# FORM 10-Q

|[X] | Quarterly
Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
for the period ended September 30, 2002
|--- | --------------------------------------------------------------------------------------------------------------------------------

|[   ] | Transition
Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934
|----- | -----------------------------------------------------------------------------------------

---

|Delaware                                       | 36-3228107                          
|---------------------------------------------- | ------------------------------------
|                                               |                                     
|(State or other
jurisdiction of incorporation) | (I.R.S. Employer
Identification No.)
|                                               |                                     
|8700 West
Bryn Mawr Avenue, Chicago, Illinois  | 60631                               
|                                               |                                     
|(Address of principal
executive offices)       | (Zip Code)                          

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 requirements for the past 90
days.   Yes: X    No:

As of October 31, 2002,
33,163,642 shares of the registrants common stock were outstanding.



---

# BALLY TOTAL
FITNESS HOLDING CORPORATION

# INDEX

|Page   | 
|------ | 
|Number | 

| | Item 1. | Financial statements: | 
| | ------- | --------------------- | 

| | Condensed
consolidated balance sheet (unaudited) | 
| | ------------------------------------------------ | 

| | September 30, 2002
and December 31, 2001 | 1 | 
| | ---------------------------------------- | - | 

| | Consolidated
statement of income (unaudited) | 
| | -------------------------------------------- | 

| | Three months
ended September 30, 2002 and 2001 | 2 | 
| | ---------------------------------------------- | - | 

| | Consolidated
statement of income (unaudited) | 
| | -------------------------------------------- | 

| | Nine months
ended September 30, 2002 and 2001 | 3 | 
| | --------------------------------------------- | - | 

| | Consolidated
statement of stockholders' equity (unaudited) | 
| | ---------------------------------------------------------- | 

| | Nine months ended
September 30, 2002 | 4 | 
| | ------------------------------------ | - | 

| | Consolidated
statement of cash flows (unaudited) | 
| | ------------------------------------------------ | 

| | Nine months
ended September 30, 2002 and 2001 | 5 | 
| | --------------------------------------------- | - | 

| | Notes to condensed
consolidated financial statements | 
| | ---------------------------------------------------- | 

| | (unaudited) | 7 | 
| | ----------- | - | 

| | Item 2. | Management's discussion and analysis of financial | 
| | ------- | ------------------------------------------------- | 

| | condition
and results of operations | 12 | 
| | ----------------------------------- | -- | 

| | Item 4. | Evaluation of Disclosure Controls and Procedures | 17 | 
| | ------- | ------------------------------------------------ | -- | 

| | Item 6. | Exhibits and reports on Form 8-K | 17 | 
| | ------- | -------------------------------- | -- | 

|SIGNATURE PAGE |  | 18 | 
|-------------- |  | -- | 



---

##### Index

# PART I.  
FINANCIAL INFORMATION

## Item 1.  
Financial Statements

`September 30   December 31
                                                             2002          2001
                                                     ------------   -----------
                           ASSETS

Current assets:
  Cash and equivalents                                 $   13,335    $    9,310
  Installment contracts receivable, net                   336,984       284,611
  Other current assets                                     81,719        68,899
                                                       ----------    ----------
    Total current assets                                  432,038       362,820

Installment contracts receivable, net                     288,767       273,607
Property and equipment, less accumulated depreciation
  and amortization of $526,161 and $490,116               663,114       628,634
Intangible assets, less accumulated
  amortization of $80,015 and $80,256                     253,092       237,037
Deferred income taxes                                      68,938        76,104
Deferred membership origination costs                     119,764       112,959
Other assets                                               32,402        25,729
                                                       ----------    ----------
                                                       $1,858,115    $1,716,890
                                                       ==========    ==========

            LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                     $   63,735    $   50,471
  Income taxes payable                                        240         1,974
  Deferred income taxes                                    31,157        32,346
  Accrued liabilities                                      84,297        75,309
  Current maturities of long-term debt                     29,048        25,302
  Deferred revenues                                       296,305       294,930
                                                       ----------    ----------
    Total current liabilities                             504,782       480,332

Long-term debt, less current maturities                   702,018       639,869
Other liabilities                                          12,658        12,555
Deferred revenues                                          70,960        71,400
Stockholders' equity                                      567,697       512,734
                                                       ----------    ----------
                                                       $1,858,115    $1,716,890
                                                       ==========    ==========`



---

##### Index

`Three months ended
                                                                   September 30
                                                       ------------------------
                                                             2002          2001
                                                       ----------    ----------
Net revenues:
  Membership revenues                                  $  180,480    $  168,665
  Products and services                                    57,398        37,105
  Miscellaneous revenue                                     5,228         4,081
                                                       ----------    ----------
                                                          243,106       209,851

