# FORM 10-Q

|[X] | Quarterly
Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
for the period ended March 31, 2004
|--- | ----------------------------------------------------------------------------------------------------------------------------

|[   ] | 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:

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

As of April 30, 2004,
there were 34,072,114 shares of the registrants common stock outstanding.



---

# TABLE OF
ADDITIONAL REGISTRANTS

| |                                                    | Jurisdiction of | I.R.S. Employer       | 
| | -------------------------------------------------- | --------------- | --------------------- | 
| | Exact Name of Additional Registrants               | Incorporation   | Identification Number | 
| |                                                    |                 |                       | 
| | 59th Street Gym LLC                                | New York        | 36-4474644            | 
| | 708 Gym LLC                                        | New York        | 36-4474644            | 
| | Ace, LLC                                           | New York        | 36-4474644            | 
| | Bally Fitness Franchising, Inc.                    | Illinois        | 36-4029332            | 
| | Bally Franchise RSC, Inc.                          | Illinois        | 36-4028744            | 
| | Bally Franchising Holdings, Inc.                   | Illinois        | 36-4024133            | 
| | Bally Total Fitness Corporation                    | Delaware        | 36-2762953            | 
| | Bally Total Fitness International, Inc.            | Michigan        | 36-1692238            | 
| | Bally Total Fitness of Missouri, Inc.              | Missouri        | 36-2779045            | 
| | Bally Total Fitness of Toledo, Inc.                | Ohio            | 38-1803897            | 
| | Ballys Fitness and Racquet Clubs, Inc.            | Florida         | 36-3496461            | 
| | BFIT Rehab of West Palm Beach, Inc.                | Florida         | 36-4154170            | 
| | Connecticut Coast Fitness Centers, Inc.            | Connecticut     | 36-3209546            | 
| | Connecticut Valley Fitness Centers, Inc.           | Connecticut     | 36-3209543            | 
| | Crunch LA LLC                                      | New York        | 36-4474644            | 
| | Crunch World LLC                                   | New York        | 36-4474644            | 
| | Flambe LLC                                         | New York        | 36-4474644            | 
| | Greater Philly No. 1 Holding Company               | Pennsylvania    | 36-3209566            | 
| | Greater Philly No. 2 Holding Company               | Pennsylvania    | 36-3209557            | 
| | Health & Tennis Corporation of New York            | Delaware        | 36-3628768            | 
| | Holiday Health Clubs of the East Coast, Inc.       | Delaware        | 52-1271028            | 
| | Holiday Health & Fitness Centers of New York, Inc. | New York        | 36-3209544            | 
| | Holiday Health Clubs and Fitness Centers, Inc.     | Colorado        | 84-0856432            | 
| | Holiday Health Clubs of the Southeast, Inc.        | South Carolina  | 52-1230906            | 
| | Holiday/Southeast Holding Corp.                    | Delaware        | 52-1289694            | 
| | Holiday Spa Health Clubs of California             | California      | 36-2763344            | 
| | Holiday Universal, Inc.                            | Delaware        | 52-0820531            | 
| | Crunch Fitness International, Inc.                 | Delaware        | 36-4474644            | 
| | Jack La Lanne Fitness Centers, Inc.                | New York        | 95-3445399            | 
| | Jack La Lanne Holding Corp.                        | New York        | 95-3445400            | 
| | Manhattan Sports Club, Inc.                        | New York        | 36-3407784            | 
| | Mission Impossible, LLC                            | California      | 36-4474644            | 
| | New Fitness Holding Co., Inc.                      | New York        | 36-3209555            | 
| | Nycon Holding Co., Inc.                            | New York        | 36-3209533            | 
| | Physical Fitness Centers of Philadelphia, Inc.     | Pennsylvania    | 36-3209542            | 
| | Providence Fitness Centers, Inc.                   | Rhode Island    | 36-3209549            | 
| | Rhode Island Holding Company                       | Rhode Island    | 36-3261314            | 
| | Scandinavian Health Spa, Inc.                      | Ohio            | 34-1114683            | 
| | Scandinavian US Swim & Fitness, Inc.               | Ohio            | 84-1035840            | 
| | Soho Ho LLC                                        | New York        | 36-4474644            | 
| | Sportslife, Inc.                                   | Georgia         | 58-1611545            | 
| | Sportslife Gwinnett, Inc.                          | Georgia         | 58-1953453            | 
| | Sportslife Roswell, Inc.                           | Georgia         | 58-1849570            | 
| | Sportslife Stone Mountain, Inc.                    | Georgia         | 58-2069477            | 
| | Sportslife Town Center II, Inc.                    | Georgia         | 58-2454078            | 
| | Tidelands Holiday Health Clubs, Inc.               | Virginia        | 52-1229398            | 
| | U.S. Health, Inc.                                  | Delaware        | 52-1137373            | 
| | West Village Gym at the Archives LLC               | New York        | 36-4474644            | 

The address for service of each of the additional registrants is c/o Bally
Total Fitness Holding Corporation, 8700 West Bryn Mawr Avenue, 2nd
Floor, Chicago, Illinois  60631, telephone 773-380-3000. The primary
industrial classification number for each of the additional registrants is 7991.



