              | 7,911   |         |   |      | 10,243  |         |   |   | 13,120  |         |   |   | 14,527  |        
|                                                         |                                                                    |              |         |         |   |      |         |         |   |   |         |         |   |   |         |        
|Income (loss) before provision (benefit) for
	income tax |                                                                    |              | (439    | )       |   |      | 620     |         |   |   | 9,630   |         |   |   | 13,535  |        
|                                                        
|                                                        
|                                                        
|                                                        
|Provision (benefit) for income tax                       |                                                                    |              | (156    | )       |   |      | 571     |         |   |   | 4,799   |         |   |   | 6,489   |        
|                                                         |                                                                    |              |         |         |   |      |         |         |   |   |         |         |   |   |         |        
|Net income (loss)                                        |                                                                    |              | (283    | )       |   |      | 49      |         |   |   | 4,831   |         |   |   | 7,046   |        
|                                                        
|                                                        
|                                                        
|                                                        
|Accreted dividends on preferred stock                    |                                                                    |              | (3,048  | )       |   |      | (7,880  | )       |   |   | (9,016  | )       |   |   | (10,201 | )      
|                                                         |                                                                    |              |         |         |   |      |         |         |   |   |         |         |   |   |         |        
|Net loss attributable to common stockholders             |                                                                    | $            | (3,331  | )       |   | $    | (7,831  | )       |   | $ | (4,185  | )       |   | $ | (3,155  | )      
|                                                         |                                                                    |              |         |         |   |      |         |         |   |   |         |         |   |   |         |        
|Other Data:                                              |                                                                    |              |         |         |   |      |         |         |   |   |         |         |   |   |         |        
|                                                        
|                                                        
|                                                        
|                                                        
|EBITDA(4)                                                |                                                                    | $            | 20,082  |         |   | $    | 31,798  |         |   | $ | 49,392  |         |   | $ | 60,729  |        
|                                                        
|                                                        
|                                                        
|                                                        
|EBITDA margin(4)                                         |                                                                    |              | 18.1    | %       |   |      | 19.9    | %       |   |   | 21.9    | %       |   |   | 21.4    | %      
|                                                        
|                                                        
|                                                        
|                                                        
|Non-cash rental lease expense, net of non-cash
	income   |                                                                    | $            | 2,809   |         |   | $    | 3,061   |         |   | $ | 2,976   |         |   | $ | 4,224   |        
|                                                        
|                                                        
|                                                        
|                                                        
|Cash provided by (used in):                              |                                                                    |              |         |         |   |      |         |         |   |   |         |         |   |   |         |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Operating activities                                               |              |         | 15,933  |   |      |         | 29,496  |   |   |         | 40,573  |   |   |         | 44,348  |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Investing activities                                               |              |         | (71,030 | ) |      |         | (55,078 | ) |   |         | (70,048 | ) |   |         | (58,358 | )
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Financing activities                                               |              | $       | 34,591  |   |      | $       | 33,553  |   |   | $       | 5,715   |   |   | $       | 16,103  |  
|                                                        
|                                                        
|                                                        
|                                                        
|Club and Membership Data:                                |                                                                    |              |         |         |   |      |         |         |   |   |         |         |   |   |         |        
|                                                        
|                                                        
|                                                        
|                                                        
|New clubs opened(5)                                      |                                                                    |              | 5       |         |   |      | 14      |         |   |   | 9       |         |   |   | 12      |        
|                                                        
|                                                        
|                                                        
|                                                        
|Clubs acquired(5)                                        |                                                                    |              | 25      |         |   |      | 4       |         |   |   | 11      |         |   |   | 2       |        
|                                                        
|                                                        
|                                                        
|                                                        
|Wholly owned clubs operated at end of period(5)          |                                                                    |              | 65      |         |   |      | 82      |         |   |   | 103     |         |   |   | 117     |        
|                                                        
|                                                        
|                                                        
|                                                        
|Total clubs operated at end of period(6)                 |                                                                    |              | 69      |         |   |      | 86      |         |   |   | 105     |         |   |   | 119     |        
|                                                        
|                                                        
|                                                        
|                                                        
|Members at end of period(7)                              |                                                                    |              | 178,700 |         |   |      | 203,100 |         |   |   | 278,000 |         |   |   | 317,000 |        
|                                                        
|                                                        
|                                                        
|                                                        
|Mature club revenue increase(8)                          |                                                                    |              | 14.2    | %       |   |      | 16.0    | %       |   |   | 18.6    | %       |   |   | 12.3    | %      
|                                                        
|                                                        
|                                                        
|                                                        
|Revenue per weighted average club
	(in thousands)(9)     |                                                                    | $            | 2,156   |         |   | $    | 2,130   |         |   | $ | 2,428   |         |   | $ | 2,619   |        

16



---



##### 



|                                               |  |               |        |                    |  |      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | ------------- | ------ | ------------------ |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                               |  |               |        |                   
|                                               |  | As of May 31, |        | As of December 31,
|                                               |  |               |        |                   
|                                               |  | 1997          |        | 1998               |  | 1997 |         | 1998 |  | 1999 |         | 2000 |  | 2001
|                                               |  |               |        |                    |  |      |         |      |  |      |         |      |  |     
|Balance Sheet Data:                            |  |               |        |                    |  |      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|                                              
|                                              
|                                              
|                                              
|Working capital (deficit)(10)                  |  | $             | (8,436 | )                  |  | $    | 5,898   |      |  | $    | 26,772  |      |  | $    | 478     |   |  | $ | (1,015  | ) |  | $ | (38,414 | ) |  | $ | (42,565 | )
|                                              
|                                              
|                                              
|                                              
|Total assets                                   |  |               | 52,923 |                    |  |      | 111,977 |      |  |      | 104,948 |      |  |      | 157,416 |   |  |   | 215,678 |   |  |   | 256,085 |   |  |   | 296,005 |  
|                                              
|                                              
|                                              
|                                              
|Long-term debt, including current installments |  |               | 41,071 |                    |  |      | 88,289  |      |  |      | 89,368  |      |  |      | 89,524  |   |  |   | 132,202 |   |  |   | 144,498 |   |  |   | 163,979 |  
|                                              
|                                              
|                                              
|                                              
|Redeemable senior preferred stock              |  |               |       |                    |  |      |        |      |  |      |        |      |  |      | 36,735  |   |  |   | 42,066  |   |  |   | 48,029  |   |  |   | 54,687  |  
|                                              
|                                              
|                                              
|                                              
|Accumulated deficit                            |  | $             | (6,951 | )                  |  | $    | (5,107  | )    |  | $    | (6,342  | )    |  | $    | (2,333  | ) |  | $ | (5,597  | ) |  | $ | (3,911  | ) |  |   | (2,365  | )




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents non-cash charges related to the vesting of certain
	stock options issued to management and the accretion of
	preferred dividends related to preferred stock underlying
	certain of such options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(2) | Reflects the write-off of previously capitalized fees and
	expenses, net of taxes, of $782,000, related to the repayment of
	certain indebtedness.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(3) | Prior to fiscal 1998, the Company capitalized direct costs
	incurred to obtain leases for new clubs to be constructed by the
	Company. During the quarter ended May 31, 1998, the Company
	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 the
	Company, effective June 1, 1997, recorded a pre-tax charge
	of $88,000 net of $70,000 in taxes, as the cumulative effect of
	this accounting change.                                                                                                                                                                                                                                                                                            
|   
|(4) | EBITDA is defined as earnings before interest, taxes,
	depreciation, amortization, extraordinary charges and cumulative
	effect of changes in accounting policy. EBITDA is presented
	because management believes it provides useful information
	regarding the operating performance and financial condition of
	the Company. 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) or as a measure of the Companys
	profitability or liquidity. 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.
|   
|(5) | During fiscal 1997, the Company opened or acquired six clubs and
	relocated one club upon the expiration of its lease. During
	fiscal 1998, the Company opened or acquired 14 clubs and
	acquired three formerly partly owned clubs. During calendar
	1998, the Company acquired one formerly partly owned club.
	During 1999 the company relocated one club. During 2000, the
	Company acquired two formerly partly owned clubs and relocated
	one club upon the expiration of its lease.                                                                                                                                                                                                                                                                                                                                                                              
|   
|(6) | Includes wholly-owned or partly owned and managed clubs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(7) | Represents members at wholly-owned or partly owned clubs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(8) | The Company defines mature clubs as those clubs operated by the
	Company for more than 24 months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(9) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Working capital (deficit) is calculated as current assets less
	current liabilities. The Company normally operates with a
	working capital deficit because it receives dues or fee revenue
	either (i) during the month services are rendered, or
	(ii) when paid-in-full in advance. As a result, the Company
	has no material accounts receivable, and records a deferred
	revenue liability for services billed in advance. The Company
	also records a deferred revenue liability, because initiation
	fees are received at enrollment and are deferred and recognized
	over the estimated average term of membership.

17



---



##### 



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

Forward-Looking Statements

Certain statements in this Annual Report on Form 10-K of
the Company for the year ended December 31, 2001 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 the control of the Company, including
the level of market demand for the Companys services,
competitive pressures, the ability to achieve reductions in
operating costs and to continue to integrate acquisitions,
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 the Company. The information contained herein represents
managements best judgement as of the date hereof based on
information currently available; however, the Company does not
intend to update this except as required by law, information to
reflect development or information obtained after the date
hereof and disclaims any legal obligation to the contrary.

Change of Financial Reporting Period

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



---



|    |                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | A Greenfield club is a new location
	constructed by the Company.                                                                                                     
|   
|(b) | In March 2000, two clubs previously managed by
	the Company were purchased. Including these two clubs, the total
	number of clubs opened or acquired in 2000 totals 22.



|      |                                                                                                                                                                                                         
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note: | The Company includes in the club count wholly
	owned and partly owned clubs. In addition, as of
	December 31, 2001 the Company managed three additional
	clubs in which it did not have an equity stake.

Introduction

The Company 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, 2001, the Company
operated 119 clubs that collectively served approximately
317,000 members. The Company develops clusters of clubs to serve
densely populated major metropolitan regions in which a high
percentage of the population commutes to work. The Company
services such populations by clustering clubs near the highest
concentrations of its target members areas of both
employment and residence. The Companys target member is
college-educated, typically between the ages of 18 and 54 and
earns an annual income in excess of $50,000.

The Companys goal is to develop the premier health club
network in each of the major metropolitan regions it enters.
Management believes that clustering clubs allows the Company to
achieve strategic

18



---



##### 





The Company has executed this strategy successfully in the New
York region through the network of clubs it operates under its
NYSC brand name. The Company is the largest fitness club
operator in Manhattan with 35 locations and operates a
total of 78 clubs under the NYSC name within a defined
radius of New York City. The Company operates 19 clubs in
the Boston region, 14 clubs in the Washington D.C.
region under its BSC and WSC brand names respectively and has
begun establishing a similar cluster in the Philadelphia region
with five clubs under is PSC brand name. In addition the Company
operates three clubs in Switzerland. The Company employs
localized brand names for its 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.

The Companys 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, the Company has increased
revenues operating income, net income, and EBITDA by expanding
its club base in New York, Boston, Washington, DC, and
Philadelphia. As a result of the Companys expanding club
base and relatively fixed nature of the Companys operating
costs, the Companys operating income has increased from
$1.3 million in fiscal 1997 to $28.1 million for the year ended
December 31, 2001. Net income (loss) improved from a loss
of $936,000 in fiscal 1997 to net income of $7.0 million for the
year ended December 31, 2001. Similarly, EBITDA has
increased from $5.5 million in fiscal 1997 to $60.7 million for
the year ended December 31, 2001, and EBITDA as a
percentage of revenues has increased from 9.7% to 21.4% over the
same period. Management expects growth in revenues, and EBITDA
to continue as the 52 clubs opened or acquired since the
beginning of 1999 continue to mature. Based on the
Companys 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. The Company believes that the revenues, EBITDA
(before corporate overhead) and operating income (before
corporate overhead) of these 52 clubs will increase as they
mature. As a result of the Companys expansion, however,
EBITDA and operating income margins may be negatively impacted
in the near term, as further new clubs are added.

Mature Club Revenue

The Company defines mature clubs as those clubs that were
operated by the Company 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 by the Company for more than 24 months.
The Companys mature club revenue increased 12.3%, 18.6%,
16.0%, and 14.2%, for years ended December 31, 2001, 2000,
1999 and 1998, respectively.

19



---



##### 



Results of Operations

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

|                                                                |  |              |       |      |  |      |       |    |  |  |       |   
|--------------------------------------------------------------- |  | ------------ | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                                |  |             
|                                                                |  | Year Ended  
|                                                                |  | December 31,
|                                                                |  |             
|                                                                |  | 1999         |       | 2000 |  | 2001
|                                                                |  |              |       |      |  |     
|Revenue                                                         |  |              | 100.0 | %    |  |      | 100.0 | %  |  |  | 100.0 | % 
|                                                               
|                                                               
|                                                               
|                                                               
|Operating Expenses:                                             |  |              |       |      |  |      |       |    |  |  |       |   
|                                                               
|                                                               
|                                                               
|                                                               
|Payroll and related                                             |  |              | 39.1  |      |  |      | 39.8  |    |  |  | 39.7  |   
|                                                               
|                                                               
|                                                               
|                                                               
|Club operating                                                  |  |              | 32.9  |      |  |      | 30.8  |    |  |  | 31.7  |   
|                                                               
|                                                               
|                                                               
|                                                               
|General and administrative                                      |  |              | 6.8   |      |  |      | 6.6   |    |  |  | 6.7   |   
|                                                               
|                                                               
|                                                               
|                                                               
|Depreciation and amortization                                   |  |              | 13.1  |      |  |      | 11.8  |    |  |  | 11.5  |   
|                                                               
|                                                               
|                                                               
|                                                               
|Compensation expense incurred in connection with
	stock options |  |              | 1.3   |      |  |      | 0.8   |    |  |  | 0.4   |   
|                                                                |  |              |       |      |  |      |       |    |  |  |       |   
|Operating income                                                |  |              | 6.8   |      |  |      | 10.2  |    |  |  | 10.0  |   
|                                                               
|                                                               
|                                                               
|                                                               
|Interest expense                                                |  |              | 7.2   |      |  |      | 6.4   |    |  |  | 5.3   |   
|                                                               
|                                                               
|                                                               
|                                                               
|Interest income                                                 |  |              | (0.8  | )    |  |      | (0.6  | )  |  |  | (0.1  | ) 
|                                                                |  |              |       |      |  |      |       |    |  |  |       |   
|Income before provision for income tax                          |  |              | 0.4   |      |  |      | 4.4   |    |  |  | 4.8   |   
|                                                               
|                                                               
|                                                               
|                                                               
|Provision for income tax                                        |  |              | 0.4   |      |  |      | 2.1   |    |  |  | 2.3   |   
|                                                                |  |              |       |      |  |      |       |    |  |  |       |   
|Net income                                                      |  |              |      |      |  |      | 2.3   |    |  |  | 2.5   |   
|                                                               
|                                                               
|                                                               
|                                                               
|Accreted dividends on preferred stock                           |  |              | 4.9   |      |  |      | 4.0   |    |  |  | 3.6   |   
|                                                                |  |              |       |      |  |      |       |    |  |  |       |   
|Net attributable to common stockholders                         |  |              | (4.9  | )%   |  |      | (1.7  | )% |  |  | (1.1  | )%
|                                                                |  |              |       |      |  |      |       |    |  |  |       |   

YEAR ENDED DECEMBER 31, 2001 COMPARED TO

THE YEAR ENDED DECEMBER 31, 2000


REVENUES.Revenues increased $58.3 million or 25.9%, to
$283.3 million during 2001 from $225.0 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 (clubs owned and
operated for at least 24 months). The mature club revenue
increase is attributable to an 8.3% increase in membership, a
2.1% increase in dues, and a 1.9% increase in ancillary revenues.