Operating costs and expenses:
  Fitness center operations                               140,946       121,992
  Products and services                                    36,681        23,241
  Member processing and collection centers                 11,686        10,718
  Advertising                                              12,221        11,512
  General and administrative                                8,443         7,151
  Special charges                                           6,500         6,700
  Depreciation and amortization                            19,587        19,155
                                                       ----------    ----------
                                                          236,064       200,469
                                                       ----------    ----------

Operating income                                            7,042         9,382

Finance charges earned                                     16,815        16,986
Interest expense                                          (13,796)      (14,606)
Other, net                                                   (556)          161
                                                       ----------    ----------
                                                            2,463         2,541
                                                       ----------    ----------

Income before income taxes                                  9,505        11,923
Income tax (provision) benefit                             (2,281)       14,600
                                                       ----------    ----------

Net income                                             $    7,224    $   26,523
                                                       ==========    ==========

Basic earnings per common share                        $      .22    $      .92
                                                       ==========    ==========

Diluted earnings per common share                      $      .22    $      .88
                                                       ==========    ==========`



---

##### Index

`Nine months ended
                                                                   September 30
                                                       ------------------------
                                                             2002          2001
                                                       ----------    ----------
Net revenues:
  Membership revenues                                  $  551,544    $  516,070
  Products and services                                   163,133       111,105
  Miscellaneous revenue                                    15,256        13,088
                                                       ----------    ----------
                                                          729,933       640,263

Operating costs and expenses:
  Fitness center operations                               418,848       368,549
  Products and services                                   103,466        69,998
  Member processing and collection centers                 33,679        31,697
  Advertising                                              45,143        43,929
  General and administrative                               25,304        21,350
  Special charges                                           6,500         6,700
  Depreciation and amortization                            55,995        55,036
                                                       ----------    ----------
                                                          688,935       597,259
                                                       ----------    ----------

Operating income                                           40,998        43,004

Finance charges earned                                     51,937        52,140
Interest expense                                          (41,986)      (45,239)
Other, net                                                   (393)          645
                                                       ----------    ----------
                                                            9,558         7,546
                                                       ----------    ----------

Income before income taxes                                 50,556        50,550
Income tax (provision) benefit                             (7,855)       13,850
                                                       ----------    ----------

Net income                                             $   42,701    $   64,400
                                                       ==========    ==========

Basic earnings per common share                        $     1.33    $     2.35
                                                       ==========    ==========

Diluted earnings per common share                      $     1.29    $     2.17
                                                       ==========    ==========`



---

##### Index

`Common stock                                  Unearned
                               -------------------                            compensation     Common       Total
                                             Par    Contributed  Accumulated   (restricted    stock in   stockholders'
                                 Shares     value     capital      deficit        stock)      treasury      equity
                               ----------  -------  -----------  -----------  ------------  -----------  -------------

Balance at December 31, 2001   32,380,557  $   329  $   657,546  $ (107,807)  $   (26,559)  $  (10,775)   $   512,734

Net income                                                           42,701                                    42,701

Issuance of common stock
  under long-term incentive
  plan                            110,000        1        4,619                    (4,619)                          1

Exercise of warrants              250,000        3        2,510                                                 2,513

Issuance of common stock
  under stock purchase and
  option plans                    123,551        1        1,752                                                 1,753

Issuance of common stock for
  acquisitions of businesses      382,827        4        8,851                                                 8,855

Purchases of common stock
  for treasury                    (54,500)                                                        (860)          (860)
                               ----------  -------  -----------  ----------   -----------   ----------    -----------

Balance at September 30, 2002  33,192,435  $   338  $   675,278  $  (65,106)  $   (31,178)  $  (11,635)   $   567,697
                               ==========  =======  ===========  ==========   ===========   ==========    ===========`



---

##### Index

`Nine months ended
                                                                   September 30
                                                       ------------------------
                                                             2002          2001
                                                       ----------    ----------
Operating:
  Net income                                           $   42,701    $   64,400
  Adjustments to reconcile--
    Depreciation and amortization, including
      amortization included in interest expense            58,895        57,800
    Change in operating assets and liabilities            (66,533)       (4,199)
                                                       ----------    ----------
  Cash provided by operating activities                    35,063       118,001

Investing:
  Purchases and construction of property
    and equipment                                         (61,991)      (67,101)
  Purchases of real estate                                (11,510)
  Acquisitions of businesses and other                     (6,217)       (2,570)
                                                       ----------    ----------
  Cash used in investing activities                       (79,718)      (69,671)

Financing:
  Debt transactions--
    Net borrowings (repayments) under revolving
      credit agreement                                     35,900       (55,000)
    Net borrowings (repayments) of other
      long-term debt                                        9,643       (60,686)
    Debt issuance and refinancing costs                      (270)
                                                       ----------    ----------
  Cash provided by (used in) debt transactions             45,273      (115,686)

  Equity transactions--
    Proceeds from sale of common stock                                   53,827
    Proceeds from exercise of warrants                      2,513        11,609
    Proceeds from issuance of common stock under
      stock purchase and option plans                       1,754         2,706
    Purchases of common stock for treasury                   (860)
                                                       ----------    ----------
  Cash provided by (used in) financing transactions        48,680       (47,544)
                                                       ----------    ----------