---

# BALLY TOTAL
FITNESS HOLDING CORPORATION

# INDEX

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

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

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

| | March 31, 2004
and December 31, 2003 | 1 | 
| | ------------------------------------ | - | 

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

| | Three months
ended March 31, 2004 and 2003 | 2 | 
| | ------------------------------------------ | - | 

| | Consolidated
statement of stockholders deficit (unaudited) | 
| | ----------------------------------------------------------- | 

| | Three months ended
March 31, 2004 | 3 | 
| | --------------------------------- | - | 

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

| | Three months
ended March 31, 2004 and 2003 | 4 | 
| | ------------------------------------------ | - | 

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

| | (unaudited) | 6 | 
| | ----------- | - | 

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

| | condition
and results of operations | 17 | 
| | ----------------------------------- | -- | 

| | Item 3. | Quantitative and qualitative disclosures about market risk | 22 | 
| | ------- | ---------------------------------------------------------- | -- | 

| | Item 4. | Evaluation of disclosure controls and procedures | 22 | 
| | ------- | ------------------------------------------------ | -- | 

| | Item 2. | Changes in securities, use of proceeds and issuer purchases of
equity securities | 23 | 
| | ------- | -------------------------------------------------------------------------------- | -- | 

| | Item 5. | Other information | 23 | 
| | ------- | ----------------- | -- | 

| | Item 6. | Exhibits and reports on Form 8-K | 24 | 
| | ------- | -------------------------------- | -- | 

|SIGNATURE PAGE |  | 25 | 
|-------------- |  | -- | 



---

##### Index

# PART I.  
FINANCIAL INFORMATION

## Item 1.  
Financial Statements

|                                                      |          |           |             |   |          
|----------------------------------------------------- | -------- | --------- | ----------- | - | ---------
|                                                      | March 31 |           | December 31
|                                                      |          | 2004      |             |   | 2003     
|                                                      |          |           |            
|ASSETS                                                |          |           |             |   |          
|Current assets:                                       |          |           |             |   |          
|Cash and equivalents                                  | $        | 13,113    |             | $ | 14,410   
|Installment contracts receivable, net                 |          | 261,574   |             |   | 258,550  
|Other current assets                                  |          | 37,260    |             |   | 39,707   
|                                                      |          |           |            
|Total current assets                                  |          | 311,947   |             |   | 312,667  
|                                                      |          |           |             |   |          
|Installment contracts receivable, net                 |          | 246,550   |             |   | 230,809  
|Property and equipment, less accumulated depreciation |          |           |             |   |          
|and amortization of $612,287 and $597,135             |          | 617,581   |             |   | 624,452  
|Goodwill                                              |          | 243,244   |             |   | 243,244  
|Trademarks                                            |          | 6,969     |             |   | 6,969    
|Intangible assets, less accumulated                   |          |           |             |   |          
|amortization of $7,458 and $7,369                     |          | 1,812     |             |   | 1,901    
|Deferred income taxes                                 |          | 1,624     |             |   | 1,313    
|Other assets                                          |          | 31,201    |             |   | 31,925   
|                                                      |          |           |            
|                                                      | $        | 1,460,928 |             | $ | 1,453,280
|                                                      |          |           |            
|LIABILITIES AND STOCKHOLDERS DEFICIT                 |          |           |             |   |          
|                                                      |          |           |             |   |          
|Current liabilities:                                  |          |           |             |   |          
|Accounts payable                                      | $        | 57,790    |             | $ | 61,494   
|Deferred income taxes                                 |          | 2,757     |             |   | 2,303    
|Accrued liabilities                                   |          | 94,992    |             |   | 89,638   
|Current maturities of long-term debt                  |          | 23,396    |             |   | 24,481   
|Deferred revenues                                     |          | 422,732   |             |   | 418,897  
|                                                      |          |           |            
|Total current liabilities                             |          | 601,667   |             |   | 596,813  
|                                                      |          |           |             |   |          
|Long-term debt, less current maturities               |          | 708,355   |             |   | 705,630  
|Other liabilities                                     |          | 11,118    |             |   | 10,639   
|Deferred revenues                                     |          | 311,337   |             |   | 298,507  
|Stockholders deficit                                 |          | (171,549) |             |   | (158,309)
|                                                      |          |           |            
|                                                      | $        | 1,460,928 |             | $ | 1,453,280
|                                                      |          |           |            