OPERATING EXPENSES. Operating expenses increased $52.9
million, or 26.2% to $255.2 million in 2001, from $202.3 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 $22.9 million, or 25.6% to
	$112.6 million in 2001, from $89.7 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 $20.4 million, or 29.5% to $89.8
	million in 2001, from $69.4 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 28.7%
	to $19.0 million in 2001, from $14.8 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.

20



---



##### 





| |                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Depreciation and amortization increased by $6.1 million, or
	22.3% to $32.7 million in 2001, from $26.6 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.
|
| | Compensation expense incurred in connection with stock options
	decreased by $687,000, or 37.4% to $1.1 million in 2001, from
	$1.8 million in 2000. The decrease in compensation expense is
	principally due to less compensatory stock options vesting in
	the year ended 2001 when compared to 2000.  

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 its 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 $1.7 million from $4.8 million in 2000 to
$6.5 million in 2001. The Companys effective tax rate
decreased to 47.9% in 2001 from 50% 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.

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.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO

THE YEAR ENDED DECEMBER 31, 1999


REVENUES.Revenues increased $65.3 million or 40.9%, to
$225.0 million during 2000 from $159.8 million in 1999. This
increase resulted from the 18 clubs opened or acquired in
1999 (approximately $18.1 million), and the 20 clubs opened
or acquired in 2000 (approximately $21.4 million). In addition,
revenues increased during 2000 by approximately $27.2 million or
18.6% at the Companys mature clubs (clubs owned and
operated for at least 24 months). The mature club revenue
increase is attributable to an 8.8% increase in membership, a
6.5% increase in dues, and a 3.3% increase in ancillary
revenues. These increases were offset by a $1.5 million decrease
in revenue associated with a club relocated in the first quarter
of 2000.

OPERATING EXPENSES. Operating expenses increased $53.4
million, or 35.8% to $202.3 million in 2000, from $148.9 million
in 1999. This increase was due to a 23.5% increase in total
months of club operations to 1,113 in 2000 from 902 in 1999. The
increase is also attributable to the clubs opened or acquired in
2000 including larger, multi-purpose clubs than that of the
prior years club base.



| |                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Payroll and related increased by $27.3 million, or 43.7% to
	$89.7 million in 2000, from $62.4 million in 1999. This increase
	was primarily attributable to the acquisition or opening of
	20 clubs in 2000 and a full year of operating the
	18 clubs opened or acquired in 1999. This increase was also
	attributable to an increase in personal training payroll and
	incentive based compensation.
|
| | Club operating increased by $16.8 million, or 31.9% to $69.4
	million in 2000, from $52.6 million in 1999. This increase is
	primarily attributable to the acquisition or opening of
	20 clubs in 2000 and the additional expenses attributable
	to operating the 18 clubs opened or acquired in 1999.                                                                                                 
|
| | General and administrative increased by $3.8 million, or 35.3%
	to $14.8 million in 2000, from $10.9 million in 1999. This
	increase is attributable to expenses associated with our
	expansion, including the expansion of our corporate offices and
	staff and the enhancement of the Companys management
	information systems.                                                                     

21



---



##### 





| |                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Depreciation and amortization increased by $5.7 million, or
	27.3% to $26.6 million in 2000, from $20.9 million in 1999. 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.
|
| | Compensation expense incurred in connection with stock options
	decreased by $206,000, or 10.1% to $1.8 million in 2000, from
	$2.0 million in 1999. The decrease in compensation expense is
	principally due to less compensatory stock options vesting in
	the year ended 2000 when compared to 1999.  

INTEREST EXPENSE. Interest expense increased $2.8 million
to $14.3 million in 2000 from $11.5 million in 1999, primarily
as a result of increased indebtedness due to the $40.0 million
of Senior Notes issued in June, 1999. The increase is also
attributable to the fact the Company began borrowing from its
line of credit in July of 2000 in order to consummate the
purchase of the Boston chain, Health Development Corporation
(HDC).

INTEREST INCOME. Interest income decreased $104,000 to
$1.2 million in 2000 from $1.3 million in 1999. This
decrease was principally due to lower levels of cash on hand
during 2000 when compared to 1999.

PROVISION FOR INCOME TAX.The provision for income taxes
increased $4.2 million from $571,000 in 1999 to $4.8 million in
2000. The Companys effective tax rate decreased to 50% in
2000 from 92% in 1999. This decrease is principally due to the
change in the effective state rate which was a greater
percentage of pretax income in 1999 than in 2000. 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 $14.6 million of net deferred tax assets.

ACCRETED DIVIDENDS ON PREFERRED STOCK.Accreted dividends
on the Preferred Stock increased $1.1 million to $9.0 million in
2000, from $7.9 million in 1999. This increase is due to the
compounding of accreted dividends.

Liquidity and Capital Resources

Historically, the Company has satisfied its 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, 2001 was $44.3
million compared to $40.6 million during the year ended
December 31, 2000. The increase in cash provided by
operating activities was primarily due to an increase in the
number of mature clubs and to improved performance by most of
these mature clubs, offset by recently opened or acquired clubs
which may be immature and not yet operating at normal operating
margins. The HDC clubs acquired in July 2000 have also
contributed to the increase in cash flows provided by
operations. Excluding cash and cash equivalents, the Company
normally operates with a working capital deficit because it
receives dues or fee revenue either (i) during the month
services are rendered, or (ii) when paid-in-full, in
advance. As a result, the Company has no material accounts
receivable. The Company also records a deferred revenue
liability, because initiation fees are received at enrollment
and are recognized over the estimated average term of
membership. Management believes that the Companys working
capital deficit is an important source of cash flow from
operating activities that it believes will continue to grow as
the Companys membership revenues increase.

Investing Activities.The Company invested $59.1 million
and $71.5 million in capital expenditures and asset acquisitions
during the years ended December 31, 2001 and 2000,
respectively, primarily as a result of the Companys
expansion efforts. The Company estimates that for the year ended
December 31, 2002, it will invest an additional $44.6
million in capital expenditures and asset acquisitions, which
includes $13.5 million that management intends to invest to
expand and renovate certain existing clubs, $12.6 million to
maintain existing clubs and $2.7 million to further upgrade its
management information system. These expenditures will be funded
by cash flow generated from operations, available cash and
credit facilities.

22



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##### 



Financing Activities. As of December 31, 2001, the
Company has approximately $446,000 million available under the
current line of credit and $14.0 million under the
Subordinated Credit Facility, which mature in July 2004 and
December 2004 respectively, and have no scheduled amortization
requirements.

The line of credit allows for maximum borrowings of $25.0
million. 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 $22.7 million of Eurodollar borrowings outstanding as
of December 31, 2001. The amount available for line of
credit borrowings has been further reduced by outstanding
letters of credit totaling $1.8 million. The interest rate
charged on the Eurodollar borrowings outstanding at
December 31, was 4.5%. The line, as amended, contains
various covenants including interest coverage and a leverage
ratio as well as restrictions on the payment of dividends.

In November 2000 the Company entered into a Subordinated Credit
Agreement (the Subordinated Agreement) with 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 13% per annum; 10%
of which is payable on a monthly basis and the remaining 3% is
accruable, at the option of the Company, through maturity. The
total amount of accrued and unpaid interest may not exceed
$2.5 million. The Company is charged a fee of .083% per
month based on the portion of the facility not utilized. As of
December 31, 2001 the Company has $6.0 million of
outstanding borrowing against the facility. In connection with
this agreement the Company 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 the Company issued an additional 7,000 shares of
restricted common stock to the lender. These restricted shares
will be forfeited by the lender in the event that the agreement
is terminated prior to November 30, 2002. The Agreement
contains similar, but less restrictive covenants than those with
the line of credit, as amended.

Although management believes that the Company will be able to
obtain or generate sufficient funds to finance the
Companys current operating and growth plans through the
end of 2002, any material acceleration or expansion of that plan
through additional greenfields or acquisitions (to the extent
such acquisitions include cash payments) may require the Company
to pursue additional sources of financing prior to the end of
2002. There can be no assurance that such financing will be
available or that it will be available on acceptable terms. The
inability to finance such further or accelerated expansion on
acceptable terms may negatively impact the Companys
competitive position and materially adversely affect the
Companys business, results of operations or financial
condition. The Line of Credit Facility accrues interest at
variable rates based on market conditions, accordingly, future
increases in interest rates could have a negative impact on net
income.

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 a discount from
face value at rates of between 5% and 9%, and are
non-collateralized.

In June 1999, the Company issued $40.0 million Senior Notes
thereby increasing the total Senior Notes outstanding to $125.0
million. These notes were issued at a price of 98.75%, providing
the Company with $39.5 million of proceeds before expenses
related to the issuance. After payment of fees and expenses of
$3.9 million, the Company received net proceeds of $35.6
million. Other cash flow financing activities during 1998 and
1999 include 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, the Company sold $40.0 million of Senior
stock. After payment of fees and expenses of approximately
$400,000 the Company 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 the option of the Company.

In October 1997, the Company issued $85.0 million Senior
Notes and entered into the Line of Credit Facility. After
payment of fees and expenses of $3.3 million, the Company
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

23



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##### 





The aggregate long-term debt, capital lease, operating lease,
and Redeemable Preferred Stock Obligations as of
December 31, 2001 are 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)                    |  | $                      | 156,676 |           |  | $         | 1,121  |           |  | $       | 155,229 |  |  | $ | 181    |  |  | $ | 145     | 
|                                    
|                                    
|                                    
|                                    
|Capital Lease Obligations(2)         |  | $                      | 7,303   |           |  | $         | 2,894  |           |  | $       | 4,293   |  |  | $ | 116    |  |  |   |        | 
|                                    
|                                    
|                                    
|                                    
|Operating Lease Obligations(3)       |  | $                      | 550,338 |           |  | $         | 42,049 |           |  | $       | 84,753  |  |  | $ | 84,452 |  |  | $ | 339,084 | 
|                                    
|                                    
|                                    
|                                    
|Redeemable Senior Preferred Stock(4) |  | $                      | 128,525 |           |  |           |       |           |  |         |        |  |  |   |       |  |  | $ | 128,525 | 
|                                     |  |                        |         |           |  |           |        |           |  |         |         |  |  |   |        |  |  |   |         | 
|Total Contractual Cash Obligations   |  | $                      | 842,842 |           |  | $         | 46,064 |           |  | $       | 244,275 |  |  | $ | 84,749 |  |  | $ | 467,754 | 
|                                     |  |                        |         |           |  |           |        |           |  |         |         |  |  |   |        |  |  |   |         | 



---

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 bonds outstanding as of December 31,
	2001, and a 13.00% interest rate charge on the $6.0 million
	of Subordinated Debt. Line of credit borrowings are not at fixed
	rates of interest. Line of credit borrowings are currently at
	4.5% or approximately $1.0 million per annum, but such
	rates may change widely with changes in market conditions.
|   
|(2) | Capital lease obligations represent principal payments only and
	exclude a total of $1.5 million of interest expense over
	the entire term of such obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(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 Senior Preferred Stock is redeemable in
	November 2008. The Cash obligation above includes future
	accrual of dividends totalling $71.1 million.                                                                                                                                                                                                                                                                                                                                                                                                                                             

Effect of Recent Changes
in Accounting Standards

Effective January 1, 2000, the Company adopted Securities
and Exchange Commission Staff Accounting Bulletin 101
Revenue Recognition in Financial Statements, and such
adoption did not have a material effect on the Companys
financial statements.

Effective January 1, 2000, the Company adopted Financial
Accounting Standards Board (FASB) Statement
No. 133 Accounting for Derivative Instruments and
Hedging Activities, and such adoption did not have a
material effect on the Companys financial statements.

In June 2001, the FASB issued Statements No. 141
Business Combinations (SFAS 141), and
No. 142, Goodwill and Other Intangible Assets
(SFAS 142), collectively referred to as the
Standards. SFAS 141 supersedes Accounting
Principles Board Opinion (APB) No. 16, Business
Combination. The provisions of SFAS 141 require that the
purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and provide
specific criteria for the initial recognition and measurement of
intangible assets apart from goodwill. SFAS 141 also
requires that upon adoption of SFAS 142 the Company
reclassify the carrying amounts of certain intangible assets
into or out of goodwill, based on certain criteria.
SFAS 142 supersedes APB 17, Intangible Assets, and is
effective for fiscal years beginning after December 15,
2001. SFAS 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS 142 prohibit the
amortization of goodwill and indefinite-lived intangible assets,
require that goodwill and indefinite-lived intangibles assets be
tested annually for impairment (and in interim periods if
certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be
impaired), and require that reporting units be identified for
the purpose of assessing potential future impairments of
goodwill.

24



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##### 



The Company will adopt the provisions of SFAS 142 in its
first quarter ended March 31, 2002. The Company is in the
process of preparing for its adoption of SFAS 142 and is
making the determinations as to what its reporting units are and
what amounts of goodwill, intangible assets, other assets, and
liabilities should be allocated to those reporting units. In
connection with the adoption of SFAS 142, the Company does
not expect to reclassify any of its goodwill balances to
intangible assets nor any of its intangibles assets to goodwill.
As a result of adoption, a substantial amount of its intangible
assets will no longer be amortized and, accordingly, the
Companys effective tax rate is expected to decrease in
2002. The goodwill amortization that would not have been
amortized pursuant to SFAS 142 during 2001 amounts to
$4.4 million. The Company will also evaluate the useful
lives assigned to its intangible assets, but does not anticipate
any changes to the useful lives.

SFAS 142 requires that goodwill be tested annually for
impairment using a two-step process. The first step is to
identify a potential impairment and, in transition, this step
must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to
complete the first step. The Company expects to complete that
first step of the goodwill impairment test during the first
quarter of 2002. The second step of the goodwill impairment test
measures the amount of the impairment loss (measured as of the
beginning of the year of adoption), if any, and must be
completed by the end of the Companys fiscal year. Any
impairment loss resulting from the transitional impairment tests
will be reflected as the cumulative effect of a change in
accounting principle in the first quarter of 2002. The Company
has not yet determined what effect these impairment tests will
have on the Companys earnings and financial position.

In August 2001, the FASB issued Statement No. 143,
Accounting for Obligations Associated with the Retirement of
Long-Lived Assets (SFAS 143). This
statement addresses the diversity in practice for recognizing
asset retirement obligations, SFAS 143 requires that
obligations associated with the retirement of a tangible
long-lived asset be recorded as a liability when those
obligations are incurred, with the amount of the liability
initially measured at fair value. SFAS 143 is effective for
financial statements for fiscal years beginning after
June 15, 2002 (early application is encouraged). The
Company expects the provisions of SFAS 143 will not have a
material impact on its consolidated results of operations and
financial position upon adoption.