Increase in cash and equivalents                            4,025           786
Cash and equivalents, beginning of period                   9,310        13,074
                                                       ----------    ----------
Cash and equivalents, end of period                    $   13,335    $   13,860
                                                       ==========    ==========`



---

##### Index

`Nine months ended
                                                                   September 30
                                                       ------------------------
                                                             2002          2001
                                                       ----------    ----------
Supplemental Cash Flows Information:

Changes in operating assets and liabilities:
  (Increase) decrease in installment contracts
    receivable                                         $  (67,488)   $   23,834
  Increase in other current and other assets              (12,857)       (3,969)
  Increase in deferred membership origination costs        (6,805)       (1,796)
  Increase (decrease) in accounts payable                  13,264        (1,226)
  Increase (decrease) in income taxes payable
    and deferred income taxes                               7,043       (15,319)
  Increase in accrued and other liabilities                 8,175         5,640
  Decrease in deferred revenues                            (7,865)      (11,363)
                                                       ----------    ----------
Change in operating assets and liabilities             $  (66,533)   $   (4,199)
                                                       ==========    ==========

Cash payments for interest and income taxes
  were as follows--
    Interest paid                                      $   34,139    $   38,577
    Interest capitalized                                   (2,442)       (3,122)
    Income taxes paid, net                                    909         1,469

Investing and financing activities exclude the
  following non-cash transactions--
    Acquisitions of property and equipment
      through capital leases/borrowings                $   11,231    $   20,240
    Acquisitions of businesses with common stock            8,855
    Common stock issued under
      long-term incentive plan                              4,619         1,470
    Assumed debt related to acquisitions
      of businesses                                         2,846
    Tax benefit from exercise of employee
      stock options                                                       4,000`



---

##### Index

## Basis of
presentation

The accompanying condensed consolidated financial statements include the
accounts of Bally Total Fitness Holding Corporation (the Company)
and the subsidiaries that it controls. The Company, through its subsidiaries, is
a commercial operator of fitness centers in North America with over 400
facilities concentrated in 29 states and Canada. The Company operates in one
industry segment, and all significant revenues arise from the commercial
operation of fitness centers, primarily in major metropolitan markets in the
United States and Canada. Unless otherwise specified in the text, references to
the Company include the Company and its subsidiaries. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2001.

All adjustments have been recorded which are, in the opinion of management,
necessary for a fair presentation of the condensed consolidated balance sheet of
the Company at September 30, 2002, its consolidated statements of income for the
three and nine months ended September 30, 2002 and 2001, its consolidated
statement of stockholders equity for the nine months ended September 30,
2002, and its consolidated statements of cash flows for the nine months ended
September 30, 2002 and 2001. All such adjustments were of a normal recurring
nature.

The accompanying condensed consolidated financial statements have been prepared
in conformity with generally accepted accounting principles which require the
Companys management to make estimates and assumptions that affect the
amounts reported therein. Actual results could vary from such estimates. In
addition, certain reclassifications have been made to prior period financial
statements to conform with the 2002 presentation.

## Seasonal
factors

The Companys operations are subject to seasonal factors and, therefore,
the results of operations for the nine months ended September 30, 2002 and 2001
are not necessarily indicative of the results of operations for the full year.

## Installment
contracts receivable

`September 30   December 31
                                                             2002          2001
                                                     ------------   -----------
Current:
  Installment contracts receivable                     $  443,189    $  397,180
  Unearned finance charges                                (42,264)      (44,898)
  Allowance for doubtful receivables
    and cancellations                                     (63,941)      (67,671)
                                                       ----------    ----------
                                                       $  336,984    $  284,611
                                                       ==========    ==========

Long-term:
  Installment contracts receivable                     $  381,415    $  358,115
  Unearned finance charges                                (22,878)      (21,675)
  Allowance for doubtful receivables
    and cancellations                                     (69,770)      (62,833)
                                                       ----------    ----------
                                                       $  288,767    $  273,607
                                                       ==========    ==========`



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##### Index

## Allowance for
doubtful receivables and cancellations

`Three months ended          Nine months ended
                                                September 30               September 30
                                   -------------------------  -------------------------
                                          2002          2001         2002          2001
                                   -----------   -----------  -----------   -----------

Balance at beginning of period     $   130,860   $   144,912  $   130,504   $   132,277
Contract cancellations and
  write-offs of uncollectible
  amounts, net of recoveries           (81,268)      (78,307)    (258,448)     (244,890)
Provision for cancellations and
  doubtful receivables                  84,119        84,237      261,655       263,455
                                   -----------   -----------  -----------   -----------
Balance at end of period           $   133,711   $   150,842  $   133,711   $   150,842
                                   ===========   ===========  ===========   ===========`