---

##### Index

|                                                      |                    |          |  |   |          
|----------------------------------------------------- | ------------------ | -------- |  | - | ---------
|                                                      | Three months ended
|                                                      | March 31          
|                                                      |                   
|                                                      |                    | 2004     |  |   | 2003     
|                                                      |                    |          | 
|Net revenues:                                         |                    |          |  |   |          
|Membership revenue                                    | $                  | 184,170  |  | $ | 185,451  
|Products and services                                 |                    | 55,741   |  |   | 49,938   
|Miscellaneous revenue                                 |                    | 4,832    |  |   | 4,851    
|                                                      |                    |          | 
|                                                      |                    | 244,743  |  |   | 240,240  
|Operating costs and expenses:                         |                    |          |  |   |          
|Fitness center operations                             |                    | 157,180  |  |   | 147,376  
|Products and services                                 |                    | 42,210   |  |   | 43,333   
|Member processing and collection centers              |                    | 12,731   |  |   | 11,424   
|Advertising                                           |                    | 19,838   |  |   | 17,933   
|General and administrative                            |                    | 10,650   |  |   | 8,167    
|Depreciation and amortization                         |                    | 19,106   |  |   | 19,556   
|                                                      |                    |          | 
|                                                      |                    | 261,715  |  |   | 247,789  
|                                                      |                    |          | 
|Operating loss                                        |                    | (16,972) |  |   | (7,549)  
|                                                      |                    |          |  |   |          
|Finance charges earned                                |                    | 20,137   |  |   | 18,883   
|Interest expense                                      |                    | (16,536) |  |   | (13,985) 
|Other, net                                            |                    | (114)    |  |   | (116)    
|                                                      |                    |          | 
|                                                      |                    | 3,487    |  |   | 4,782    
|                                                      |                    |          | 
|Loss from continuing operations before income taxes   |                    | (13,485) |  |   | (2,767)  
|Income tax provision                                  |                    | (300)    |  |   | (50,782) 
|                                                      |                    |          | 
|Loss from continuing operations                       |                    | (13,785) |  |   | (53,549) 
|Loss from discontinued operations                     |                    | -        |  |   | (504)    
|                                                      |                    |          | 
|Loss before cumulative effect of                      |                    |          |  |   |          
|changes in accounting principles                      |                    | (13,785) |  |   | (54,053) 
|Cumulative effect of changes in                       |                    |          |  |   |          
|accounting principles                                 |                    | -        |  |   | (581,123)
|                                                      |                    |          | 
|Net loss                                              | $                  | (13,785) |  | $ | (635,176)
|                                                      |                    |          | 
|Basic and diluted loss per common share:              |                    |          |  |   |          
|Loss from continuing operations                       | $                  | (0.42)   |  | $ | (1.64)   
|Loss from discontinued operations                     |                    |          |  |   | (0.02)   
|Cumulative effect of changes in accounting principles |                    |          |  |   | (17.84)  
|                                                      |                    |          | 
|Net loss per common share                             | $                  | (0.42)   |  | $ | (19.50)  
|                                                      |                    |          | 



---

##### Index

|                                |              |  |       |     |             |   |             |  |              |           |          |        |               |       |   |          |  |   |          
|------------------------------- | ------------ |  | ----- | --- | ----------- | - | ----------- |  | ------------ | --------- | -------- | ------ | ------------- | ----- | - | -------- |  | - | ---------
|                                | Common stock |  |       |     |             |   |             |  |              |           |          |        |               |       |   |         
|                                |              |  |       |     |             |   |             |  |              |           |          | Common |               | Total
|                                |              |  | Par   |     | Contributed |   | Accumulated |  | Unearned     |           | stock in |        | stockholders
|                                | Shares       |  | value |     | capital     |   | deficit     |  | compensation |           | treasury |        | deficit      
|                                |              |  |       |     |             |   |             |  |              |           |          |        |              
|                                |              |  |       |     |             |   |             |  |              |           |          |        |               |       |   |          |  |   |          
|Balance at December 31, 2003    | 34,035,734   |  | $     | 347 |             | $ | 675,335     |  | $            | (793,364) |          | $      | (28,992)      |       | $ | (11,635) |  | $ | (158,309)
|                                |              |  |       |     |             |   |             |  |              |           |          |        |               |       |   |          |  |   |          
|Net loss                        |              |  |       |     |             |   |             |  |              | (13,785)  |          |        |               |       |   |          |  |   | (13,785) 
|                                |              |  |       |     |             |   |             |  |              |           |          |        |               |       |   |          |  |   |          
|Restricted stock activity       | (7,500)      |  |       |     |             |   | (315)       |  |              |           |          |        | 550           |       |   |          |  |   | 235      
|                                |              |  |       |     |             |   |             |  |              |           |          |        |               |       |   |          |  |   |          
|Issuance of common stock under  |              |  |       |     |             |   |             |  |              |           |          |        |               |       |   |          |  |   |          
|stock purchase and option plans | 43,880       |  |       |     |             |   | 310         |  |              |           |          |        |               |       |   |          |  |   | 310      
|                                |              |  |       |     |             |   |             |  |              |           |          |        |              
|Balance at March 31, 2004       | 34,072,114   |  | $     | 347 |             | $ | 675,330     |  | $            | (807,149) |          | $      | (28,442)      |       | $ | (11,635) |  | $ | (171,549)
|                                |              |  |       |     |             |   |             |  |              |           |          |        |              



---

##### Index

|                                                                  |                    |          |  |   |           
|----------------------------------------------------------------- | ------------------ | -------- |  | - | ----------
|                                                                  | Three months ended
|                                                                  | March 31          
|                                                                  |                   
|                                                                  |                    | 2004     |  |   | 2003      
|                                                                  |                    |          | 
|                                                                  |                    |          |  |   | (Restated)
|OPERATING:                                                        |                    |          |  |   |           
|Loss before cumulative effect of changes in accounting principles | $                  | (13,785) |  | $ | (54,053)  
|Adjustments to reconcile to cash provided                        |                    |          |  |   |           
|Depreciation and amortization, including amortization             |                    |          |  |   |           
|included in interest expense                                      |                    | 19,941   |  |   | 20,568    
|Change in operating assets and liabilities                        |                    | 2,839    |  |   | 3,042     
|Change in deferred taxes                                          |                    | 143      |  |   | 47,933    
|Stock-based compensation                                          |                    | 235      |  |   | -         
|                                                                  |                    |          | 
|Cash provided by operating activities                             |                    | 9,373    |  |   | 17,490    
|                                                                  |                    |          |  |   |           
|INVESTING:                                                        |                    |          |  |   |           
|Purchases and construction of property and equipment              |                    | (9,964)  |  |   | (7,601)   
|Other                                                             |                    | (117)    |  |   | (403)     
|                                                                  |                    |          | 
|Cash used in investing activities                                 |                    | (10,081) |  |   | (8,004)   
|                                                                  |                    |          |  |   |           
|FINANCING:                                                        |                    |          |  |   |           
|Debt transactions                                                |                    |          |  |   |           
|Net borrowings (repayments) under revolving credit agreement      |                    | 8,000    |  |   | (3,000)   
|Net repayments of other long-term debt                            |                    | (8,574)  |  |   | (3,752)   
|Debt issuance and refinancing costs                               |                    | (325)    |  |   | (107)     
|                                                                  |                    |          | 
|Cash used in debt transactions                                    |                    | (899)    |  |   | (6,859)   
|                                                                  |                    |          |  |   |           
|Equity transactions                                              |                    |          |  |   |           
|Proceeds from issuance of common stock under                      |                    |          |  |   |           
|stock purchase and option plans                                   |                    | 310      |  |   | 373       
|                                                                  |                    |          | 
|Cash used in financing activities                                 |                    | (589)    |  |   | (6,486)   
|                                                                  |                    |          | 
|                                                                  |                    |          |  |   |           
|Increase (decrease) in cash and equivalents                       |                    | (1,297)  |  |   | 3,000     
|Cash and equivalents, beginning of period                         |                    | 14,410   |  |   | 10,886    
|                                                                  |                    |          | 
|Cash and equivalents, end of period                               | $                  | 13,113   |  | $ | 13,886    
|                                                                  |                    |          | 