In October 2001, the FASB issued Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 applies to
all long-lived assets (including discontinued operations).
SFAS 144 establishes a single accounting model for the
impairment or disposal of long-lived assets, including
discontinued operations. FAS 144 requires that long-lived
assets that are to be disposed of by sale be measured at the
lower of book value or fair value less cost to sell. The
provisions of SFAS 144 are effective in fiscal years
beginning after December 15, 2001. The Company plans to
adopt SFAS 144 effective January 1, 2002 and does not
expect that the adoption will have a material impact on its
financial position and results of operations.

September 11 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 of our clubs located in downtown
Manhattan. Three of the effected four clubs were reopened and
back in operation by October 2001. Because of its close
proximity to the World Trade Center the fourth club, although
not structurally damaged, is still closed. The Company expects
this club will be reopen for business in the first half of 2002.
Membership dues credits in the amount of $314,000 have been
recorded in the quarter ended September 30, 2001 due to the
September 11 events. These credits represent a pro rata
share of the September membership dues previously collected for
which members were not able to utilize club services.

The Company carries business interruption insurance to mitigate
certain lost revenue, profits and costs (Costs)
experienced with the September 11 events. Although the
Company has business interruption insurance to cover lost
revenues and profits at this location, we cannot predict with
any degree of certainty what future amounts will actually be
received and accordingly any future recoveries of lost revenue
and profits will be recorded when payment is received.

25



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##### 



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.

The Companys 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 the Company. 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 the Company
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 value would be reduced to fair value.
Actual cash flows realized could differ from those estimated and
could result in asset impairments in the future.

As of December 31, 2001 the Companys net deferred tax
assets totaled $19.1 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 the Companys ability to
generate sufficient future taxable income. The Companys
pre tax profit was $620,000, $9.6 million and
$13.5 million, and current tax liabilities were $3.8,
$8.1 million and $11.0 million for the years ended
December 31, 1999, 2000 and 2001, respectively. Because
there is currently no evidence the Company will not continue to
be profitable, the weight of available evidence indicates the
Company 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 assets, the write down of the asset
could have a significant impact on the Companys financial
statements.

Inflation

The Company believes that inflation has not had a material
impact on its results of operations for the three year period
ended December 31, 2001.

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 14(a)(1) and
14(a)(2) .

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

None.

26



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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              |  |     | 42 |          |  | Chairman and Director                             
|                       
|                       
|                       
|                       
|Robert Giardina         |  |     | 44 |          |  | Chief Executive Officer, Office of the President  
|                       
|                       
|                       
|                       
|Alexander Alimanestianu |  |     | 42 |          |  | Chief Development Officer, Office of the President
|                       
|                       
|                       
|                       
|Richard Pyle            |  |     | 43 |          |  | Chief Financial Officer, Office of the President  
|                       
|                       
|                       
|                       
|Deborah Smith           |  |     | 42 |          |  | Senior Vice President, Operations                 
|                       
|                       
|                       
|                       
|Keith E. Alessi         |  |     | 47 |          |  | Director                                          
|                       
|                       
|                       
|                       
|Paul Arnold             |  |     | 55 |          |  | Director                                          
|                       
|                       
|                       
|                       
|Bruce Bruckmann         |  |     | 48 |          |  | Director                                          
|                       
|                       
|                       
|                       
|Stephen Edwards         |  |     | 38 |          |  | Director                                          
|                       
|                       
|                       
|                       
|Jason Fish              |  |     | 44 |          |  | Director                                          

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

Robert Giardinahas served as President and Chief
Operating Officer of the Company from 1992 to 2001, and became
Chief Executive Officer in January 2002. Mr. Giardina
joined the Company in 1981 (when the Company had four clubs)
after six years of employment with other fitness club companies.
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 the Company in 1990. He
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 the Company, he worked as a corporate
attorney for six years with one of the Companys outside
law firms. Mr. Alimanestianu has been involved in the
development or acquisition of over 100 of the Companys
clubs.

Richard Pyle, a British chartered accountant, joined the
Company in 1987 and has been chiefly responsible for the
Companys financial matters since that time, as a Vice
President in 1988, Senior Vice President and Chief Financial
Officer in 1992 and Executive Vice President in 1995,
successively. Before joining the Company, 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.

Deborah Smithjoined the Company 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 Company clubs in New York,
Switzerland, Maryland and Washington, DC. She oversees club
operations in all U.S. geographic areas.

Keith E. Alessihas served as a director of the Company
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.

27



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##### 



Paul Arnoldhas served as a director of the Company 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 the Company
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., California
Pizza Kitchen, Inc. and Anvil Knitwear, Inc. and a director of
several private companies.

Stephen Edwardshas served as a director of the Company
since December, 1996. Since 1994, Mr. Edwards has served as
Managing Director of BRS. From 1993 until 1994, Mr. Edwards
served as an officer of CVC. From 1988 through 1991, he was an
associate of CVC. Prior to joining CVC, Mr. Edwards worked
with Citicorp/ Citibank in various corporate finance positions.
Mr. Edwards is currently a director of Anvil Knitwear, Inc.
and OSullivan Industries and a director of several private
companies.

Jason Fishhas been a director of the Company 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., the
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 the Companys Chief
Executive Officer and the four highest compensated executive
officers (collectively, the named executive
officers). The compensation set forth below fully reflects
compensation for work performed on behalf of the Company.

|                        |                          |        |      |                     |  |          |         |              |  |                            |         |         |  |  |   |   |  |  |   |   | 
|----------------------- | ------------------------ | ------ | ---- | ------------------- |  | -------- | ------- | ------------ |  | -------------------------- | ------- | ------- |  |  | - | - |  |  | - | - | 
|                        |                          |        |      |                     |  |          |         | Other Annual |  | Long-Term Compensation    
|Name and                |                          |        |      | Salary              |  | Bonus(1) |         | Compensation |  | Awards Common Stock       
|Principal Position      |                          | Period |      | ($)                 |  | ($)      |         | ($)          |  | Underlying Options/SARs(#)
|                        |                          |        |      |                     |  |          |         |              |  |                           
|                        |                          |        |      |                     |  |         
|                        |                          |        |      | Annual Compensation |  |         
|                       
|                       
|                       
|                       
|Mark Smith              |                          |        | 2001 |                     |  |          | 413,662 |              |  |                            | 364,597 |         |  |  |  |   |  |  |  |  
|                        | Chairman                 |        |      | 2000                |  |          |         | 397,752      |  |                            |         | 540,000 |  |  |   |  |  |  |   |  | 
|                        |                          |        |      | 1999                |  |          |         | 379,979      |  |                            |         | 338,000 |  |  |   |  |  |  |   |  | 
|                       
|                       
|                       
|                       
|                       
|Robert Giardina         |                          |        | 2001 |                     |  |          | 392,327 |              |  |                            | 276,678 |         |  |  |  |   |  |  |  |  
|                        | Chief Executive Officer  |        |      | 2000                |  |          |         | 377,237      |  |                            |         | 413,000 |  |  |   |  |  |  |   |  | 
|                        | Office of the President  |        |      | 1999                |  |          |         | 360,381      |  |                            |         | 257,260 |  |  |   |  |  |  |   |  | 
|                       
|                       
|                       
|                       
|                       
|Richard Pyle            |                          |        | 2001 |                     |  |          | 215,035 |              |  |                            | 216,258 |         |  |  |  |   |  |  |  |  
|                        | Chief Financial Officer, |        |      | 2000                |  |          |         | 206,764      |  |                            |         | 317,000 |  |  |   |  |  |  |   |  | 
|                        | Office of the President  |        |      | 1999                |  |          |         | 197,525      |  |                            |         | 196,855 |  |  |   |  |  |  |   |  | 
|                       
|                       
|                       
|                       
|                       
|Alexander Alimanestianu |                          |        | 2001 |                     |  |          | 215,035 |              |  |                            | 216,258 |         |  |  |  |   |  |  |  |  
|                        | Chief Development        |        |      | 2000                |  |          |         | 206,764      |  |                            |         | 317,000 |  |  |   |  |  |  |   |  | 
|                        | Officer, Office of the   |        |      | 1999                |  |          |         | 197,525      |  |                            |         | 196,855 |  |  |   |  |  |  |   |  | 
|                        | President                |        |      |                     |  |          |         |              |  |                            |         |         |  |  |   |   |  |  |   |   | 

28



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##### 



|                   |                        |        |      |                     |  |          |         |              |  |                            |         |         |  |  |   |   |  |  |   |   | 
|------------------ | ---------------------- | ------ | ---- | ------------------- |  | -------- | ------- | ------------ |  | -------------------------- | ------- | ------- |  |  | - | - |  |  | - | - | 
|                   |                        |        |      |                     |  |          |         | Other Annual |  | Long-Term Compensation    
|Name and           |                        |        |      | Salary              |  | Bonus(1) |         | Compensation |  | Awards Common Stock       
|Principal Position |                        | Period |      | ($)                 |  | ($)      |         | ($)          |  | Underlying Options/SARs(#)
|                   |                        |        |      |                     |  |          |         |              |  |                           
|                   |                        |        |      |                     |  |         
|                   |                        |        |      | Annual Compensation |  |         
|                  
|                  
|                  
|                  
|Deborah Smith      |                        |        | 2001 |                     |  |          | 172,911 |              |  |                            | 145,839 |         |  |  |  |   |  |  |  |  
|                   | Senior Vice President, |        |      | 2000                |  |          |         | 166,261      |  |                            |         | 216,000 |  |  |   |  |  |  |   |  | 
|                   | Operations             |        |      | 1999                |  |          |         | 158,832      |  |                            |         | 130,511 |  |  |   |  |  |  |   |  | 




|    |                                                                       
|--- | ----------------------------------------------------------------------
|(1) | Includes annual bonus payments under the Companys Annual
	Bonus Plan.

Option/ SAR Grants During the Year Ended December 31,
2001

There were no options granted to named executive officers by the
Company during the year ended December 31, 2001.

Aggregated Option/ SAR Exercises During the Years Ended
December 31, 2001 and 2001 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, 2001 as well as the number and value of
all unexercised options held by the named executive officers as
of December 31, 2001.

|                        |  |             |   |             |  |                           |   |                           |  |        |         |           |  |  |          |  |  |  |             |  |  |  |             | 
|----------------------- |  | ----------- | - | ----------- |  | ------------------------- | - | ------------------------- |  | ------ | ------- | --------- |  |  | -------- |  |  |  | ----------- |  |  |  | ----------- | 
|                        |  |             |   |             |  |                           |   |                           |  |       
|                        |  |             |   |             |  |                           |   | Value of Unexercised     
|                        |  |             |   |             |  | Number of Securities      |   | In-the-Money             
|                        |  |             |   |             |  | Options/SARs              |   | 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 |  |  |  | 1,377,480/0 |  |  |  | 2,121,313/0 | 
|                       
|                       
|                       
|                       
|Robert Giardina         |  |             |  |             |  |                           |  |                           |  |        | 8,829/0 |           |  |  | 32,793/0 |  |  |  | 1,377,324/0 |  |  |  | 1,624,901/0 | 
|                       
|                       
|                       
|                       
|Richard Pyle            |  |             |  |             |  |                           |  |                           |  |        | 8,828/0 |           |  |  | 27,569/0 |  |  |  | 1,377,168/0 |  |  |  | 1,366,044/0 | 
|                       
|                       
|                       
|                       
|Alexander Alimanestianu |  |             |  |             |  |                           |  |                           |  |        | 8,828/0 |           |  |  | 27,199/0 |  |  |  | 1,377,168/0 |  |  |  | 1,347,726/0 | 
|                       
|                       
|                       
|                       
|Deborah Smith           |  |             |  |             |  |                           |  |                           |  |        | 5,750/0 |           |  |  | 9,530/0  |  |  |  | 890,400/0   |  |  |  | 472,225/0   | 




|    |                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 the historical and projected financial performance of
	the Company.

Compensation Committee Interlocks and Insider
Participation

The current members of the Compensation Committee are Bruce
Bruckmann, Stephen Edwards and Mark Smith.
Messrs. Bruckmann and Edwards are non-employee directors of
the Company.

Management Equity Agreements

Simultaneously with a recapitalization, the Company entered into
Executive Stock Agreements with certain of the officers and
other key employees of the Company. Pursuant to the Executive
Stock Agreements, the executives each have purchased shares of
Common Stock and/or shares of Series B Preferred of the
Company at a purchase price of $1.00 per share of Common Stock
and $35.00 per share of Series B Preferred Stock.

Company Benefit Plans

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 years

29



---



##### 





Item 12.  Security Ownership of Certain
Beneficial Owners and Management

The following table sets forth (as of December 31, 2001)
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 the Companys voting securities;
(ii) each named executive officer and director of the
Company; and (iii) all directors and named executive
officers of the Company as a group.

|                                                                                           |  |              |           |                |  |                 |      |                 |  |                 |        |  |  |  |         |  |  |  |         | 
|------------------------------------------------------------------------------------------ |  | ------------ | --------- | -------------- |  | --------------- | ---- | --------------- |  | --------------- | ------ |  |  |  | ------- |  |  |  | ------- | 
|                                                                                           |  | Common       |           | Percentage of  |  |                 |      |                 |  |                
|                                                                                           |  | Stock        |           | Common         |  | Redeemable      |      |                 |  |                
|                                                                                           |  | Beneficially |           | Stock          |  | Senior          |      | Series A        |  | 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   |                |  |                 | 37.5 | %               |  |                 |       |  |  |  | 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(4)
	600 Fifth Avenue,
	23rd Floor
	New York, New York 10020        |  |              | 139,437   |                |  |                 | 10.4 | %               |  |                 | 15,000 |  |  |  |        |  |  |  |        | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|CapitalSource Holdings L.L.C.
	4445 Willard Avenue
	Chevy Chase, MD 20815                  |  |              | 23,000    |                |  |                 | 1.7  | %               |  |                 |       |  |  |  |        |  |  |  |        | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Rosewood Capital L.P.(5)
	One Maritime Plaza,
	Suite 1330
	San Francisco, California 94111 |  |              | 17,908    |                |  |                 | 1.7  | %               |  |                 | 5,000  |  |  |  |        |  |  |  |        | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Executive Officers and Directors:                                                          |  |              |           |                |  |                 |      |                 |  |                 |        |  |  |  |         |  |  |  |         | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Mark Smith(6)                                                                              |  |              | 74,955    |                |  |                 | 5.6  | %               |  |                 |       |  |  |  |        |  |  |  | 42,812  | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Robert Giardina(6)                                                                         |  |              | 59,480    |                |  |                 | 4.4  | %               |  |                 |       |  |  |  |        |  |  |  | 32,793  | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Richard Pyle(6)                                                                            |  |              | 51,410    |                |  |                 | 3.8  | %               |  |                 |       |  |  |  |        |  |  |  | 27,569  | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Alexander Alimanestianu(6)                                                                 |  |              | 50,839    |                |  |                 | 3.8  | %               |  |                 |       |  |  |  |        |  |  |  | 27,199  | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Deborah Smith(6)                                                                           |  |              | 21,658    |                |  |                 | 1.6  | %               |  |                 |       |  |  |  |        |  |  |  | 10,080  | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Bruce C. Bruckmann(7)                                                                      |  |              | 517,642   |                |  |                 | 38.4 | %               |  |                 |       |  |  |  | 107,057 |  |  |  |        | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Stehpen Edwards(8)                                                                         |  |              | 504,456   |                |  |                 | 37.5 | %               |  |                 |       |  |  |  | 104,330 |  |  |  |        | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Jason Fish(9)                                                                              |  |              | 293,091   |                |  |                 | 21.8 | %               |  |                 | 20,000 |  |  |  | 41,045  |  |  |  |        | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Paul Arnold                                                                                |  |              | *         |                |  |                 | *    |                 |  |                 |       |  |  |  | 591     |  |  |  |        | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Keith Alessi                                                                               |  |              | *         |                |  |                 | *    |                 |  |                 |       |  |  |  | 591     |  |  |  |        | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Executive Officers and Directors as a
	Group:                                              |  |              |           |                |  |                 |      |                 |  |                 |        |  |  |  |         |  |  |  |         | 
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|10 Persons(10)                                                                             |  |              | 1,074,789 |                |  |                 | 79.8 | %               |  |                 | 20,000 |  |  |  | 149,285 |  |  |  | 140,453 | 