## Membership
revenues

Gross committed membership fees represent the gross contracted value of
memberships originated during the periods, inclusive of initial membership fees,
monthly dues, finance charges, and products and services included in membership
programs. This data is presented in order to expand the presentation of
originating membership data as the Company now operates under several brands,
membership structures and an evolving menu of products and services accompanying
certain membership programs. The following is a reconciliation of gross
committed membership fees to initial membership fees originated, net:

`Three months ended          Nine months ended
                                                September 30               September 30
                                   -------------------------  -------------------------
                                          2002          2001         2002          2001
                                   -----------   -----------  -----------   -----------

Gross committed membership fees    $   287,389   $   265,697  $   888,117   $   835,796
Less:  Committed monthly dues          (59,385)      (33,369)    (180,600)     (111,525)
       Provision for cancellations
          and doubtful receivables     (84,119)      (84,237)    (261,655)     (263,455)
       Unearned finance charges
          and other                    (42,134)      (41,944)    (122,366)     (125,291)
       Products and services
         revenues included in
         membership programs           (20,349)      (14,584)     (57,348)      (43,077)
                                   -----------   -----------  -----------   -----------
Initial membership fees
  originated, net                  $    81,402   $    91,563  $   266,148   $   292,448
                                   ===========   ===========  ===========   ===========`



---

##### Index

The following presents the components of membership revenues as presented in the
accompanying consolidated statements of income:

`Three months ended          Nine months ended
                                                September 30               September 30
                                   -------------------------  -------------------------
                                          2002          2001         2002          2001
                                   -----------   -----------  -----------   -----------
Initial membership fees:
  Originated, net                  $    81,402   $    91,563  $   266,148   $   292,448
  Decrease in deferral                   4,848         7,748        2,885         6,631
                                   -----------   -----------  -----------   -----------
                                        86,250        99,311      269,033       299,079
Dues:
  Dues collected                        91,624        66,270      277,532       212,259
  Decrease in deferral                   2,606         3,084        4,979         4,732
                                   -----------   -----------  -----------   -----------
                                        94,230        69,354      282,511       216,991
                                   -----------   -----------  -----------   -----------
Membership revenues                $   180,480   $   168,665  $   551,544   $   516,070
                                   ===========   ===========  ===========   ===========`

## Products and services

`Three months ended          Nine months ended
                                                September 30               September 30
                                   -------------------------  -------------------------
                                          2002          2001         2002          2001
                                   -----------   -----------  -----------   -----------
Net revenues:
  Retail and nutritional
  supplements--
    Membership programs            $     7,305   $     7,357  $    22,815   $    23,768
    Direct sales                        13,791        11,777       42,024        33,101
  Personal training--
    Membership programs                 13,044         7,227       34,533        19,309
    Direct sales                        21,389         9,498       58,785        29,864
  Financial services                     1,869         1,246        4,976         5,063
                                   -----------   -----------  -----------   -----------
                                        57,398        37,105      163,133       111,105
Operating costs and expenses:
  Retail and nutritional
    supplements                         16,221        13,241       48,266        39,815
  Personal training                     20,460        10,000       55,200        30,183
                                   -----------   -----------  -----------   -----------
                                        36,681        23,241      103,466        69,998
                                   -----------   -----------  -----------   -----------
Contribution margin                $    20,717   $    13,864  $    59,667   $    41,107
                                   ===========   ===========  ===========   ===========`



---

##### Index

## Earnings per
common share

Basic earnings per common share for each period is computed based on the
weighted average number of shares of common stock outstanding of 32,379,261 and
28,703,778 for the three months ended September 30, 2002 and 2001, respectively,
and 32,069,163 and 27,394,485 for the nine months ended September 30, 2002 and
2001, respectively. Diluted earnings per common share for each period includes
the addition of common stock equivalents of 625,467 and 1,568,790 for the three
months ended September 30, 2002 and 2001, respectively, and 1,021,453 and
2,306,202 for the nine months ended September 30, 2002 and 2001, respectively.
Common stock equivalents represent the dilutive effect of the assumed exercise
of outstanding warrants and stock options.

## New accounting
pronouncements

The Company adopted the provisions of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets(SFAS No.
142),in the first quarter of 2002. As a result, the Company ceased
amortization of goodwill in 2002 in accordance with the provisions of this
standard. Upon adoption, the Company determined that the value of recorded
goodwill was not impaired. Based on the decline in the Companys common
stock price below book value per share, the Company has performed an internal
assessment of business valuation and has concluded that no impairment of
goodwill has occurred based on current projections of future cash flows. The
Company will, during the fourth quarter of 2002, seek expert assistance to
confirm its internal assessment. The following table presents prior year third
quarter and year to date net income and earnings per share adjusted to add back
goodwill amortization:

`Three months ended September 30, 2001
                                          -------------------------------------
                                                           Earnings per share
                                                         ----------------------
                                             Net income     Basic      Diluted
                                             ----------  ----------  ----------