---

##### Index

|                                                         |                    |          |  |   |           
|-------------------------------------------------------- | ------------------ | -------- |  | - | ----------
|                                                         | Three months ended
|                                                         | March 31          
|                                                         |                   
|                                                         |                    | 2004     |  |   | 2003      
|                                                         |                    |          | 
|                                                         |                    |          |  |   | (Restated)
|SUPPLEMENTAL CASH FLOWS INFORMATION:                     |                    |          |  |   |           
|                                                         |                    |          |  |   |           
|Changes in operating assets and liabilites:              |                    |          |  |   |           
|Increase in installment contracts receivable             | $                  | (18,765) |  | $ | (13,779)  
|Decrease in other current and other assets               |                    | 2,811    |  |   | 1,235     
|Increase (decrease) in accounts payable                  |                    | (3,704)  |  |   | 5,365     
|Increase in accrued and other liabilities                |                    | 5,832    |  |   | 2,105     
|Increase in deferred revenues                            |                    | 16,665   |  |   | 8,116     
|                                                         |                    |          | 
|Change in operating assets and liabilities               | $                  | 2,839    |  | $ | 3,042     
|                                                         |                    |          | 
|                                                         |                    |          |  |   |           
|Cash payments for interest and income taxes              |                    |          |  |   |           
|were as follows                                         |                    |          |  |   |           
|Interest paid                                            | $                  | 16,482   |  | $ | 5,854     
|Interest capitalized                                     |                    | (458)    |  |   | (218)     
|Income taxes paid (refunded), net                        |                    | (621)    |  |   | 702       
|                                                         |                    |          |  |   |           
|Investing and financing activities exclude the following |                    |          |  |   |           
|non-cash transactions                                   |                    |          |  |   |           
|Acquisitions of property and equipment                   |                    |          |  |   |           
|through capital leases/borrowings                        | $                  | 2,182    |  | $ | 59        
|Restricted stock activity                                |                    | (315)    |  |   | -         



---

##### 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 418 fitness centers at March 31, 2004 concentrated in
29 states and Canada. Additionally, as of April 30, 2004, 23 clubs were operated
pursuant to franchise and joint venture agreements in the United States, Asia,
Mexico, and the Caribbean. 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/A for the year ended December 31,
2003.

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 March 31, 2004, its consolidated statement of operations for the
three months ended March 31, 2004 and 2003, its consolidated statement of
stockholders equity for the three months ended March 31, 2004, and its
consolidated statement of cash flows for the three months ended March 31, 2004
and 2003. With the exception of changes made to the Consolidated Statement of
Cash Flows for the three month period ended March 31, 2003, to effect changes in
accounting fully described in the Companys Annual Report on Form 10-K for
the year ended December 31, 2003, all such adjustments were of a normal and
recurring nature.

The accompanying condensed consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States,
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 2004 presentation.

## Seasonal factors

The Companys operations are subject to seasonal factors and, therefore,
the results of operations for the three months ended March 31, 2004 and 2003 are
not necessarily indicative of the results of operations for the full year.

## Market risk

The Company is exposed to market risk from changes in the interest rates on
certain of its outstanding debt. The outstanding loan balance under its bank
credit facility and the Series 2001-1 accounts receivable-backed variable
funding certificates bear interest at variable rates based upon prevailing
short-term interest rates in the United States and Europe.