30



---



##### 





---



|  |                         
|- | ------------------------
|* | 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, 2001 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 Institutional 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 a warrant to purchase 75,714 shares of Common Stock
	with an exercise price of $.01 per share and an expiration date
	of December 10, 2006 and warrants to purchase 53,723 shares
	of Common Stock with an exercise price of $.01 and an expiration
	date of November 15, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(5) | Includes warrants to purchase 17,908 shares of Common Stock with
	an exercise price of $.01 per share and an expiration date of
	November 30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(6) | Includes options to acquire, exercisable within 60 days,
	Common Stock, and Series B Preferred Stock options,
	exercisable within 60 days, pursuant to the Old Option Plan
	and the Preferred Option Plan, 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 the
	Companys principal executive offices.
|   
|(7) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(8) | Includes shares held by BRS. Mr. Edwards disclaims
	beneficial ownership of such shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(9) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



|     |                                                                                                                                                                                                                            
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes (i) shares held by BRS, which may be deemed to be
	owned beneficially by Messrs. Bruckmann and Edwards, 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 19.6% 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.

Item 13.  Certain Relationships and Related
Transactions

Redeemable Senior Preferred Stock

In November 1998, the Company issued 40,000 shares of
Redeemable Senior Preferred Stock (Senior). After
the payment of fees and expenses of approximately $400,000 the
Company 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 the
Company.

31



---



##### 



Registration Rights Agreement

In connection with the Recapitalization, the Company, 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 the Company, at the expense of the Company 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 the Company has consummated an initial registered public
offering of its 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
the Company paying all expenses of the Offering, whenever the
Company proposes 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, the Company has 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 certain advisory
and consulting services to the Company. 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 the outstanding
Common Stock of the Company.

Subordinated Credit Agreement

In November 2000 the Company 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 13% per annum; 10% of which is payable on a monthly basis and
the remaining 3% is accruable, at the option of the Company,
through maturity. The total amount of accrued and unpaid
interest may not exceed $2.5 million. 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 $225,000 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 the Company issued an additional
7,000 shares of restricted common stock to the lender. These
restricted shares will be forfeited by the lender in the event
that the agreement is terminated prior to November 30, 2002.

32



---



##### 



PART IV

Item 14.  Exhibits, Financial Statement
Schedules, and Reports on Form 8-K

(a) Document List

1.  Financial Statements

The following consolidated financial statements of the Company
are included in Item 8:

|                                                                                                       |  |      |     | 
|------------------------------------------------------------------------------------------------------ |  | ---- | --- | 
|                                                                                                       |  | Page
|                                                                                                       |  |     
|Report of independent accountants                                                                      |  |      | F-1 | 
|Consolidated balance sheets at December 31,
	2000 and 2001                                             |  |      | F-2 | 
|Consolidated statements of operations for the
	years ended December 31, 1999, 2000 and 2001            |  |      | F-3 | 
|Consolidated statements of stockholders
	deficit for the years ended December 31, 1999, 2000 and 2001 |  |      | F-4 | 
|Consolidated statements of cash flows for the
	years ended December 31, 1999, 2000 and 2001            |  |      | 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

July 28, 2000 Form 8-K filed in connection with the
acquisition of Health Development Corporation.

(c) Exhibits:

| |    |   |  |                                                                                                                                                                                                                                                                              
| | -- | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.***                                                                                                                                                             
| | 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.***

33



---



##### 



| |     |    |  |                                                                                                                                                                                                                                                             
| | --- | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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  |  | Subordinated Credit Agreement among the Company
	and CapitalSource dated November 6, 2000                                                                                                                                                                   
| | 10. | 9  |  | Stock Purchase Agreement among the Company, CMC
	and CDP, dated as of November 13, 1998.***                                                                                                                                                                 
| | 10. | 10 |  | Stock Purchase Agreement among the Company, the
	Farallon Entities and RC, dated as of November 30, 1998.***                                                                                                                                                
| | 10. | 11 |  | Stock Purchase Agreement among the Company and
	CapitalSource dated as of November 6, 2000.                                                                                                                                                                 
| | 10. | 12 |  | 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. | 13 |  | 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.                           

34



---



##### 



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 at December 31, 2000,
and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2001, 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 expressed above.



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

New York, New York



F-1



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

All figures $000, except share data


December 31, 2000 and 2001


|                                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                 |         |         |         |   |         |         |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                
|                                                                                                                                                                                                                                                       |                                                                                                                                                   | December 31,                                                                   
|                                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                
|                                                                                                                                                                                                                                                       |                                                                                                                                                   | 2000                                                                            |         | 2001   
|                                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                 |         |        
|Assets                                                                                                                                                                                                                                                 |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|Current assets:                                                                                                                                                                                                                                        |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Cash and cash equivalents                                                                                                                         |                                                                                 | $       | 3,365   |         |   | $       | 5,458   |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Accounts receivable                                                                                                                               |                                                                                 |         | 678     |         |   |         | 1,355   |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Inventory                                                                                                                                         |                                                                                 |         | 893     |         |   |         | 1,326   |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Prepaid corporate income taxes                                                                                                                    |                                                                                 |         | 1,828   |         |   |         |        |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Prepaid expenses and other current assets                                                                                                         |                                                                                 |         | 2,018   |         |   |         | 3,113   |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                   | Total current assets                                                            |         |         | 8,782   |   |         |         | 11,252  |  
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|Fixed assets, net                                                                                                                                                                                                                                      |                                                                                                                                                   |                                                                                 | 161,510 |         |         |   | 200,120 |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|Goodwill, net                                                                                                                                                                                                                                          |                                                                                                                                                   |                                                                                 | 45,265  |         |         |   | 42,145  |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|Intangible assets, net                                                                                                                                                                                                                                 |                                                                                                                                                   |                                                                                 | 10,134  |         |         |   | 6,515   |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|Deferred tax asset                                                                                                                                                                                                                                     |                                                                                                                                                   |                                                                                 | 14,566  |         |         |   | 19,092  |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|Deferred membership costs                                                                                                                                                                                                                              |                                                                                                                                                   |                                                                                 | 13,586  |         |         |   | 14,748  |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|Other assets                                                                                                                                                                                                                                           |                                                                                                                                                   |                                                                                 | 2,242   |         |         |   | 2,133   |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                   | Total assets                                                                    |         | $       | 256,085 |   |         | $       | 296,005 |  
|                                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|Liabilities, Redeemable Senior Preferred Stock
	and Stockholders Deficit                                                                                                                                                                              |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|Current liabilities:                                                                                                                                                                                                                                   |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Current portion of long-term debt and capital
	lease obligations                                                                                  |                                                                                 | $       | 3,411   |         |   | $       | 4,015   |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Accounts payable                                                                                                                                  |                                                                                 |         | 2,550   |         |   |         | 7,615   |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Accrued expenses                                                                                                                                  |                                                                                 |         | 18,284  |         |   |         | 18,918  |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Deferred revenue                                                                                                                                  |                                                                                 |         | 22,951  |         |   |         | 23,269  |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                   | Total current liabilities                                                       |         |         | 47,196  |   |         |         | 53,817  |  
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|Long-term debt and capital lease obligations                                                                                                                                                                                                           |                                                                                                                                                   |                                                                                 | 141,087 |         |         |   | 159,964 |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|Deferred lease liabilities                                                                                                                                                                                                                             |                                                                                                                                                   |                                                                                 | 17,044  |         |         |   | 21,510  |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|Deferred revenue                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                 | 2,736   |         |         |   | 3,609   |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|Other liabilities                                                                                                                                                                                                                                      |                                                                                                                                                   |                                                                                 | 3,904   |         |         |   | 4,783   |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                   | Total liabilities                                                               |         |         | 211,967 |   |         |         | 243,683 |  
|                                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|Commitments and contingencies                                                                                                                                                                                                                          |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|Redeemable senior preferred stock, $1.00 par
	value; liquidation value $51,100 and $57,416 at
	December 31, 2000 and 2001, respectively; authorized
	100,000 shares; 40,000 shares issued and outstanding at
	December 31, 2000 and 2001, respectively |                                                                                                                                                   |                                                                                 | 48,029  |         |         |   | 54,687  |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|Stockholders deficit :                                                                                                                                                                                                                                |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Series A preferred stock, at liquidation
	value                                                                                                   |                                                                                 |         | 26,580  |         |   |         | 30,432  |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Series B preferred stock, at liquidation
	value                                                                                                   |                                                                                 |         | 232     |         |   |         | 265     |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Class A voting common stock, $.001 par
	value; issued and outstanding 1,005,698 and 1,028,698 shares at
	December 31, 2000 and 2001, respectively |                                                                                 |         | 1       |         |   |         | 1       |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Paid-in capital                                                                                                                                   |                                                                                 |         | 10,280  |         |   |         | 11,695  |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Unearned compensation                                                                                                                             |                                                                                 |         | (156    | )       |   |         | (422    | )      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Foreign currency translation adjustment                                                                                                           |                                                                                 |         | 12      |         |   |         | 21      |        
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                       | Accumulated deficit                                                                                                                               |                                                                                 |         | (40,860 | )       |   |         | (44,357 | )      
|                                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                   | Total stockholders deficit                                                     |         |         | (3,911  | ) |         |         | (2,365  | )
|                                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        
|                                                                                                                                                                                                                                                       |                                                                                                                                                   | Total liabilities, redeemable senior preferred
	stock and stockholders deficit |         | $       | 256,085 |   |         | $       | 296,005 |  
|                                                                                                                                                                                                                                                       |                                                                                                                                                   |                                                                                 |         |         |         |   |         |        

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, 1999, 2000 and 2001


|                                      |                                                                 |                                                     |         |         |        |      |         |         |        |   |         |         |        |  
|------------------------------------- | --------------------------------------------------------------- | --------------------------------------------------- | ------- | ------- | ------ | ---- | ------- | ------- | ------ | - | ------- | ------- | ------ | -
|                                      |                                                                 |                                                    
|                                      |                                                                 | Years Ended December 31,                           
|                                      |                                                                 |                                                    
|                                      |                                                                 | 1999                                                |         | 2000    |        | 2001
|                                      |                                                                 |                                                     |         |         |        |     
|Revenues:                             |                                                                 |                                                     |         |         |        |      |         |         |        |   |         |        
|                                     
|                                     
|                                     
|                                     
|                                      | Club operations                                                 |                                                     | $       | 157,440 |        |      | $       | 222,424 |        |   | $       | 279,855 |       
|                                     
|                                     
|                                     
|                                     
|                                      | Fees and other                                                  |                                                     |         | 2,339   |        |      |         | 2,625   |        |   |         | 3,437   |       
|                                      |                                                                 |                                                     |         |         |        |      |         |         |        |   |         |        
|                                      |                                                                 |                                                     | 159,779 |         |        |      | 225,049 |         |        |   | 283,292 |        
|                                      |                                                                 |                                                     |         |         |        |      |         |         |        |   |         |        
|Operating expenses:                   |                                                                 |                                                     |         |         |        |      |         |         |        |   |         |        
|                                     
|                                     
|                                     
|                                     
|                                      | Payroll and related                                             |                                                     |         | 62,412  |        |      |         | 89,677  |        |   |         | 112,586 |       
|                                     
|                                     
|                                     
|                                     
|                                      | Club operating                                                  |                                                     |         | 52,619  |        |      |         | 69,390  |        |   |         | 89,842  |       
|                                     
|                                     
|                                     
|                                     
|                                      | General and administrative                                      |                                                     |         | 10,908  |        |      |         | 14,754  |        |   |         | 18,986  |       
|                                     
|                                     
|                                     
|                                     
|                                      | Depreciation and amortization                                   |                                                     |         | 20,935  |        |      |         | 26,642  |        |   |         | 32,667  |       
|                                     
|                                     
|                                     
|                                     
|                                      | Compensation expense incurred in connection with
	stock options |                                                     |         | 2,042   |        |      |         | 1,836   |        |   |         | 1,149   |       
|                                      |                                                                 |                                                     |         |         |        |      |         |         |        |   |         |        
|                                      |                                                                 |                                                     | 148,916 |         |        |      | 202,299 |         |        |   | 255,230 |        
|                                      |                                                                 |                                                     |         |         |        |      |         |         |        |   |         |        
|                                      |                                                                 | Operating income                                    |         |         | 10,863 |      |         |         | 22,750 |   |         |         | 28,062 |  
|                                     
|                                     
|                                     
|                                     
|Interest expense                      |                                                                 |                                                     | 11,527  |         |        |      | 14,300  |         |        |   | 14,918  |        
|                                     
|                                     
|                                     
|                                     
|Interest income                       |                                                                 |                                                     | (1,284  | )       |        |      | (1,180  | )       |        |   | (391    | )      
|                                      |                                                                 |                                                     |         |         |        |      |         |         |        |   |         |        
|                                      |                                                                 | Income before provision for corporate income
	taxes |         |         | 620    |      |         |         | 9,630  |   |         |         | 13,535 |  
|                                     
|                                     
|                                     
|                                     
|Provision for corporate income taxes  |                                                                 |                                                     | 571     |         |        |      | 4,799   |         |        |   | 6,489   |        
|                                      |                                                                 |                                                     |         |         |        |      |         |         |        |   |         |        
|                                      |                                                                 | Net income                                          |         |         | 49     |      |         |         | 4,831  |   |         |         | 7,046  |  
|                                     
|                                     
|                                     
|                                     
|Accreted dividends on preferred stock |                                                                 |                                                     | (7,880  | )       |        |      | (9,016  | )       |        |   | (10,201 | )      
|                                      |                                                                 |                                                     |         |         |        |      |         |         |        |   |         |        
|                                      |                                                                 | Net loss attributable to common
	stockholders       |         | $       | (7,831 | )    |         | $       | (4,185 | ) |         | $       | (3,155 | )
|                                      |                                                                 |                                                     |         |         |        |      |         |         |        |   |         |        