As reported                                  $   26,523  $     0.92  $     0.88
Add back: goodwill amortization                   1,935        0.07        0.06
                                             ----------  ----------  ----------
As adjusted                                  $   28,458  $     0.99  $     0.94
                                             ==========  ==========  ==========


                                           Nine months ended September 30, 2001
                                          -------------------------------------
                                                           Earnings per share
                                                         ----------------------
                                             Net income     Basic      Diluted
                                             ----------  ----------  ----------

As reported                                  $   64,400  $     2.35  $     2.17
Add back: goodwill amortization                   5,713        0.21        0.19
                                             ----------  ----------  ----------
As adjusted                                  $   70,113  $     2.56  $     2.36
                                             ==========  ==========  ==========`

## Income taxes

At September 30, 2002, for accounting purposes, the Company had approximately
$69 million of unrecognized federal net operating loss carryforwards.
Separately, the Companys alternative minimum tax (AMT) net
operating loss carryforwards have been substantially recognized. Therefore,
having fully recognized AMT net operating loss carryforwards for reporting
purposes, the Companys federal income tax rate increased to 20% during the
second quarter of 2002. The 20% federal rate will remain in effect until such
time as all of the Companys AMT credits are fully utilized, which is not
currently expected before 2004. The



---

##### Index

balance of the provision
consists primarily of taxes owed to states where local earnings are no longer
offset by state net operating loss carryforwards.

For federal income tax payment purposes, the Company has available net operating
loss carryforwards exceeding $380 million and AMT net operating loss
carryforwards in excess of $224 million. Therefore, the Company currently does
not expect to make any significant federal tax payments earlier than 2004. At
such time, the Company will be required to pay taxes at the 20% AMT rate for
periods currently estimated to extend beyond 2005, including those periods
benefited by AMT credits. For accounting purposes, the 2002 federal tax
provision consists entirely of non-cash deferred income tax charges.



---

##### Index

## Item 2.  
Management's Discussion and Analysis of Financial Condition and Results of Operations

## Comparison of
the Three Months Ended September 30, 2002 and 2001

Net revenues for the third quarter of 2002 were $243.1 million compared to
$209.8 million in 2001, an increase of $33.3 million (16%), inclusive of $17.1
million (8%) attributable to the acquisition of 19 Crunch Fitness centers on
December 31, 2001. Net revenues from comparable fitness centers increased 4%.
The increase in total net revenues resulted from the following:

- Membership revenues
increased $11.8 million (7%) over the prior year quarter, including a 36%
increase in dues revenue (18% related to Crunch Fitness) recognized during the
period. Dues revenue for the third quarter of 2002 equaled more than half of
total membership revenue. The provision for doubtful receivables and
cancellations, included as a direct reduction of membership revenue, was 41% of
the gross financed portion of membership fee originations for both periods.
- Products and services
revenue increased $20.3 million (55%) over the 2001 quarter, primarily
reflecting the continued growth of personal training services, nutritional
product sales and the addition of Crunch Fitness, which accounted for $5.0
million of the increase.
- Miscellaneous revenue
increased $1.1 million (28%) over the prior year quarter, reflecting increases
in sub-rental income, franchise fees and co-marketing arrangements.

The weighted-average number of fitness centers increased to 416 from 384 in the
third quarter of 2001, an increase of 8%, including a 54% increase in the
weighted-average number of centers operating under the Companys upscale
brands from 37 to 57, largely resulting from the acquisition of Crunch Fitness.

Gross committed membership fees during the third quarter increased 8% compared
to the 2001 quarter. The gross committed monthly membership fees originated
during the third quarter of 2002 averaged $41 versus $39 in the year ago
quarter, a 5% increase. This increase results primarily from higher monthly dues
included in memberships originated at our Bally Total Fitness clubs and the
addition of Crunch Fitness with its higher membership fee structure. The number
of new members joining increased 6% during the third quarter of 2002 compared
with the same quarter a year ago, with a 1% increase at our Bally Total Fitness
clubs. The average committed duration of memberships originated during the third
quarter of 2002 was 30.6 months versus 31.0 months in the prior year quarter, a
1% decrease. This decrease results primarily from the shorter commitment term of
memberships offered at Crunch Fitness and the addition of five new clubs in
states and provinces that limit contract duration to twelve months.