---

##### Index

On $100 million of the Series 2001-1 accounts receivable-backed variable funding
certificates, the Company has purchased a 7.75% rate cap extending through the
refinanced period of July 2005. The Company has also entered into interest rate
swap agreements whereby the fixed interest commitment on $200 million of
outstanding principal on the Companys 9.875% Senior Subordinated Notes,
due 2007, was swapped for a variable rate commitment based on the London
Interbank Offered Rate (LIBOR), plus 6.01% (7.245% at March 31, 2004).

|Installment contracts receivable                     |          |           |             |   |          
|---------------------------------------------------- | -------- | --------- | ----------- | - | ---------
|                                                     | March 31 |           | December 31
|                                                     |          | 2004      |             |   | 2003     
|                                                     |          |           |            
|Current:                                             |          |           |             |   |          
|Installment contracts receivable                     | $        | 428,302   |             | $ | 397,719  
|Unearned finance charges                             |          | (43,195)  |             |   | (37,228) 
|Allowance for doubtful receivables and cancellations |          | (123,533) |             |   | (101,941)
|                                                     |          |           |            
|                                                     | $        | 261,574   |             | $ | 258,550  
|                                                     |          |           |            
|                                                     |          |           |             |   |          
|Long-term:                                           |          |           |             |   |          
|Installment contracts receivable                     | $        | 368,477   |             | $ | 344,397  
|Unearned finance charges                             |          | (24,688)  |             |   | (22,458) 
|Allowance for doubtful receivables and cancellations |          | (97,239)  |             |   | (91,130) 
|                                                     |          |           |            
|                                                     | $        | 246,550   |             | $ | 230,809  
|                                                     |          |           |            

|                                      |                    |        |  |   |       
|------------------------------------- | ------------------ | ------ |  | - | ------
|Products and services                 | Three months ended
|                                      | March 31          
|                                      |                   
|                                      |                    | 2004   |  |   | 2003  
|                                      |                    |        | 
|Net revenues:                         |                    |        |  |   |       
|Retail and nutritional supplements    | $                  | 14,910 |  | $ | 15,065
|Personal training                     |                    | 32,511 |  |   | 25,774
|Products and services included in new |                    |        |  |   |       
|membership programs                   |                    | 8,320  |  |   | 7,859 
|Financial services                    |                    | -      |  |   | 1,240 
|                                      |                    |        | 
|                                      |                    | 55,741 |  |   | 49,938
|Operating costs and expenses          |                    | 42,210 |  |   | 43,333
|                                      |                    |        | 
|Operating margin                      | $                  | 13,531 |  | $ | 6,605 
|                                      |                    |        | 
|Margin percentage                     |                    | 24%    |  |   | 13%   



---

##### Index

## Earnings per common
share

Basic loss per common share is computed by dividing net loss by the
weighted-average number of shares of common stock outstanding of 32,717,502 and
32,574,990 for the three months ended March 31, 2004 and 2003, respectively. The
weighted-average number of shares of common stock and common stock equivalents
were 33,416,834 and 32,911,773 for the three months ended March 31, 2004 and
2003, respectively. Diluted loss per share for the three months ended March 31,
2004 and 2003 do not include the effect of common stock equivalents of 699,332
and 336,783, respectively, because the effect would be anti-dilutive. Options
outstanding to purchase 3,533,406 and 3,047,206 shares of common stock at March
31, 2004 and 2003, respectively, were not included in the computation of diluted
loss per share because the exercise prices of the options were greater than
the average market prices of the Companys common shares. The range of
exercise prices per share for these options was between $7.00 and $36.00 and
$6.55 and $36.00 at March 31, 2004 and 2003, respectively.

## Income taxes

At March 31, 2004, for accounting purposes, the Company had approximately
$469,766 of unrecognized federal net operating loss carryforwards, alternative
minimum tax (AMT) credit carryforwards of approximately $5,896 and
AMT net operating loss carryforwards of approximately $329,811. The AMT credits
can be carried forward indefinitely, while the tax loss carryforwards begin to
expire in 2011 and fully expire in 2024. In addition, the Company has
substantial state tax loss carryforwards which began to expire in 2003 and fully
expire in 2024. Based upon the Companys past performance and the
expiration dates of its carryforwards, the ultimate realization of all of the
Companys deferred tax assets cannot be assured. Accordingly, a valuation
allowance has been recorded to reduce deferred tax assets to a level which, more
likely than not, will be realized. The Company will continue to review and
evaluate the valuation allowance.

In accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, the Company reviews the likelihood of
realizing the future benefits of tax loss carryforwards. As a result of this
review, the Company decided in 2003 to increase the valuation allowance, which
resulted in non-cash federal income tax expense.  Also due to the valuation
allowance there was no tax benefit attributable to the 2003 charge for the
cumulative effect of changes in accounting principles.

## Stock Plans

The Company accounts for its stock-based compensation plans, described in the
Companys 2003 Annual Report on Form 10-K/A, using the intrinsic value
method and in accordance with the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost related to option
plans was reflected in net income, as all options granted under those plans had
an exercise price equal to the fair market value of the underlying common stock
on the date of grant. The Company has recorded compensation expense related to
the restricted stock grants which vest over time. The following table
illustrates, in accordance with the provisions of Statement of Financial
Accounting Standards No. 148, Accounting for StockBased
CompensationTransition and Disclosure, the effect on net loss and loss
per share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.



---

##### Index

|                                                  |                    |          |  |   |          
|------------------------------------------------- | ------------------ | -------- |  | - | ---------
|                                                  | Three months ended
|                                                  | March 31          
|                                                  |                   
|                                                  |                    | 2004     |  |   | 2003     
|                                                  |                    |          | 
|Net loss, as reported                             | $                  | (13,785) |  | $ | (635,176)
|Plus: stock-based compensation expense            |                    |          |  |   |          
|included in net loss                              |                    | 235      |  |   | -        
|Less: stock-based compensation expense determined |                    |          |  |   |          
|under fair value based method                     |                    | (1,039)  |  |   | (952)    
|                                                  |                    |          | 
|Pro forma net loss                                | $                  | (14,589) |  | $ | (636,128)
|                                                  |                    |          | 
|Basic and diluted loss per common share           |                    |          |  |   |          
|As reported                                       | $                  | (0.42)   |  | $ | (19.50)  
|Pro forma                                         |                    | (0.45)   |  |   | (19.53)  

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Companys stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in managements
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.