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, 1999, 2000 and 2001





|                                                                                                                 |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   |    |    | 
|---------------------------------------------------------------------------------------------------------------- | ---------------------------- | -------------------- | ------- | -------------------- |  | ------------------- | ------ | ------- |  | -------- | ------ | ----------- |  | ------- | --- | ------------ |  | ---------- | --------- | --------- |  | - | - | - |  | - | ----- | ------ |  | - | ------ | ------ | - | - | -- | -- | 
|                                                                                                                 |                              |                      |         |                      |  |                     |        |         |  |         
|                                                                                                                 |                              | Preferred Stock      |         | Common Stock         |  |                     |        |         |  |         
|                                                                                                                 |                              |                      |         |                      |  |                     |        |         |  |         
|                                                                                                                 |                              |                      |         |                      |  |                     |        |         |  |          |        | Foreign    
|                                                                                                                 |                              | Series A ($1.00 par) |         | Series B ($1.00 par) |  | Class A ($.001 par) |        |         |  |          |        | Currency   
|                                                                                                                 |                              |                      |         |                      |  |                     |        | Paid-in |  | Unearned |        | Translation
|                                                                                                                 |                              | Shares               |         | Amount               |  | Shares              |        | Amount  |  | Shares   |        | Amount      |  | Capital |     | Compensation |  | Adjustment
|                                                                                                                 |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |           
|Balance at January 1, 1999                                                                                       |                              |                      | 153,637 |                      |  | $                   | 20,351 |         |  |          | 3,857  |             |  | $       | 179 |              |  |            | 1,015,714 |           |  | $ | 1 |   |  | $ | 7,844 |        |  | $ | (2,546 | )      |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Compensation expense incurred in connection with
	Series B Preferred stock options                               |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   | 784   |        |  |   |        |        |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Amortization of unearned compensation                                                                            |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   | 1,258  |        |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Accretion of Series A and Series B
	preferred stock dividend ($18.64 and $6.48 per share,
	respectively)         |                              |                      |         |                      |  |                     | 2,865  |         |  |          |        |             |  |         | 25  |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Accretion of redeemable senior preferred stock
	dividend ($124.75 per share plus accretion to liquidation value) |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Cancellation of unvested options                                                                                 |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   | (48   | )      |  |   | 48     |        |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Repurchase of shares                                                                                             |                              |                      |         |                      |  |                     |        |         |  |          | (2     | )           |  |         |    |              |  |            | (1,628    | )         |  |   |  |   |  |   | (24   | )      |  |   |        |        |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Net income                                                                                                       |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   |    |   
|                                                                                                                 |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   |    |   
|                                                                                                                 | Balance at December 31, 1999 |                      |         | 153,637              |  |                     |        | 23,216  |  |          |        | 3,855       |  |         |     | 204          |  |            |           | 1,014,086 |  |   |   | 1 |  |   |       | 8,556  |  |   |        | (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 A and Series B
	preferred stock dividend ($21.90 and $7.85 per share,
	respectively)         |                              |                      |         |                      |  |                     | 3,364  |         |  |          |        |             |  |         | 30  |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Accretion of redeemable senior preferred stock
	dividend ($140.55 per share plus accretion to liquidation value) |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Cancellation of unvested options                                                                                 |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   | (115  | )      |  |   | 115    |        |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Exercise of stock options                                                                                        |                              |                      |         |                      |  |                     |        |         |  |          | 5,384  |             |  |         |     |              |  |            | 3,757     |           |  |   |   |   |  |   | 61    |        |  |   |        |        |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Repurchase of shares                                                                                             |                              |                      |         |                      |  |                     |        |         |  |          | (5,417 | )           |  |         | (2  | )            |  |            | (12,145   | )         |  |   |   |   |  |   | (449  | )      |  |   |        |        |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Foreign currency translation adjustment                                                                          |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   | $ | 12 |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Net income                                                                                                       |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   |    |   
|                                                                                                                 |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   |    |   
|                                                                                                                 | Balance at December 31, 2000 |                      |         | 153,637              |  |                     |        | 26,580  |  |          |        | 3,822       |  |         |     | 232          |  |            |           | 1,005,698 |  |   |   | 1 |  |   |       | 10,280 |  |   |        | (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 A and Series B
	preferred stock dividend ($25.07 and $8.63 per share,
	respectively)         |                              |                      |         |                      |  |                     | 3,852  |         |  |          |        |             |  |         | 33  |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Accretion of redeemable senior preferred stock
	dividend ($157.90 per share plus accretion to liquidation value) |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |    |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Deferred compensation recorded in connection with
	the issuance of stock options                                 |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   | 422   |        |  |   | (422   | )      |   |   |    |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Foreign currency translation adjustment                                                                          |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   | 9  |   
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Net income                                                                                                       |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   |    |   
|                                                                                                                 |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   |    |   
|                                                                                                                 | Balance at December 31, 2001 |                      |         | 153,637              |  |                     | $      | 30,432  |  |          |        | 3,822       |  |         | $   | 265          |  |            |           | 1,028,698 |  |   | $ | 1 |  |   | $     | 11,695 |  |   | $      | (422   | ) |   | $  | 21 | 
|                                                                                                                 |                              |                      |         |                      |  |                     |        |         |  |          |        |             |  |         |     |              |  |            |           |           |  |   |   |   |  |   |       |        |  |   |        |        |   |   |    |   

[Additional columns below]

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

|                                                                                                                 |                              |             |         |               |   |   |        |        |  
|---------------------------------------------------------------------------------------------------------------- | ---------------------------- | ----------- | ------- | ------------- | - | - | ------ | ------ | -
|                                                                                                                 |                              |             |         | Total        
|                                                                                                                 |                              | Accumulated |         | Stockholders
|                                                                                                                 |                              | Deficit     |         | Deficit      
|                                                                                                                 |                              |             |         |              
|Balance at January 1, 1999                                                                                       |                              | $           | (28,162 | )             |   | $ | (2,333 | )     
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Compensation expense incurred in connection with
	Series B Preferred stock options                               |                              |             |         |               |   |   | 784    |       
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Amortization of unearned compensation                                                                            |                              |             |         |               |   |   | 1,258  |       
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Accretion of Series A and Series B
	preferred stock dividend ($18.64 and $6.48 per share,
	respectively)         |                              |             | (2,890  | )             |   |   |       |       
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Accretion of redeemable senior preferred stock
	dividend ($124.75 per share plus accretion to liquidation value) |                              |             | (5,331  | )             |   |   | (5,331 | )     
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Cancellation of unvested options                                                                                 |                              |             |         |               |   |   |        |       
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Repurchase of shares                                                                                             |                              |             |         |               |   |   | (24    | )     
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Net income                                                                                                       |                              |             | 49      |               |   |   | 49     |       
|                                                                                                                 |                              |             |         |               |   |   |        |       
|                                                                                                                 | Balance at December 31, 1999 |             |         | (36,334       | ) |   |        | (5,597 | )
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|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 A and Series B
	preferred stock dividend ($21.90 and $7.85 per share,
	respectively)         |                              |             | (3,394  | )             |   |   |       |       
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Accretion of redeemable senior preferred stock
	dividend ($140.55 per share plus accretion to liquidation value) |                              |             | (5,963  | )             |   |   | (5,963 | )     
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Cancellation of unvested options                                                                                 |                              |             |         |               |   |   |       |       
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Exercise of stock options                                                                                        |                              |             |         |               |   |   | 61     |       
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Repurchase of shares                                                                                             |                              |             |         |               |   |   | (451   | )     
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Foreign currency translation adjustment                                                                          |                              |             |        |               |   |   | 12     |       
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Net income                                                                                                       |                              |             | 4,831   |               |   |   | 4,831  |       
|                                                                                                                 |                              |             |         |               |   |   |        |       
|                                                                                                                 | Balance at December 31, 2000 |             |         | (40,860       | ) |   |        | (3,911 | )
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|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 A and Series B
	preferred stock dividend ($25.07 and $8.63 per share,
	respectively)         |                              |             | (3,885  | )             |   |   |       |       
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Accretion of redeemable senior preferred stock
	dividend ($157.90 per share plus accretion to liquidation value) |                              |             | (6,658  | )             |   |   | (6,658 | )     
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Deferred compensation recorded in connection with
	the issuance of stock options                                 |                              |             |         |               |   |   |       |       
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Foreign currency translation adjustment                                                                          |                              |             |         |               |   |   | 9      |       
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Net income                                                                                                       |                              |             | 7,046   |               |   |   | 7,046  |       
|                                                                                                                 |                              |             |         |               |   |   |        |       
|                                                                                                                 | Balance at December 31, 2001 |             | $       | (44,357       | ) |   | $      | (2,365 | )
|                                                                                                                 |                              |             |         |               |   |   |        |       

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, 1999, 2000 and 2001


Increase (decrease) in Cash and Cash Equivalents


|                                                                                                     |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |         |        |         |  
|---------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------------------------------------- | ----------------------------------------------------- | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ----- | ------- | ------ | ------- | -
|                                                                                                     |                                                                                    |                                                                
|                                                                                                     |                                                                                    | Years Ended December 31,                                       
|                                                                                                     |                                                                                    |                                                                
|                                                                                                     |                                                                                    | 1999                                                            |                                                       | 2000    |        | 2001   
|                                                                                                     |                                                                                    |                                                                 |                                                       |         |        |        
|Cash flows from operating activities:                                                                |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Net income                                                                         |                                                                 | $                                                     | 49      |        |         | $      | 4,831   |        |         | $     | 7,046   |       
|                                                                                                     |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|                                                                                                     | Adjustments to reconcile net income to net cash
	provided by operating activities: |                                                                 |                                                       |         |        |         |        |         |        |         |       |         |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                                                                                    | Compensation expense incurred in connection with
	stock options |                                                       |         | 2,042  |         |        |         | 1,836  |         |       |         | 1,149  |        
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                                                                                    | Depreciation and amortization                                   |                                                       |         | 20,935 |         |        |         | 26,642 |         |       |         | 32,667 |        
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                                                                                    | Amortization of debt issuance costs                             |                                                       |         | 1,147  |         |        |         | 1,531  |         |       |         | 1,882  |        
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                                                                                    | Noncash rental expense, net of noncash rental
	income           |                                                       |         | 3,061  |         |        |         | 2,976  |         |       |         | 4,224  |        
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                                                                                    | Net change in certain working capital components                |                                                       |         | 9,596  |         |        |         | 9,392  |         |       |         | 3,475  |        
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                                                                                    | Increase in deferred tax asset                                  |                                                       |         | (3,259 | )       |        |         | (3,326 | )       |       |         | (4,526 | )      
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                                                                                    | Increase in deferred membership costs                           |                                                       |         | (3,836 | )       |        |         | (2,745 | )       |       |         | (1,162 | )      
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                                                                                    | Other                                                           |                                                       |         | (239   | )       |        |         | (564   | )       |       |         | (407   | )      
|                                                                                                     |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|                                                                                                     |                                                                                    |                                                                 | Total adjustments                                     |         |        | 29,447  |        |         |        | 35,742  |       |         |        | 37,302  |  
|                                                                                                     |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|                                                                                                     |                                                                                    |                                                                 | Net cash provided by operating
	activities            |         |        | 29,496  |        |         |        | 40,573  |       |         |        | 44,348  |  
|                                                                                                     |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|Cash flows from investing activities:                                                                |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Capital expenditures, net of effect of acquired
	businesses                        |                                                                 |                                                       | (53,364 | )      |         |        | (47,454 | )      |         |       | (57,811 | )     
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Acquisition of businesses, net of cash acquired                                    |                                                                 |                                                       | (2,932  | )      |         |        | (24,053 | )      |         |       | (1,272  | )     
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Investment in affiliate                                                            |                                                                 |                                                       |        |        |         |        | (210    | )      |         |       |        |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Intangible and other assets                                                        |                                                                 |                                                       | (33     | )      |         |        | (359    | )      |         |       |        |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Landlord contributions                                                             |                                                                 |                                                       | 1,251   |        |         |        | 2,028   |        |         |       | 725     |       
|                                                                                                     |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|                                                                                                     |                                                                                    |                                                                 | Net cash used in investing
	activities                |         |        | (55,078 | )      |         |        | (70,048 | )     |         |        | (58,358 | )
|                                                                                                     |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|Cash flows from financing activities:                                                                |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Redemption and liquidation of stock, including
	expenses                           |                                                                 |                                                       | (24     | )      |         |        | (390    | )      |         |       |        |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Net credit line borrowings                                                         |                                                                 |                                                       |        |        |         |        | 9,000   |        |         |       | 13,745  |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Proceeds from borrowings, net of expenses                                          |                                                                 |                                                       | 35,581  |        |         |        |        |        |         |       | 5,762   |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Repayments of borrowings                                                           |                                                                 |                                                       | (2,004  | )      |         |        | (2,895  | )      |         |       | (3,404  | )     
|                                                                                                     |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|                                                                                                     |                                                                                    |                                                                 | Net cash provided by financing
	activities            |         |        | 33,553  |        |         |        | 5,715   |       |         |        | 16,103  |  
|                                                                                                     |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|                                                                                                     |                                                                                    |                                                                 | Net increase (decrease) in cash and cash
	equivalents |         |        | 7,971   |        |         |        | (23,760 | )     |         |        | 2,093   |  
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Cash and cash equivalents at beginning of period                                                     |                                                                                    |                                                                 | 19,154                                                |         |        |         | 27,125 |         |        |         | 3,365 |        
|                                                                                                     |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|                                                                                                     |                                                                                    |                                                                 | Cash and cash equivalents at end of
	period           |         | $      | 27,125  |        |         | $      | 3,365   |       |         | $      | 5,458   |  
|                                                                                                     |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|Summary of the change in certain working capital
	components, net of effects of acquired businesses: |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | (Increase) decrease in accounts receivable                                         |                                                                 | $                                                     | 272     |        |         | $      | 151     |        |         | $     | (304    | )     
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | (Increase) decrease in inventory                                                   |                                                                 |                                                       | 183     |        |         |        | 213     |        |         |       | (433    | )     
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | (Increase) decrease in prepaid expenses and other
	current assets                  |                                                                 |                                                       | 43      |        |         |        | 392     |        |         |       | (514    | )     
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Increase in accounts payable and accrued expenses                                  |                                                                 |                                                       | 3,022   |        |         |        | 4,990   |        |         |       | 1,745   |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Decrease (increase) in prepaid corporate
	income taxes                             |                                                                 |                                                       | 243     |        |         |        | (624    | )      |         |       | 1,828   |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Increase in deferred revenue                                                       |                                                                 |                                                       | 5,833   |        |         |        | 4,270   |        |         |       | 1,153   |       
|                                                                                                     |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        
|                                                                                                     |                                                                                    |                                                                 | Net change in certain working capital
	components     |         | $      | 9,596   |        |         | $      | 9,392   |       |         | $      | 3,475   |  
|                                                                                                     |                                                                                    |                                                                 |                                                       |         |        |         |        |         |        |         |       |        

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 117 fitness clubs
(clubs) and partly owns and operates two clubs as of
December 31, 2001. The Company operates in a single
segment. The Company operates 78 clubs in the New York
metropolitan market, 19 clubs in the Boston market, 14 clubs in
the Washington, D.C. market, five 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 foreign 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. and all wholly owned
subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

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. 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 $2,950 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 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.