Operating income for the third quarter of 2002, excluding special charges, was
$13.5 million compared to $16.1 million in 2001. Net revenues increased $33.3
million (16%) for the third quarter of 2002, offset by a $35.4 million (20%)
increase in operating costs and expenses, excluding special charges, and an
increase in depreciation and amortization of $.4 million. In the third quarter
of 2002, we recorded a non-recurring charge of $6.5 million ($.15 per diluted
share on an after tax basis) to settle a class action lawsuit arising in the
early 1990s. In the prior year quarter, we recorded a non-recurring charge
of $6.7 million ($.21 per diluted share on an after tax basis) related to costs
from disruptions and shutdowns of various club operations resulting from the
September 11th terrorist attacks and a one-time inventory markdown
related to our repositioning of in-club retail stores. Earnings before interest,
taxes, depreciation and amortization, including finance charges earned
(EBITDA), exclusive of special charges, were $49.9 million versus
$52.2 million for the last year quarter, a 4% decrease. The EBITDA margin,
before special charges, was 19% in the third quarter of 2002 compared to 23% in
the 2001 period. This decrease is due, in part, to the initially lower margins
attributable to the acquisition of 19 Crunch Fitness centers on December 31,
2001, the growing proportion of clubs open less than three years which, due to
deferred revenue accounting and their immature membership dues base, yield
below-average margins compared to mature clubs, and the continuing trend of
lower new membership originations at our mature clubs. Fitness center operating
expenses increased $19.0 million (16%) due principally to incremental costs of
operating new fitness centers, including Crunch Fitness, which represented
approximately $9.6 million of the increase. Products and services expenses
increased $13.4 million (58%) to support the revenue growth of product and
service offerings. Contribution margin from products and services increased to



---

##### Index

$20.7 million from $13.9 million
in the 2001 quarter, a 49% increase (12% related to Crunch Fitness), with a
contribution margin percentage of 36% in the 2002 quarter compared to 37% during
the prior year period. Member processing and collection center expenses
increased $1.0 million from the prior year quarter, reflecting increased costs
to serve the higher number of clubs and members as compared to the prior year
period. Advertising expenses increased $.7 million (6%) compared to the prior
year quarter. General and administrative expenses increased $1.3 million (18%)
compared to the prior year quarter to support our overall growth strategy.
Depreciation and amortization expense increased $.4 million (2%), resulting from
additional depreciation and amortization expense of $2.3 million due to
additional expenditures for property and equipment and acquired fitness centers
during the past two years, offset by the elimination of goodwill amortization of
$1.9 million in the prior year quarter as a result of the adoption of Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). The Company has performed an internal business
valuation and has concluded that no impairment of goodwill has occurred based on
current projections of future cash flows.

The income tax provision for the three months ended September 30, 2002,
increased $16.9 million compared to the prior year quarter. This increase is
attributable to the Company having fully recognized alternative minimum tax
(AMT) net operating loss carryforwards for reporting purposes. As a
result, our federal income tax rate increased to 20% beginning in the second
quarter of 2002. The 20% rate will remain in effect until such time as all our
AMT credits are fully utilized, which is not currently expected before 2004.
For accounting purposes, the 2002 federal tax provision consists entirely of
non-cash deferred income tax charges. In the prior year quarter, in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, we reviewed the likelihood of realizing the future benefit of
our unrecognized tax loss carryforwards. Based on consistent and growing
profitability, we reduced our valuation allowance against tax loss carryforwards
resulting in a federal tax benefit in the prior year quarter of $15 million. The
balance of the provision consists primarily of taxes owed to states where local
earnings are no longer offset by state net operating loss carryforwards.

Finance charges earned in excess of interest expense totaled $3.0 million in the
third quarter of 2002, an increase of $.6 million over the prior year period
resulting principally from lower interest rates on the Companys
borrowings.

## Comparison of
the Nine Months Ended September 30, 2002 and 2001

Net revenues for the first nine months of 2002 were $729.9 million compared to
$640.2 million in 2001, an increase of $89.7 million (14%), inclusive of $49.6
million (8%) attributable to Crunch Fitness. Net revenues from comparable
fitness centers increased 3%. The increase in total net revenues resulted from
the following:

- Membership revenues
increased $35.5 million (7%) over the prior year period, including a 30%
increase in dues revenue (18% related to Crunch Fitness) recognized during the
period. Dues revenue for the first nine months of 2002 equaled more than half of
total membership revenue. The provision for doubtful receivables and
cancellations, included as a direct reduction of membership revenue, was 41% of
the gross financed portion of membership fee originations for both periods.
- Products and services
revenue increased $52.0 million (47%) over the prior year period, primarily
reflecting the continued growth of personal training services, nutritional
product sales and the addition of Crunch Fitness, which accounted for $14.9
million of the increase.
- Miscellaneous revenue
increased $2.2 million (17%) over the prior year period, reflecting increases in
sub-rental income, franchise fees and co-marketing arrangements.



---

##### Index

The weighted-average number of fitness centers increased to 412 from 385 in the
first nine months of 2001, an increase of 7%, including a 56% increase in the
weighted-average number of centers operating under the Companys upscale
brands from 36 to 56, largely resulting from the acquisition of Crunch Fitness.