## Guarantees

The Company guarantees the lease on one fitness center, as part of a joint
venture with Holmes Place, Plc. The lease has a 15 year term which began in
May 2002, with current annual rental (subject to escalation) of $611.  The
Company believes that it does not have any obligation to perform under the
guarantee as of March 31, 2004.

## Condensed
Consolidating Financial Statements

Condensed consolidating financial statements present the accounts of Bally Total
Fitness Holding Corporation (Parent), and its Guarantor and
Non-Guarantor subsidiaries, as defined in the indenture to the Bally Total
Fitness Holding Corporation 10 1⁄2% Senior Notes due 2011 (the
Notes) issued in July 2003. The Notes are unconditionally guaranteed, on a
joint and several basis, by the Guarantor subsidiaries including substantially
all domestic subsidiaries of Bally Total Fitness Holding Corporation.
Non-Guarantor subsidiaries include Canadian operations and special purpose
entities for accounts receivable and real estate finance programs.

As defined in the indenture to the Bally Total Fitness Holding Corporation
101⁄2% Senior Notes due 2011, guarantor subsidiaries include:





---

##### Index



The following tables present the condensed consolidating balance sheet at March
31, 2004 and December 31, 2003, the condensed consolidating statements of
operations for the three months ended March 31, 2004 and 2003, and the condensed
consolidating statements of cash flows for the three months ended March 31, 2004
and 2003.



---

##### Index

|                               |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|------------------------------ | -------------- | --------- | ------------ | --------- | ------------ | ------------- | ------------ | ------- | ----- | - | ------------ |  | - | ---------
|                               | March 31, 2004
|                               |               
|                               |                |           |              | Guarantor |              | Non-Guarantor |              |         |       |   | Consolidated
|                               | Parent         |           | Subsidiaries |           | Subsidiaries |               | Eliminations |         | Total
|                               |                |           |              |           |              |               |              |         |      
|ASSETS                         |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|                               |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|Current assets:                |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|Cash and equivalents           | $              | -         |              | $         | 11,211       |               | $            | 1,902   |       | $ | -            |  | $ | 13,113   
|Installment contracts          |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|receivable, net                |                | -         |              |           | 11,757       |               |              | 249,817 |       |   | -            |  |   | 261,574  
|Other current assets           |                | -         |              |           | 35,907       |               |              | 1,353   |       |   | -            |  |   | 37,260   
|                               |                |           |              |           |              |               |              |         |      
|Total current assets           |                | -         |              |           | 58,875       |               |              | 253,072 |       |   | -            |  |   | 311,947  
|                               |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|Installment contracts          |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|receivable, net                |                | -         |              |           | -            |               |              | 246,550 |       |   | -            |  |   | 246,550  
|Property and equipment, net    |                | -         |              |           | 576,480      |               |              | 41,101  |       |   | -            |  |   | 617,581  
|Goodwill                       |                | 31,390    |              |           | 189,274      |               |              | 22,580  |       |   | -            |  |   | 243,244  
|Trademarks                     |                | 6,767     |              |           | 202          |               |              | -       |       |   | -            |  |   | 6,969    
|Intangible assets, net         |                | -         |              |           | 1,812        |               |              | -       |       |   | -            |  |   | 1,812    
|Deferred income taxes          |                | -         |              |           | 1,624        |               |              | -       |       |   | -            |  |   | 1,624    
|Investment in and advances     |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|to subsidiaries                |                | 394,368   |              |           | 221,315      |               |              | -       |       |   | (615,683)    |  |   | -        
|Other assets                   |                | 11,588    |              |           | 4,983        |               |              | 14,630  |       |   | -            |  |   | 31,201   
|                               |                |           |              |           |              |               |              |         |      
|                               | $              | 444,113   |              | $         | 1,054,565    |               | $            | 577,933 |       | $ | (615,683)    |  | $ | 1,460,928
|                               |                |           |              |           |              |               |              |         |      
|LIABILITIES AND                |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|STOCKHOLDERS                  |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|EQUITY (DEFICIT)               |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|                               |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|Current liabilities:           |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|Accounts payable               | $              | 961       |              | $         | 56,603       |               | $            | 226     |       | $ | -            |  | $ | 57,790   
|Deferred income taxes          |                | -         |              |           | 1,403        |               |              | 1,354   |       |   | -            |  |   | 2,757    
|Accrued liabilities            |                | 18,513    |              |           | 74,144       |               |              | 2,335   |       |   | -            |  |   | 94,992   
|Current maturities             |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|of long-term debt              |                | 16,270    |              |           | 3,120        |               |              | 4,006   |       |   | -            |  |   | 23,396   
|Deferred revenues              |                | -         |              |           | 421,349      |               |              | 1,383   |       |   | -            |  |   | 422,732  
|                               |                |           |              |           |              |               |              |         |      
|Total current liabilities      |                | 35,744    |              |           | 556,619      |               |              | 9,304   |       |   | -            |  |   | 601,667  
|                               |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|Long-term debt, less current   |                |           |              |           |              |               |              |         |       |   |              |  |   |          
|maturities                     |                | 579,918   |              |           | 14,611       |               |              | 113,826 |       |   | -            |  |   | 708,355  
|Net affiliate payable          |                | -         |              |           | 660,521      |               |              | 224,925 |       |   | (885,446)    |  |   | -        
|Other liabilities              |                | -         |              |           | 10,613       |               |              | 505     |       |   | -            |  |   | 11,118   
|Deferred revenues              |                | -         |              |           | 310,320      |               |              | 1,017   |       |   | -            |  |   | 311,337  
|Stockholders equity (deficit) |                | (171,549) |              |           | (498,119)    |               |              | 228,356 |       |   | 269,763      |  |   | (171,549)
|                               |                |           |              |           |              |               |              |         |      
|                               | $              | 444,113   |              | $         | 1,054,565    |               | $            | 577,933 |       | $ | (615,683)    |  | $ | 1,460,928
|                               |                |           |              |           |              |               |              |         |      