F-6



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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, 1999, 2000 and 2001
totaled $5,024, $7,484, and $9,507, 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,
|                                                                                 |                                                            |                         
|                                                                                 |                                                            | 1999                     |   | 2000   |  | 2001
|                                                                                 |                                                            |                          |   |        |  |     
|Cash paid:                                                                       |                                                            |                          |   |        |  |      |   |        |  |  |   |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Interest (net of amounts capitalized)                      |                          | $ | 10,083 |  |      | $ | 13,353 |  |  | $ | 13,887 | 
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Taxes                                                      |                          |   | 3,577  |  |      |   | 9,054  |  |  |   | 10,087 | 
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Noncash investing and financing activities:                                      |                                                            |                          |   |        |  |      |   |        |  |  |   |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Acquisition of fixed assets included in accounts
	payable  |                          |   | 2,859  |  |      |   | 3,757  |  |  |   | 3,782  | 
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Acquisition of equipment and software financed by
	lessors |                          |   | 3,386  |  |      |   | 3,951  |  |  |   | 2,853  | 
|See Notes 6, 9 and 10 for additional noncash
	investing and financing activities |                                                            |                          |   |        |  |      |   |        |  |  |   |       

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.

F-7



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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 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 is immaterial for all periods
presented.

l. Investments in Affiliated
Companies

The Company has investments in Capitol Hill Squash Club
Associates and Kalorama Sports Management Associates
(collectively referred to as the Affiliates). 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. Goodwill and Intangible Assets

Goodwill and intangible assets consist of goodwill, membership
lists, debt issuance costs, a beneficial lease and
covenants-not-to-compete. Such intangibles are stated at cost
and, except debt issuance costs, are being amortized by the
straight-line method over their estimated lives. Debt issuance
costs are amortized as additional interest expense over the life
of the underlying debt, four to seven years, using the interest
method. Membership lists are amortized over 24 months and
covenants not-to-compete are amortized over the contractual
life, generally five years. Except for the goodwill related to
the acquisition of a club subsequent to June 30, 2001,
goodwill and the beneficial lease is being amortized over the
remaining lives of the underlying club leases, five to fifteen
years. In accordance with the Financial Accounting Standards
Board FASB No. 142, Goodwill and Other
Intangible Assets, (Note 1q) goodwill has not been
amortized for the club acquired subsequent to June 30, 2001.

n. Accounting for the Impairment of
Long-Lived Assets

Long-lived assets, such as fixed assets and intangible assets,
including goodwill, 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. For
all periods presented, no impairment losses were recorded.

F-8



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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.

Disclosures, including pro forma operating results had the
Company prepared its financial statements in accordance with the
fair value based method of accounting for stock-based
compensation, have been included in Note 9.

q. Recent Accounting
Pronouncements

Effective January 1, 2000, the Company adopted Securities
and Exchange Commission Staff Accounting Bulletin 101
Revenue Recognition in Financial Statements, and such
adoption did not have a material effect on the Companys
financial statements.

Effective January 1, 2000, the Company adopted Financial
Accounting Standards Board (FASB) Statement
No. 133 Accounting for Derivative Instruments and
Hedging Activities, and such adoption did not have a
material effect on the Companys financial statements.

In June 2001, the FASB issued Statements No. 141 Business
Combinations (SFAS 141), and No. 142,
Goodwill and Other Intangible Assets
(SFAS 142), collectively referred to as the
Standards. SFAS 141 supersedes Accounting
Principles Board Opinion (APB) No. 16, Business
Combination. The provisions of SFAS 141 require that the
purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and provide
specific criteria for the initial recognition and measurement of
intangible assets apart from goodwill. SFAS 141 also
requires that upon adoption of SFAS 142 the Company
reclassify the carrying amounts of certain intangible assets
into or out of goodwill, based on certain criteria.
SFAS 142 supersedes APB 17, Intangible Assets, and is
effective for fiscal years beginning after December 15,
2001. SFAS 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS 142 prohibit the
amortization of goodwill and indefinite-lived intangible assets,
require that goodwill and indefinite-lived intangibles assets be
tested annually for impairment (and in interim periods if
certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be
impaired), and require that reporting units be identified for
the purpose of assessing potential future impairments of
goodwill.

The Company will adopt the provisions of SFAS 142 in its first
quarter ended March 31, 2002. The Company is in the process
of preparing for its adoption of SFAS 142 and is making the
determinations as to what its reporting units are and what
amounts of goodwill, intangible assets, other assets, and
liabilities should be allocated to those reporting units. In
connection with the adoption of SFAS 142, the Company does
not expect to reclassify any of its goodwill balances to
intangible assets nor any of its intangibles assets to goodwill.

F-9



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

As a result of adoption, a substantial amount of its intangible
assets will no longer be amortized and, accordingly, the
Companys effective tax rate is expected to decrease in
2002. The goodwill amortization that would not have been
amortized pursuant to SFAS 142 during 2001 amounts to
$4,436. The Company will also evaluate the useful lives assigned
to its intangible assets, but does not anticipate any changes to
the useful lives.

SFAS 142 requires that goodwill be tested annually for
impairment using a two-step process. The first step is to
identify a potential impairment and, in transition, this step
must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to
complete the first step. The Company expects to complete that
first step of the goodwill impairment test during the first
quarter of 2002. The second step of the goodwill impairment test
measures the amount of the impairment loss (measured as of the
beginning of the year of adoption), if any, and must be
completed by the end of the Companys fiscal year. Any
impairment loss resulting from the transitional impairment tests
will be reflected as the cumulative effect of a change in
accounting principle in the first quarter 2002. The Company has
not yet determined what effect these impairment tests will have
on the Companys earnings and financial position.

In August 2001, the FASB issued Statement No. 143,
Accounting for Obligations Associated with the Retirement of
Long-Lived Assets (SFAS 143). This
statement addresses the diversity in practice for recognizing
asset retirement obligations. SFAS 143 requires that
obligations associated with the retirement of a tangible
long-lived asset be recorded as a liability when those
obligations are incurred, with the amount of the liability
initially measured at fair value. SFAS 143 is effective for
financial statements for fiscal years beginning after
June 15, 2002 (early application is encouraged). The
Company expects the provisions of SFAS 143 will not have a
material impact on its consolidated results of operations and
financial position upon adoption.

In October 2001, the FASB issued Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 applies to
all long-lived assets (including discontinued operations).
SFAS 144 establishes a single accounting model for the
impairment or disposal of long-lived assets, including
discontinued operations. FAS 144 requires that long-lived
assets that are to be disposed of by sale be measured at the
lower of book value or fair value less cost to sell. The
provisions of SFAS 144 are effective in fiscal years
beginning after December 15, 2001. The Company plans to
adopt SFAS 144 effective January 1, 2002 and does not
expect that the adoption will have a material impact on its
financial position and results of operations.

F-10



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

3. Fixed Assets

Fixed assets as of December 31, 2000 and 2001, are shown at
cost, less accumulated depreciation and amortization, and are
summarized below:

|                                           |                                                 |              |         |        |  |   |         |        | 
|------------------------------------------ | ----------------------------------------------- | ------------ | ------- | ------ |  | - | ------- | ------ | 
|                                           |                                                 |             
|                                           |                                                 | December 31,
|                                           |                                                 |             
|                                           |                                                 | 2000         |         | 2001  
|                                           |                                                 |              |         |       
|Leasehold improvements                     |                                                 | $            | 139,039 |        |  | $ | 177,315 |       
|                                          
|                                          
|                                          
|                                          
|Club equipment                             |                                                 |              | 38,141  |        |  |   | 45,547  |       
|                                          
|                                          
|                                          
|                                          
|Furniture, fixtures and computer equipment |                                                 |              | 22,291  |        |  |   | 27,717  |       
|                                          
|                                          
|                                          
|                                          
|Computer software                          |                                                 |              | 2,580   |        |  |   | 3,769   |       
|                                          
|                                          
|                                          
|                                          
|Building and improvements                  |                                                 |              | 4,995   |        |  |   | 4,995   |       
|                                          
|                                          
|                                          
|                                          
|Land                                       |                                                 |              | 986     |        |  |   | 986     |       
|                                          
|                                          
|                                          
|                                          
|Construction in progress                   |                                                 |              | 7,624   |        |  |   | 18,471  |       
|                                           |                                                 |              |         |        |  |   |         |       
|                                           |                                                 |              | 215,656 |        |  |   | 278,800 |       
|                                          
|                                          
|                                          
|                                          
|                                           | Less, Accumulated depreciation and amortization |              |         | 54,146 |  |   |         | 78,680 | 
|                                           |                                                 |              |         |        |  |   |         |       
|                                           |                                                 | $            | 161,510 |        |  | $ | 200,120 |       
|                                           |                                                 |              |         |        |  |   |         |       

Depreciation and leasehold amortization expense the years ended
December 31, 1999, 2000 and 2001, was $15,056, $20,706 and
$26,075, respectively.

In connection with certain construction in progress the Company
has provided surety bonds totaling $1,499 as of
December 31, 2001, guaranteeing completion of construction.

4. Goodwill and Intangible Assets

Goodwill and intangible assets as of December 31, 2000 and
2001 are shown at cost, less accumulated amortization, and are
summarized below:

|                                              |                                |                        |        |        |        |   |        |        |        | 
|--------------------------------------------- | ------------------------------ | ---------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                              |                                |                       
|                                              |                                | December 31,          
|                                              |                                |                       
|                                              |                                | 2000                   |        | 2001  
|                                              |                                |                        |        |       
|Goodwill arising on acquisition of businesses |                                | $                      | 54,386 |        |        | $ | 55,702 |       
|                                             
|                                             
|                                             
|                                             
|                                              | Less, Accumulated amortization |                        |        | 9,121  |        |   |        | 13,557 |       
|                                              |                                |                        |        |        |        |   |        |       
|                                              |                                | Goodwill, net          |        | $      | 45,265 |   |        | $      | 42,145 | 
|                                              |                                |                        |        |        |        |   |        |       
|Debt issuance costs                           |                                | $                      | 10,350 |        |        | $ | 10,589 |       
|                                             
|                                             
|                                             
|                                             
|Membership lists                              |                                |                        | 9,572  |        |        |   | 9,752  |       
|                                             
|                                             
|                                             
|                                             
|Covenants-not-to-compete                      |                                |                        | 1,276  |        |        |   | 1,276  |       
|                                             
|                                             
|                                             
|                                             
|Beneficial lease                              |                                |                        | 223    |        |        |   | 223    |       
|                                              |                                |                        |        |        |        |   |        |       
|                                              |                                |                        | 21,421 |        |        |   | 21,840 |       
|                                             
|                                             
|                                             
|                                             
|                                              | Less, Accumulated amortization |                        |        | 11,287 |        |   |        | 15,325 |       
|                                              |                                |                        |        |        |        |   |        |       
|                                              |                                | Intangible assets, net |        | $      | 10,134 |   |        | $      | 6,515  | 
|                                              |                                |                        |        |        |        |   |        |       

Amortization expense of intangible assets for the years ended
December 31, 1999, 2000 and 2001, was $7,026, $7,467 and
$8,474, respectively. Such amounts include amortization expense
of debt issuance costs of $1,147, $1,531 and $1,882,
respectively, which has been classified as interest expense for
financial reporting purposes.

F-11



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Goodwill amortization for the years ended December 31,
1999, 2000 and 2001 was $2,845, $3,545 and $4,436, respectively.

5. Accrued Expenses

Accrued expenses consist of the following:

|                                               |  |              |        |      |  |   |        | 
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2000         |        | 2001
|                                               |  |              |        |     
|Accrued payroll                                |  | $            | 5,998  |      |  | $ | 6,334  | 
|                                              
|                                              
|                                              
|                                              
|Accrued interest                               |  |              | 2,726  |      |  |   | 2,782  | 
|                                              
|                                              
|                                              
|                                              
|Accrued construction in progress and equipment |  |              | 3,583  |      |  |   | 3,845  | 
|                                              
|                                              
|                                              
|                                              
|Accrued occupancy costs                        |  |              | 2,843  |      |  |   | 3,324  | 
|                                              
|                                              
|                                              
|                                              
|Accrued other                                  |  |              | 3,134  |      |  |   | 2,633  | 
|                                               |  |              |        |      |  |   |        | 
|                                               |  | $            | 18,284 |      |  | $ | 18,918 | 
|                                               |  |              |        |      |  |   |        | 

6. Long-Term Debt and Capital Lease Obligations

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

|                                       |                                           |                   |         |       |         |   |         |       |         | 
|-------------------------------------- | ----------------------------------------- | ----------------- | ------- | ----- | ------- | - | ------- | ----- | ------- | 
|                                       |                                           |                  
|                                       |                                           | December 31,     
|                                       |                                           |                  
|                                       |                                           | 2000              |         | 2001 
|                                       |                                           |                   |         |      
|Series B-9 3/4% Senior Notes, due 2004 |                                           | $                 | 125,000 |       |         | $ | 125,000 |      
|                                      
|                                      
|                                      
|                                      
|Line of credit borrowings              |                                           |                   | 9,000   |       |         |   | 22,745  |      
|                                      
|                                      
|                                      
|                                      
|Subordinated credit borrowings         |                                           |                   |        |       |         |   | 6,000   |      
|                                      
|                                      
|                                      
|                                      
|Notes payable for acquired businesses  |                                           |                   | 4,129   |       |         |   | 2,931   |      
|                                      
|                                      
|                                      
|                                      
|Capital lease obligations              |                                           |                   | 6,369   |       |         |   | 7,303   |      
|                                       |                                           |                   |         |       |         |   |         |      
|                                       |                                           |                   | 144,498 |       |         |   | 163,979 |      
|                                      
|                                      
|                                      
|                                      
|                                       | Less, Current portion due within one year |                   |         | 3,411 |         |   |         | 4,015 |        
|                                       |                                           |                   |         |       |         |   |         |      
|                                       |                                           | Long-term portion |         | $     | 141,087 |   |         | $     | 159,964 | 
|                                       |                                           |                   |         |       |         |   |         |      

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
|                         |  |           
|2002                     |  | $          | 4,015   | 
|                        
|                        
|                        
|                        
|2003                     |  |            | 3,765   | 
|                        
|                        
|                        
|                        
|2004                     |  |            | 155,757 | 
|                        
|                        
|                        
|                        
|2005                     |  |            | 256     | 
|                        
|                        
|                        
|                        
|2006                     |  |            | 42      | 
|                        
|                        
|                        
|                        
|Thereafter               |  |            | 144     | 
|                         |  |            |         | 
|                         |  | $          | 163,979 | 
|                         |  |            |         | 

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

F-12



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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 $22,745 of
Eurodollar borrowings outstanding against this line as of
December 31, 2001. The amount available for borrowing has
been further reduced by outstanding letters of credit totaling
$1,809 (see Note 8). Amounts available for future
borrowings as of December 31, 2001 was $446. The interest
rate charged on the Eurodollar borrowings outstanding at
December 31, 2001 was 4.5%. 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,
2001, had an aggregate book value of approximately $3,677, 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 13% per annum; 10% 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. 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. These restricted shares will be forfeited by the lender
in the event that the agreement is terminated prior to
November 30, 2002. The Agreement contains similar, but less
restrictive covenants than those with the line of credit, as
amended. There were $6,000 of Subordinated credit borrowings
outstanding as of December 31, 2001.