Gross committed membership fees increased 6% compared to the 2001 period. The
gross committed monthly membership fees originated during the first nine months
of 2002 averaged $43 versus $40 in the year ago period, an 8% increase. This
increase results primarily from higher monthly dues included in memberships
originated at our Bally Total Fitness clubs and the addition of Crunch Fitness
with its higher membership fee structure. The number of new members joining
increased 3% during the first nine months of 2002 compared with the same period
a year ago, with a 2% reduction at our Bally Total Fitness clubs. The average
committed duration of memberships originated during the first nine months of
2002 was 30.5 months versus 31.3 months in the prior year period, a 3% decrease.
This decrease results primarily from the shorter committed term of memberships
offered at Crunch Fitness and the addition of five new clubs in states and
provinces that limit contract duration to twelve months.

Operating income for the first nine months of 2002, excluding special charges,
was $47.5 million compared to $49.7 million in 2001. Net revenues increased by
$89.7 million (14%) for the first nine months of 2002, offset by a $90.9 million
(17%) increase in operating costs and expenses, excluding special charges, and
an increase in depreciation and amortization of $1.0 million. Earnings before
interest, taxes, depreciation and amortization, including finance charges
earned, exclusive of special charges, were $155.4 million versus $156.9 million
for the prior year period, a 1% decrease. The EBITDA margin, before special
charges, was 20% in the first nine months of 2002 compared to 23% in the 2001
period. This decrease is due, in part, to the initially lower margins
attributable to the Crunch Fitness centers, the growing proportion of clubs open
less than three years which, due to deferred revenue accounting and their
immature membership dues base, yield below-average margins compared to mature
clubs, and the continuing trend of lower new membership originations at our
mature clubs. Fitness center operating expenses increased $50.3 million (14%)
due principally to incremental costs of operating new fitness centers, including
Crunch Fitness, which represented approximately $29.8 million of the increase.
Products and services expenses increased $33.5 million (48%) to support the
revenue growth of product and service offerings. Contribution margin from
products and services increased to $59.7 million from $41.1 million in the 2001
period, a 45% increase (12% related to Crunch Fitness), with a contribution
margin percentage of 37% in both periods. Member processing and collection
center expenses increased $2.0 million from the prior year period, reflecting
increased costs to serve the higher number of clubs and members as compared to
the prior year period. Advertising expenses increased $1.2 million (3%) compared
to the prior year. General and administrative expenses increased $4.0 million
(19%) compared to the prior year period to support our overall growth strategy.
Depreciation and amortization expense increased $1.0 million resulting from
additional depreciation and amortization expense of $6.7 million due to
additional expenditures for property and equipment and acquired fitness centers
during the past two years, offset by the elimination of goodwill amortization of
$5.7 million in the prior year period as a result of the adoption of SFAS No.
142.

The income tax provision for the nine months ended September 30, 2002, increased
$21.7 million compared to the prior year period. This increase is attributable
to the Company having fully recognized alternative minimum tax (AMT)
net operating loss carryforwards for reporting purposes. As a result, our
federal income tax rate increased to 20% beginning in the second quarter of
2002. The 20% rate will remain in effect until such time as all our our AMT
credits are fully utilized, which is not currently expected before 2004. For
accounting purposes, the 2002 federal tax provision consists entirely of
non-cash deferred income tax charges. In the prior year period, in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, we reviewed the likelihood of realizing the future benefit of
our unrecognized tax loss carryforwards. Based on consistent and growing
profitability, we reduced our valuation allowance against tax loss carryforwards
resulting in a federal tax benefit in the prior year quarter of $15 million. The
balance of the provision consists primarily of taxes owed to states where local
earnings are no longer offset by state net operating loss carryforwards



---

##### Index

Finance charges earned in excess of interest expense totaled $10.0 million in
the first nine months of 2002, an increase of $3.1 million over the prior year
period resulting principally from lower interest rates on the Companys
borrowings.

## Liquidity and
Capital Resources

Cash flows from operating activities were $35.1 million in the first nine months
of 2002, compared to $118.0 million in the 2001 period which included $79.5
million of accelerated collections from the sale of installment contracts
receivable. During the first and third quarters of 2001, the Company sold a
portion of its installment contracts receivable portfolio to a major financial
institution at net book value, with combined proceeds of $105 million. Excluding
the impact of the sales of receivables in 2001, and net of the change in dues
prepayments during the periods, cash flows from operating activities were $18.7
million in the third quarter of 2002, compared to $21.8 million in the prior
year quarter, and $73.9 million in the first nine months of 2002, versus $47.6
million in the 2001 period, a $26.3 million increase. We continue to pursue
sources of monetizing our installment accounts receivable portfolio, including
additional bulk sales such as that recently announced in October 2002 which
generated $24 million of initial cash proceeds.