---

##### Index

|                               |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|------------------------------ | ----------------- | --------- | ------------ | --------- | ------------ | ------------- | ------------ | ------- | ----- | - | ------------ |  | - | ---------
|                               | December 31, 2003
|                               |                  
|                               |                   |           |              | Guarantor |              | Non-Guarantor |              |         |       |   | Consolidated
|                               | Parent            |           | Subsidiaries |           | Subsidiaries |               | Eliminations |         | Total
|                               |                   |           |              |           |              |               |              |         |      
|ASSETS                         |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|                               |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|Current assets:                |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|Cash and equivalents           | $                 | -         |              | $         | 12,895       |               | $            | 1,515   |       | $ | -            |  | $ | 14,410   
|Installment contracts          |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|receivable, net                |                   | -         |              |           | 11,816       |               |              | 246,734 |       |   | -            |  |   | 258,550  
|Other current assets           |                   | -         |              |           | 38,396       |               |              | 1,311   |       |   | -            |  |   | 39,707   
|                               |                   |           |              |           |              |               |              |         |      
|Total current assets           |                   | -         |              |           | 63,107       |               |              | 249,560 |       |   | -            |  |   | 312,667  
|                               |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|Installment contracts          |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|receivable, net                |                   | -         |              |           | -            |               |              | 230,809 |       |   | -            |  |   | 230,809  
|Property and equipment, net    |                   | -         |              |           | 582,465      |               |              | 41,987  |       |   | -            |  |   | 624,452  
|Goodwill                       |                   | 31,390    |              |           | 189,282      |               |              | 22,572  |       |   | -            |  |   | 243,244  
|Trademarks                     |                   | 6,767     |              |           | 202          |               |              | -       |       |   | -            |  |   | 6,969    
|Intangible assets, net         |                   | -         |              |           | 1,901        |               |              | -       |       |   | -            |  |   | 1,901    
|Deferred income taxes          |                   | -         |              |           | 1,313        |               |              | -       |       |   | -            |  |   | 1,313    
|Investment in and advances     |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|to subsidiaries                |                   | 403,553   |              |           | 221,315      |               |              | -       |       |   | (624,868)    |  |   | -        
|Other assets                   |                   | 11,813    |              |           | 5,227        |               |              | 14,885  |       |   | -            |  |   | 31,925   
|                               |                   |           |              |           |              |               |              |         |      
|                               | $                 | 453,523   |              | $         | 1,064,812    |               | $            | 559,813 |       | $ | (624,868)    |  | $ | 1,453,280
|                               |                   |           |              |           |              |               |              |         |      
|LIABILITIES AND                |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|STOCKHOLDERS                  |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|EQUITY (DEFICIT)               |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|                               |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|Current liabilities:           |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|Accounts payable               | $                 | 1,449     |              | $         | 59,601       |               | $            | 444     |       | $ | -            |  | $ | 61,494   
|Deferred income taxes          |                   | -         |              |           | 1,262        |               |              | 1,041   |       |   | -            |  |   | 2,303    
|Accrued liabilities            |                   | 19,859    |              |           | 67,393       |               |              | 2,386   |       |   | -            |  |   | 89,638   
|Current maturities             |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|of long-term debt              |                   | 17,189    |              |           | 3,293        |               |              | 3,999   |       |   | -            |  |   | 24,481   
|Deferred revenues              |                   | -         |              |           | 415,505      |               |              | 3,392   |       |   | -            |  |   | 418,897  
|                               |                   |           |              |           |              |               |              |         |      
|Total current liabilities      |                   | 38,497    |              |           | 547,054      |               |              | 11,262  |       |   | -            |  |   | 596,813  
|                               |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|Long-term debt, less current   |                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|maturities                     |                   | 573,335   |              |           | 16,477       |               |              | 115,818 |       |   | -            |  |   | 705,630  
|Net affiliate payable          |                   | -         |              |           | 679,429      |               |              | 216,432 |       |   | (895,861)    |  |   | -        
|Other liabilities              |                   | -         |              |           | 10,135       |               |              | 504     |       |   | -            |  |   | 10,639   
|Deferred revenues              |                   | -         |              |           | 296,091      |               |              | 2,416   |       |   | -            |  |   | 298,507  
|Stockholders equity (deficit) |                   | (158,309) |              |           | (484,374)    |               |              | 213,381 |       |   | 270,993      |  |   | (158,309)
|                               |                   |           |              |           |              |               |              |         |      
|                               | $                 | 453,523   |              | $         | 1,064,812    |               | $            | 559,813 |       | $ | (624,868)    |  | $ | 1,453,280
|                               |                   |           |              |           |              |               |              |         |      