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 a discount from
face value at rates of between 5% and 9%, and are
non-collateralized.

The carrying value of long-term debt, other than the Senior
Notes, approximates fair market value as of December 31,
2000 and 2001 as the debt is generally short-term in nature. The
Senior Notes have a fair value of approximately $128,125, based
on the quoted market price as of December 31, 2001.

F-13



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The Companys interest expense and capitalized interest
related to funds borrowed to finance club facilities under
construction for the years ended December 31, 1999, 2000
and 2001 are as follows:

|                           |  |                          |        |      |  |      |        |  |  |   |        | 
|-------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                           |  |                         
|                           |  | Years Ended December 31,
|                           |  |                         
|                           |  | 1999                     |        | 2000 |  | 2001
|                           |  |                          |        |      |  |     
|Interest costs expensed    |  | $                        | 11,527 |      |  | $    | 14,300 |  |  | $ | 14,918 | 
|                          
|                          
|                          
|                          
|Interest costs capitalized |  |                          | 455    |      |  |      | 660    |  |  |   | 907    | 
|                           |  |                          |        |      |  |      |        |  |  |   |        | 
|                           |  | $                        | 11,982 |      |  | $    | 14,960 |  |  | $ | 15,825 | 
|                           |  |                          |        |      |  |      |        |  |  |   |        | 

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, 2001, minimum rental payments, under all
capital leases, including payments to acquire leased equipment,
are as follows:

|                         |                                     |                                                 |       |       |       | 
|------------------------ | ----------------------------------- | ----------------------------------------------- | ----- | ----- | ----- | 
|                         |                                     | Minimum                                        
|Year Ending December 31, |                                     | Annual Rental                                  
|                         |                                     |                                                
|2002                     |                                     | $                                               | 3,572 |      
|                        
|                        
|                        
|                        
|2003                     |                                     |                                                 | 3,160 |      
|                        
|                        
|                        
|                        
|2004                     |                                     |                                                 | 1,893 |      
|                        
|                        
|                        
|                        
|2005                     |                                     |                                                 | 178   |      
|                         |                                     |                                                 |       |      
|                         |                                     |                                                 | 8,803 |      
|                        
|                        
|                        
|                        
|                         | Less, Amounts representing interest |                                                 |       | 1,500 |      
|                         |                                     |                                                 |       |      
|                         |                                     | Present value of minimum capital lease payments |       | $     | 7,303 | 
|                         |                                     |                                                 |       |      

The cost of leased equipment included in club equipment was
approximately $8,921 and $10,083 at December 31, 2000 and
2001, respectively; and the related accumulated depreciation was
$3,072 and $3,421, respectively.

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, 2000 and 2001.

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 $1,809 as of December 31, 2001.

F-14



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The leases expire at various times through December 31,
2022, 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
|                         |  |              
|2002                     |  | $             | 42,049  | 
|                        
|                        
|                        
|                        
|2003                     |  |               | 42,159  | 
|                        
|                        
|                        
|                        
|2004                     |  |               | 42,594  | 
|                        
|                        
|                        
|                        
|2005                     |  |               | 42,305  | 
|                        
|                        
|                        
|                        
|2006                     |  |               | 42,147  | 
|                        
|                        
|                        
|                        
|Aggregate thereafter     |  |               | 339,084 | 
|                         |  |               |         | 
|                         |  | $             | 550,338 | 
|                         |  |               |         | 

Rent expense, including the effect of deferred lease
liabilities, for the years ended December 31, 1999, 2000
and 2001 was approximately $30,325, $37,268 and $47,988,
respectively. Such amounts include additional rent of $4,634,
$5,816 and $8,236, respectively.

The Company, as landlord, leases space to third party tenants
under noncancelable operating leases. 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
at various times through December 31, 2008. Future minimum
rentals receivable under noncancelable leases are as follows:

|                         |  |               |       | 
|------------------------ |  | ------------- | ----- | 
|                         |  | Minimum      
|Year Ending December 31, |  | Annual Rental
|                         |  |              
|2002                     |  | $             | 1,027 | 
|                        
|                        
|                        
|                        
|2003                     |  |               | 892   | 
|                        
|                        
|                        
|                        
|2004                     |  |               | 503   | 
|                        
|                        
|                        
|                        
|2005                     |  |               | 209   | 
|                        
|                        
|                        
|                        
|2006                     |  |               | 85    | 
|                        
|                        
|                        
|                        
|Aggregate thereafter     |  |               | 90    | 
|                         |  |               |       | 
|                         |  | $             | 2,806 | 
|                         |  |               |       | 

Rental income, including noncash rental income, for the years
ended December 31, 1999, 2000 and 2001, was $1,529, $1,716
and $1,881, respectively. Such amounts include additional rental
charges above the base rent of $431, $630 and $775, respectively.

9. Stockholders Equity and Redeemable Senior
Preferred Stock

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); 100,000 shares of
Redeemable Senior Preferred Stock (Senior), par
value $1.00 per share; 200,000 shares of Series A Preferred
Stock, (Series A) par value $1.00 per share,
and 200,000 shares of Series B Preferred Stock
(Series B) par value $1.00 per share.

F-15



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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

Redeemable Senior
Preferred Stock

During November 1998, the Company issued 40,000 shares of
mandatorily redeemable Senior stock and 143,261 warrants. 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 accreted amount for each of the years ended
December 31, 1999, 2000 and 2001 was $341, $341 and $342,
respectively. 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 $17,416, as of
December 31, 2001. The Senior stockholders are entitled to
a cumulative 12% annual dividend, based upon the per share price
of $1,000.

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

|                                                                                |                                                |   |        |        | 
|------------------------------------------------------------------------------- | ---------------------------------------------- | - | ------ | ------ | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Proceeds received in connection with the issuance
	of Senior stock and warrants |                                                | $ | 40,000 |       
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Expenses incurred in connection with issuance                                   |                                                |   | (365   | )     
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Fair value ascribed to warrants at issuance                                     |                                                |   | (3,416 | )     
|                                                                                |                                                |   |        |       
|                                                                                | Fair value of senior stock at date of issuance |   |        | 36,219 | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Accretion to Senior stock liquidation value                                     |                                                |   | 28     |       
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Accretion of Senior stock dividends                                             |                                                |   | 488    |       
|                                                                                |                                                |   |        |       
|December 31, 1998 Senior stock carrying value                                   |                                                |   | 36,735 |       
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Accretion to Senior stock liquidation value                                     |                                                |   | 341    |       
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Accretion of Senior stock dividends                                             |                                                |   | 4,990  |       
|                                                                                |                                                |   |        |       
|December 31, 1999, Senior stock carrying
	value                                 |                                                |   | 42,066 |       
|                                                                                |                                                |   |        |       
|Accretion to Senior stock liquidation value                                     |                                                |   | 341    |       
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Accretion of Senior stock dividends                                             |                                                |   | 5,622  |       
|                                                                                |                                                |   |        |       
|December 31, 2000, Senior stock carrying
	value                                 |                                                |   | 48,029 |       
|                                                                                |                                                |   |        |       
|Accretion to Senior stock liquidation value                                     |                                                |   | 342    |       
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Accretion of Senior stock dividends                                             |                                                |   | 6,316  |       
|                                                                                |                                                |   |        |       
|December 31, 2001, Senior stock carrying
	value                                 |                                                | $ | 54,687 |       
|                                                                                |                                                |   |        |       

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.

F-16



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Preferred Stock

The Preferred Stock has liquidation preferences over Common
Stock. The Companys Series A and Series B stock
have 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 $15,068 as of
December 31, 2001. Series A stockholders are entitled
to a cumulative 14% annual dividend based upon the per share
price of $100.

Series B stock has a liquidation value of $35 per share
plus cumulative unpaid dividends of $131 as of December 31,
2001. Series B stockholders are entitled to a cumulative
14% annual dividend based upon the per share price of $35.

Cumulative unpaid dividends on all Preferred 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.

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.

b. Stock Options and Warrants

The following table summarizes the stock option activity for the
years ended December 31, 1999, 2000 and 2001:

|                             |           |         |        |          |       |           |       |          |       |  |         |        |       |   |       |       | 
|---------------------------- | --------- | ------- | ------ | -------- | ----- | --------- | ----- | -------- | ----- |  | ------- | ------ | ----- | - | ----- | ----- | 
|                             |           |         |        | Weighted |       |           |       | Weighted
|                             |           |         |        | Average  |       |           |       | Average 
|                             |           | Class A |        | Exercise |       | Series B  |       | Exercise
|                             |           | Common  |        | Price    |       | Preferred |       | Price   
|                             |           |         |        |          |       |           |       |         
|Balance at January 1, 1999   |           |         | 71,842 |          |       | $         | 4.38  |          |       |  | 164,783 |        |       | $ | 10.00 |      
|                            
|                            
|                            
|                            
|                             | Granted   |         |        | 12,600   |       |           | $     | 53.00    | (i)   |  |         |       |       |   |       |       | 
|                            
|                            
|                            
|                            
|                             | Exercised |         |        | (718     | )(ii) |           | $     | 5.73     |       |  |         | (1,093 | )(ii) |   | $     | 10.00 | 
|                            
|                            
|                            
|                            
|                             | Cancelled |         |        | (2,162   | )     |           | $     | 21.49    |       |  |         |       |       |   |       |       | 
|                             |           |         |        |          |       |           |       |          |       |  |         |        |       |   |       |      
|Balance at December 31, 1999 |           |         | 81,562 |          |       | $         | 11.42 |          |       |  | 163,690 |        |       | $ | 10.00 |      
|                            
|                            
|                            
|                            
|                             | Granted   |         |        | 17,446   |       |           | $     | 75.00    | (i)   |  |         |       |       |   |       |       | 
|                            
|                            
|                            
|                            
|                             | Exercised |         |        | (4,035   | )     |           | $     | 3.42     |       |  |         | (5,384 | )     |   | $     | 10.00 | 
|                            
|                            
|                            
|                            
|                             | Cancelled |         |        | (2,291   | )     |           | $     | 14.58    |       |  |         |       |       |   |       |       | 
|                             |           |         |        |          |       |           |       |          |       |  |         |        |       |   |       |      
|Balance at December 31, 2000 |           |         | 92,682 |          |       | $         | 23.88 |          |       |  | 158,306 |        |       | $ | 10.00 |      
|                            
|                            
|                            
|                            
|                             | Granted   |         |        | 7,400    |       |           | $     | 100.00   | (iii) |  |         |       |       |   |       |       | 
|                            
|                            
|                            
|                            
|                             | Exercised |         |        | (788     | )     |           | $     | 32.53    |       |  |         |       |       |   |       |       | 
|                            
|                            
|                            
|                            
|                             | Cancelled |         |        | (512     | )     |           | $     | 25.76    |       |  |         |       |       |   |       |       | 
|                             |           |         |        |          |       |           |       |          |       |  |         |        |       |   |       |      
|Balance at December 31, 2001 |           |         | 98,782 |          |       | $         | 29.32 |          |       |  | 158,306 |        |       | $ | 10.00 |      
|                             |           |         |        |          |       |           |       |          |       |  |         |        |       |   |       |      




|      |                                                                                                                              
|----- | -----------------------------------------------------------------------------------------------------------------------------
|(i)   | Option exercise price was equal to market price on the grant
	date based upon independent appraisal.                         
|     
|(ii)  | The Company repurchased 655 shares of common stock and 1,093
	shares of Series B Preferred stock related to these
	exercises.
|     
|(iii) | Option exercise price of these options were less than the
	estimated fair value on the grant date.                           

F-17



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

All Series B Preferred stock options were exercisable upon
grant. As of December 31, 1999, 2000 and 2001, a total of
49,511, 68,279 and 76,474 Class A Common stock options were
exercisable, respectively.

The following table summarizes stock option information as of
December 31, 2001:

|                   |             |                     |         |                     |  |           |            |             |  |           |       |        |  |  |         |        |  |   |       |       | 
|------------------ | ----------- | ------------------- | ------- | ------------------- |  | --------- | ---------- | ----------- |  | --------- | ----- | ------ |  |  | ------- | ------ |  | - | ----- | ----- | 
|                   |             |                     |         |                     |  |          
|                   |             | 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              |  |           |            | 60 months   |  |           | $     | 1.00   |  |  |         | 50,936 |  |   | $     | 1.00  | 
|                  
|                  
|                  
|                  
|                   | 1998 Grants |                     |         | 11,900              |  |           |            | 76 months   |  |           | $     | 17.50  |  |  |         | 11,900 |  |   | $     | 17.50 | 
|                  
|                  
|                  
|                  
|                   | 1999 Grants |                     |         | 11,100              |  |           |            | 84 months   |  |           | $     | 53.00  |  |  |         | 6,660  |  |   | $     | 53.00 | 
|                  
|                  
|                  
|                  
|                   | 2000 Grants |                     |         | 17,446              |  |           |            | 96 months   |  |           | $     | 75.00  |  |  |         | 6,978  |  |   | $     | 75.00 | 
|                  
|                  
|                  
|                  
|                   | 2001 Grants |                     |         | 7,400               |  |           |            | 115 months  |  |           | $     | 100.00 |  |  |         |       |  |   | $     |      | 
|                   |             |                     |         |                     |  |           |            |             |  |           |       |        |  |  |         |        |  |   |       |      
|Total Grants       |             |                     | 98,782  |                     |  |           |            |             |  |           |       |        |  |  | 76,474  |        |  |   |       |      
|                   |             |                     |         |                     |  |           |            |             |  |           |       |        |  |  |         |        |  |   |       |      
|Series B Preferred |             |                     | 158,306 |                     |  |           | 251 months |             |  | $         | 10.00 |        |  |  | 158,306 |        |  | $ | 10.00 |      
|                   |             |                     |         |                     |  |           |            |             |  |           |       |        |  |  |         |        |  |   |       |      

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 Amended Grants, the 1998 Grants, and the
2001 Grant. 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, 1999,
2000 and 2001, amortization of unearned compensation totaled
$1,258, $969 and $156, respectively.

As of December 31, 2001, there were 8,492 shares reserved
for future option awards.

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, 1999, 2000 and 2001 compensation expense
recognized in connection with Series B Options totaled
$784, $867 and $993, respectively. There are no shares of
Series B Preferred Stock reserved for future option grants.

F-18



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Pro Forma Operating
Results

The following table summarizes the pro forma operating results
of the Company had compensation costs for the outstanding
options been determined in accordance with the fair value based
method of accounting for stock-based compensation.