The following table sets forth cash flows from operating activities on a
comparable basis to exclude the impact of last years sales of receivables,
to add back actual cash collections on the sold portfolios, and to reflect the
impact of changes in dues prepayments during each of the periods (in thousands):

`Three months ended          Nine months ended
                                                September 30               September 30
                                   -------------------------  -------------------------
                                          2002          2001         2002          2001
                                   -----------   -----------  -----------   -----------
Cash flows from operating
  activities, as reported          $     8,146   $    64,821  $    35,063   $   118,001
    Acceleration of collections
      through bulk sale of
      installment contracts
      receivable                                     (60,000)                  (105,000)
    Collections on installment
      contracts receivable sold         11,719        12,499       42,819        25,532
    Change in dues prepayments          (1,206)        4,438       (3,968)        9,095
                                   -----------   -----------  -----------   -----------

Cash flows from operating
  activities on a comparable basis $    18,659   $    21,758  $    73,914   $    47,628
                                   ===========   ===========  ===========   ===========`

Our bank credit facility provides up to $225.0 million of availability
consisting of a three-year $135.0 million term loan and a $90.0 million
three-year revolving credit facility. The amount available under the revolving
credit facility is reduced by any outstanding letters of credit, which cannot
exceed $30.0 million. As of September 30, 2002, the Company had drawn $53.9
million on its $90 million revolving credit line and had outstanding letters of
credit totaling $4.6 million. The $135.0 million term loan is repayable in 13
installments. The first installment of $250,000 was paid in December 2001, 11
quarterly installments of $460,000 began March 31, 2002 and the final
installment of $129,690,000 is due November 2004. We have no scheduled principal
payments under our subordinated debt until October 2007. Our debt service
requirements, including interest, through September 30, 2003 are approximately
$79.0 million. During April 2002, the Company repaid the remaining balance
outstanding on its 1996 securitization with proceeds from its 2001
securitization facility. We believe to the extent required, that we will be able
to satisfy our short-term requirements for debt service and capital expenditures
out of available cash balances, cash flows from operations and borrowings on the
revolving credit facility. In addition to cash from operating activities, we
believe our longer-term debt service requirements through 2004 can be satisfied
by availability on our bank credit facility, including extensions,



---

##### Index

expansion of our
securitization facility, other secured borrowings or through additional
offerings of our common stock.

We are authorized to repurchase up to 1,500,000 shares of our common stock on
the open market from time to time. We repurchased 625,100 shares between August
1998 and November 1999 at an average price of $18 per share, and 54,500 shares
in February 2002 at $16 per share.

Capital expenditures totaled $62.0 million for property and equipment and $11.5
million for purchases of real estate in the first nine months of 2002. Property
and equipment expenditures are expected to total approximately $16 million
during the fourth quarter of 2002. The Company does not anticipate any
additional real estate purchases in 2002. Capital spending in 2003 is targeted
to range between $50 million and $55 million as we further our goal to be free
cash flow positive.

## Forward-Looking
Statements

Forward-looking statements in this Form 10-Q including, without limitation,
statements relating to the Companys plans, strategies, objectives,
expectations, intentions, and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks, uncertainties,
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. These
factors include, among others, the following: general economic and business
conditions; competition; success of operating initiatives, advertising and
promotional efforts; existence of adverse publicity or litigation; acceptance of
new product and service offerings; changes in business strategy or plans;
quality of management; availability, terms, and development of capital; business
abilities and judgment of personnel; changes in, or the failure to comply with,
government regulations; regional weather conditions and other factors described
in this Form 10-Q or in other filings of the Company with the Securities and
Exchange Commission. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.



---

##### Index

# BALLY TOTAL
FITNESS HOLDING CORPORATION

## Item 4.  
Evaluation of Disclosure Controls and Procedures

The Companys Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as
of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date). Based on such evaluation, such officers have
concluded that, as of the Evaluation Date, the Companys disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Companys reports filed or
submitted under the Exchange Act.

Since the Evaluation Date, there have not been any significant changes in the
Companys internal controls or in other factors that could significantly
affect such controls.

# PART II.  
OTHER INFORMATION

## Item 6.  
Exhibits and reports on Form 8-K

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

| | Exhibit 99.1  
Certification of Lee S. Hillman pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, filed herewith.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                         
| | Exhibit 99.2  
Certification of John W. Dwyer pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith. 

| | (b) | Reports on Form 8-K:
| | --- | --------------------

| |                |           | Financial 
| | -------------- | --------- | ----------
| | Date           | Items     | Statements
| |                |           |           
| | August 6, 2002 | #5 and #7 | None      



---

##### Index

# BALLY TOTAL
FITNESS HOLDING CORPORATION

# SIGNATURE
PAGE

Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

| | BALLY TOTAL FITNESS HOLDING CORPORATION
| | ---------------------------------------
| |                                        
| | Registrant                             
| |                                        
| |                                        

| | By: | /s/ John W. Dwyer
| | --- | -----------------

| |                                                               
| | --------------------------------------------------------------
| | John W. Dwyer                                                 
| | Executive
Vice President, Chief Financial Officer and Director
| | (principal financial officer)                                 



---

##### Index

I, Lee S. Hillman, certify that:

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

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

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

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

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

---



---

##### Index

I, John W. Dwyer, certify that:

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

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

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

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

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

---