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

|                   |                                 |                          |   |        |   |      |   |        |   |  |   |        |  
|------------------ | ------------------------------- | ------------------------ | - | ------ | - | ---- | - | ------ | - |  | - | ------ | -
|                   |                                 |                         
|                   |                                 | Years Ended December 31,
|                   |                                 |                         
|                   |                                 | 1999                     |   | 2000   |   | 2001
|                   |                                 |                          |   |        |   |     
|Pro forma amounts: |                                 |                          |   |        |   |      |   |        |   |  |   |       
|                  
|                  
|                  
|                  
|                   | Net loss to common stockholders |                          | $ | (7,723 | ) |      | $ | (3,950 | ) |  | $ | (3,300 | )
|                   |                                 |                          |   |        |   |      |   |        |   |  |   |       

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, 1999, 2000 and 2001, the
weighted-average fair value of the option grants was
approximately $30.10, $47.11 and $111.89 respectively. The
following weighted-average assumptions were used in computing
the fair value of options grants: expected volatility of 60% for
the year ended December 31, 1999, 69% for the year ended
December 31, 2000 and 72% for the year ended
December 31, 2001, risk-free interest rate of approximately
5.7%, 6.6% and 4.6% for December 31, 1999, 2000 and 2001,
respectively, expected lives of five years for December 31,
1999, 2000 and 2001, and a zero dividend yield for all periods.

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. As
of December 31, 2001, the remaining outstanding warrants
are fully exercisable and expire in December 2006.

F-19



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

10. Asset Acquisitions

During the period from January 1, 1999 through
December 31, 2001, the Company completed the acquisition of
19 fitness clubs. With the exception of the Health Development
Corporation (HDC) acquisition, as 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,           
|                                           |                                |                                    
|                                           |                                | 1999                                |       | 2000  |       | 2001
|                                           |                                |                                     |       |       |       |     
|Number of clubs acquired                   |                                |                                     | 4     |       |       |      | 13     |        |        |   | 2     |      
|                                           |                                |                                     |       |       |       |      |        |        |        |   |       |      
|Purchase prices payable in cash at closing |                                | $                                   | 2,932 |       |       | $    | 24,053 |        |        | $ | 1,272 |      
|                                          
|                                          
|                                          
|                                          
|Issuance and assumption of notes payable   |                                |                                     | 1,476 |       |       |      | 2,238  |        |        |   | 250   |      
|                                           |                                |                                     |       |       |       |      |        |        |        |   |       |      
|                                           |                                | Total purchase prices               |       | $     | 4,408 |      |        | $      | 26,291 |   |       | $     | 1,522 | 
|                                           |                                |                                     |       |       |       |      |        |        |        |   |       |      
|Allocation of purchase prices:             |                                |                                     |       |       |       |      |        |        |        |   |       |      
|                                          
|                                          
|                                          
|                                          
|                                           | Goodwill                       |                                     | $     | 2,318 |       |      | $      | 19,926 |        |   | $     | 1,316 |      
|                                          
|                                          
|                                          
|                                          
|                                           | Fixed assets                   |                                     |       | 986   |       |      |        | 6,809  |        |   |       | 235   |      
|                                          
|                                          
|                                          
|                                          
|                                           | Membership lists               |                                     |       | 427   |       |      |        | 3,548  |        |   |       | 181   |      
|                                          
|                                          
|                                          
|                                          
|                                           | Covenants-not-to-compete       |                                     |       | 701   |       |      |        | 25     |        |   |       |      |      
|                                          
|                                          
|                                          
|                                          
|                                           | Other net liabilities acquired |                                     |       | (24   | )     |      |        | (372   | )      |   |       | (172  | )    
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred revenue               |                                     |       |       |       |      |        | (3,645 | )      |   |       | (38   | )    
|                                           |                                |                                     |       |       |       |      |        |        |        |   |       |      
|                                           |                                | Total allocation of purchase prices |       | $     | 2,090 |      |        | $      | 6,365  |   |       | $     | 1,522 | 
|                                           |                                |                                     |       |       |       |      |        |        |        |   |       |      

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 the impact of these acquisitions on the
consolidated financial statements of the Company was not
material, with the exception of the HDC acquisition:

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 amounts to $19,200. The acquisition was financed with
$6,000 of borrowings under the line of credit, and cash on hand.

The following 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 to amortization of goodwill,
amortization of membership lists, interest expense on
acquisition debt, adjustments 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 these two clubs have also been adjusted.

|                                          |  |                     |         |             |  |   |         |  
|----------------------------------------- |  | ------------------- | ------- | ----------- |  | - | ------- | -
|                                          |  |                    
|                                          |  | For the Years Ended
|                                          |  | December 31,       
|                                          |  |                    
|                                          |  | 1999                |         | 2000       
|                                          |  |                     |         |            
|                                          |  | (Unaudited)         |         | (Unaudited)
|                                         
|                                         
|                                         
|                                         
|Pro forma revenues                        |  | $                   | 175,981 |             |  | $ | 234,771 |  
|                                         
|                                         
|                                         
|                                         
|Pro forma net income (loss)               |  | $                   | (1,149  | )           |  | $ | 4,179   |  
|                                         
|                                         
|                                         
|                                         
|Pro forma net loss to common shareholders |  | $                   | (9,029  | )           |  | $ | (4,837  | )

F-20



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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

11. Revenue from Club Operations

Revenues from club operations for the years ended
December 31, 1999, 2000 and 2001 are summarized below:

|                    |  |                          |         |      |  |      |         |  |  |   |         | 
|------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                    |  |                         
|                    |  | Years Ended December 31,
|                    |  |                         
|                    |  | 1999                     |         | 2000 |  | 2001
|                    |  |                          |         |      |  |     
|Membership dues     |  | $                        | 132,467 |      |  | $    | 182,368 |  |  | $ | 228,269 | 
|                   
|                   
|                   
|                   
|Initiation Fees     |  |                          | 7,635   |      |  |      | 11,033  |  |  |   | 13,346  | 
|                   
|                   
|                   
|                   
|Other club revenues |  |                          | 17,338  |      |  |      | 29,023  |  |  |   | 38,240  | 
|                    |  |                          |         |      |  |      |         |  |  |   |         | 
|                    |  | $                        | 157,440 |      |  | $    | 222,424 |  |  | $ | 279,855 | 
|                    |  |                          |         |      |  |      |         |  |  |   |         | 

12. Corporate Income Taxes

The provision (benefit) for income taxes for the year ended
December 31, 1999, 2000 and 2001 consists of the following:

|         |  |                              |        |           |  |       |        |   |  |   |        |  
|-------- |  | ---------------------------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|         |  |                             
|         |  | Year Ended December 31, 1999
|         |  |                             
|         |  |                              |        | State     |  |      
|         |  | Federal                      |        | and Local |  | Total
|         |  |                              |        |           |  |      
|Current  |  | $                            | 2,432  |           |  | $     | 1,398  |   |  | $ | 3,830  |  
|        
|        
|        
|        
|Deferred |  |                              | (1,932 | )         |  |       | (1,327 | ) |  |   | (3,259 | )
|         |  |                              |        |           |  |       |        |   |  |   |        |  
|         |  | $                            | 500    |           |  | $     | 71     |   |  | $ | 571    |  
|         |  |                              |        |           |  |       |        |   |  |   |        |  

|         |  |                              |        |           |  |       |       |   |  |   |        |  
|-------- |  | ---------------------------- | ------ | --------- |  | ----- | ----- | - |  | - | ------ | -
|         |  |                             
|         |  | Year Ended December 31, 2000
|         |  |                             
|         |  |                              |        | State     |  |      
|         |  | Federal                      |        | and Local |  | Total
|         |  |                              |        |           |  |      
|Current  |  | $                            | 5,679  |           |  | $     | 2,446 |   |  | $ | 8,125  |  
|        
|        
|        
|        
|Deferred |  |                              | (3,170 | )         |  |       | (156  | ) |  |   | (3,326 | )
|         |  |                              |        |           |  |       |       |   |  |   |        |  
|         |  | $                            | 2,509  |           |  | $     | 2,290 |   |  | $ | 4,799  |  
|         |  |                              |        |           |  |       |       |   |  |   |        |  

|         |  |                              |        |           |  |       |        |   |  |   |        |  
|-------- |  | ---------------------------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|         |  |                             
|         |  | Year Ended December 31, 2001
|         |  |                             
|         |  |                              |        | State     |  |      
|         |  | Federal                      |        | and Local |  | Total
|         |  |                              |        |           |  |      
|Current  |  | $                            | 7,653  |           |  | $     | 3,362  |   |  | $ | 11,015 |  
|        
|        
|        
|        
|Deferred |  |                              | (3,357 | )         |  |       | (1,169 | ) |  |   | (4,526 | )
|         |  |                              |        |           |  |       |        |   |  |   |        |  
|         |  | $                            | 4,296  |           |  | $     | 2,193  |   |  | $ | 6,489  |  
|         |  |                              |        |           |  |       |        |   |  |   |        |  

F-21



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The components of the net deferred tax asset as of,
December 31, 2000 and 2001 are summarized below:

|                          |                                                                 |                                                        |                         |        |        |        |        |        |        |        | 
|------------------------- | --------------------------------------------------------------- | ------------------------------------------------------ | ----------------------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | 
|                          |                                                                 |                                                       
|                          |                                                                 | December 31,                                          
|                          |                                                                 |                                                       
|                          |                                                                 | 2000                                                   |                         | 2001  
|                          |                                                                 |                                                        |                         |       
|Deferred tax assets:      |                                                                 |                                                        |                         |        |        |        |        |       
|                         
|                         
|                         
|                         
|                          | Deferred lease liabilities                                      |                                                        | $                       | 7,287  |        |        | $      | 9,129  |       
|                         
|                         
|                         
|                         
|                          | Deferred revenue                                                |                                                        |                         | 5,783  |        |        |        | 6,013  |       
|                         
|                         
|                         
|                         
|                          | Fixed assets and intangible assets                              |                                                        |                         | 4,161  |        |        |        | 5,993  |       
|                         
|                         
|                         
|                         
|                          | Compensation expense incurred in connection with
	stock options |                                                        |                         | 4,073  |        |        |        | 4,444  |       
|                         
|                         
|                         
|                         
|                          | State net operating loss carry-forwards                         |                                                        |                         | 446    |        |        |        | 411    |       
|                         
|                         
|                         
|                         
|                          | Other                                                           |                                                        |                         | 47     |        |        |        | 47     |       
|                          |                                                                 |                                                        |                         |        |        |        |        |       
|                          |                                                                 |                                                        | 21,797                  |        |        |        | 26,037 |       
|                          |                                                                 |                                                        |                         |        |        |        |        |       
|Deferred tax liabilities: |                                                                 |                                                        |                         |        |        |        |        |       
|                         
|                         
|                         
|                         
|                          | Deferred costs                                                  |                                                        |                         | (6,027 | )      |        |        | (6,387 | )     
|                         
|                         
|                         
|                         
|                          | Acquired membership liabilities                                 |                                                        |                         | (770   | )      |        |        | (274   | )     
|                         
|                         
|                         
|                         
|                          | Accrued expenses                                                |                                                        |                         | (150   | )      |        |        |       |       
|                          |                                                                 |                                                        |                         |        |        |        |        |       
|                          |                                                                 |                                                        | (6,947                  | )      |        |        | (6,661 | )     
|                          |                                                                 |                                                        |                         |        |        |        |        |       
|                          |                                                                 | Net deferred tax assets, prior to valuation
	allowance |                         |        | 14,850 |        |        |        | 19,376 |       
|                         
|                         
|                         
|                         
|Valuation allowance       |                                                                 |                                                        | (284                    | )      |        |        | (284   | )     
|                          |                                                                 |                                                        |                         |        |        |        |        |       
|                          |                                                                 |                                                        | Net deferred tax assets |        | $      | 14,566 |        |        | $      | 19,092 | 
|                          |                                                                 |                                                        |                         |        |        |        |        |       

As of December 31, 2001, the Company has state net
operating loss (NOL) carry-forwards of approximately
$8,000. Such amounts expire between December 31, 2002 and
December 31, 2021. The Companys $284 valuation
allowance has been maintained for NOL carryforwards in a
Massachusetts subsidiary which 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 34% in 1999, 35% in
2000 and 35% in 2001 to the income before provision for
corporate income taxes:

|                                                                                            |  |              |    |      |  |      |    |   |  |  |    |  
|------------------------------------------------------------------------------------------- |  | ------------ | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                                                                            |  |             
|                                                                                            |  | Years Ended 
|                                                                                            |  | December 31,
|                                                                                            |  |             
|                                                                                            |  | 1999         |    | 2000 |  | 2001
|                                                                                            |  |              |    |      |  |     
|Federal statutory tax rate                                                                  |  |              | 34 | %    |  |      | 35 | % |  |  | 35 | %
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|State and local income taxes, net of federal tax
	benefit and change of valuation allowance |  |              | 8  |      |  |      | 8  |   |  |  | 8  |  
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|Change in state effective income tax rate                                                   |  |              | 40 |      |  |      | 3  |   |  |  | 1  |  
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|Non-deductible goodwill and other permanent
	differences                                    |  |              | 10 |      |  |      | 5  |   |  |  | 4  |  
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|Non-taxable interest income                                                                 |  |              |   |      |  |      |   |   |  |  |   |  
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|Other                                                                                       |  |              |   |      |  |      | (1 | ) |  |  |   |  
|                                                                                            |  |              |    |      |  |      |    |   |  |  |    |  
|                                                                                            |  |              | 92 | %    |  |      | 50 | % |  |  | 48 | %
|                                                                                            |  |              |    |      |  |      |    |   |  |  |    |  

13. September 11 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 of our clubs located in

F-22



---



##### 



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

downtown Manhattan. Three of the effected four clubs were
reopened and back in operation by October 2001. Because of its
close proximity to the World Trade Center the fourth club,
although not structurally damaged, is still closed. The Company
expects this club will be reopen for business in the first half
of 2002. Membership dues credits in the amount of $314 have been
recorded in the quarter ended September 30, 2001 due to the
September 11 events. These credits represent a pro rata
share of the September membership dues previously collected for
which members were not able to utilize club services.

The Company carries business interruption insurance to mitigate
certain lost revenue, profits and costs (Costs)
experienced with the September 11 events. Although the
Company has business interruption insurance to cover lost
revenues and profits at this location, we cannot predict with
any degree of certainty what future amounts will actually be
received and accordingly any future recoveries of lost revenue
and profits will be recorded when payment is received. We have
recorded a $175 insurance receivable representing Costs incurred
in September 2001, which we believe is probable of recovery from
our insurance carrier. Such costs include rent, payroll,
benefits, and other club operating costs incurred during periods
of club closure.

14. Contingencies

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.

15. 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 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
individual, per annum. In February 2002, employer matching
contributions totaling $200 were made for the Plan year ended
December 31, 2001.

F-23



---



##### 



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 6, 2002.



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



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

| |                              
| | -----------------------------
| |                              
| | Mark Smith                   
| | Chairman                     
| | (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


(principal executive officer)




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






Executive Vice President and Chief Financial Officer


(principal financial and accounting officer)




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






Director




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






Director




|    |                   
|--- | ------------------
|By: | /s/ BRUCE BRUCKMAN






Director




|    |                    
|--- | -------------------
|By: | /s/ STEPHEN EDWARDS






Director




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






Director




---



##### 



EXHIBIT INDEX

| |     |   |  |                                                                                                                                                                                                                                                                              
| | --- | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.***                                                                                                                                                             
| | 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.***
| | 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.