---

##### Index

|                                  |                                   |          |              |           |              |               |              |         |       |   |              |  |   |         
|--------------------------------- | --------------------------------- | -------- | ------------ | --------- | ------------ | ------------- | ------------ | ------- | ----- | - | ------------ |  | - | --------
|                                  | Three Months Ended March 31, 2004
|                                  |                                  
|                                  |                                   |          |              | Guarantor |              | Non-Guarantor |              |         |       |   | Consolidated
|                                  | Parent                            |          | Subsidiaries |           | Subsidiaries |               | Eliminations |         | Total
|                                  |                                   |          |              |           |              |               |              |         |      
|Net revenues:                     |                                   |          |              |           |              |               |              |         |       |   |              |  |   |         
|Membership revenue                | $                                 | -        |              | $         | 177,470      |               | $            | 6,700   |       | $ | -            |  | $ | 184,170 
|Products and services             |                                   | -        |              |           | 53,425       |               |              | 2,316   |       |   | -            |  |   | 55,741  
|Miscellaneous revenue             |                                   | -        |              |           | 4,408        |               |              | 424     |       |   | -            |  |   | 4,832   
|                                  |                                   |          |              |           |              |               |              |         |      
|                                  |                                   | -        |              |           | 235,303      |               |              | 9,440   |       |   | -            |  |   | 244,743 
|Operating costs and expenses:     |                                   |          |              |           |              |               |              |         |       |   |              |  |   |         
|Fitness center operations         |                                   | -        |              |           | 151,905      |               |              | 5,275   |       |   | -            |  |   | 157,180 
|Products and services             |                                   | -        |              |           | 40,393       |               |              | 1,817   |       |   | -            |  |   | 42,210  
|Member processing and             |                                   |          |              |           |              |               |              |         |       |   |              |  |   |         
|collection centers                |                                   | -        |              |           | 9,236        |               |              | 3,495   |       |   | -            |  |   | 12,731  
|Advertising                       |                                   | -        |              |           | 19,517       |               |              | 321     |       |   | -            |  |   | 19,838  
|General and administrative        |                                   | 1,103    |              |           | 9,124        |               |              | 423     |       |   | -            |  |   | 10,650  
|Depreciation and amortization     |                                   | -        |              |           | 18,369       |               |              | 737     |       |   | -            |  |   | 19,106  
|                                  |                                   |          |              |           |              |               |              |         |      
|                                  |                                   | 1,103    |              |           | 248,544      |               |              | 12,068  |       |   | -            |  |   | 261,715 
|                                  |                                   |          |              |           |              |               |              |         |      
|Operating loss                    |                                   | (1,103)  |              |           | (13,241)     |               |              | (2,628) |       |   | -            |  |   | (16,972)
|                                  |                                   |          |              |           |              |               |              |         |       |   |              |  |   |         
|Equity in net income (loss)       |                                   |          |              |           |              |               |              |         |       |   |              |  |   |         
|of subsidiaries                   |                                   | 1,230    |              |           | -            |               |              | -       |       |   | (1,230)      |  |   | -       
|Finance charges earned            |                                   | -        |              |           | -            |               |              | 20,137  |       |   | -            |  |   | 20,137  
|Interest expense                  |                                   | (13,912) |              |           | (154)        |               |              | (2,470) |       |   | -            |  |   | (16,536)
|Other, net                        |                                   | -        |              |           | (50)         |               |              | (64)    |       |   | -            |  |   | (114)   
|                                  |                                   |          |              |           |              |               |              |         |      
|                                  |                                   | (12,682) |              |           | (204)        |               |              | 17,603  |       |   | (1,230)      |  |   | 3,487   
|                                  |                                   |          |              |           |              |               |              |         |      
|Income (loss) before income taxes |                                   | (13,785) |              |           | (13,445)     |               |              | 14,975  |       |   | (1,230)      |  |   | (13,485)
|Income tax provision              |                                   | -        |              |           | (300)        |               |              | -       |       |   | -            |  |   | (300)   
|                                  |                                   |          |              |           |              |               |              |         |      
|Net income (loss)                 | $                                 | (13,785) |              | $         | (13,745)     |               | $            | 14,975  |       | $ | (1,230)      |  | $ | (13,785)
|                                  |                                   |          |              |           |              |               |              |         |      



---

##### Index

|                                        |                                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|--------------------------------------- | --------------------------------- | --------- | ------------ | --------- | ------------ | ------------- | ------------ | ------- | ----- | - | ------------ |  | - | ---------
|                                        | Three Months Ended March 31, 2003
|                                        |                                  
|                                        |                                   |           |              | Guarantor |              | Non-Guarantor |              |         |       |   | Consolidated
|                                        | Parent                            |           | Subsidiaries |           | Subsidiaries |               | Eliminations |         | Total
|                                        |                                   |           |              |           |              |               |              |         |      
|Net revenues:                           |                                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|Membership revenue                      | $                                 | -         |              | $         | 178,827      |               | $            | 6,624   |       | $ | -            |  | $ | 185,451  
|Products and services                   |                                   | -         |              |           | 47,948       |               |              | 1,990   |       |   | -            |  |   | 49,938   
|Miscellaneous revenue                   |                                   | -         |              |           | 4,469        |               |              | 382     |       |   | -            |  |   | 4,851    
|                                        |                                   |           |              |           |              |               |              |         |      
|                                        |                                   | -         |              |           | 231,244      |               |              | 8,996   |       |   | -            |  |   | 240,240  
|Operating costs and expenses:           |                                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|Fitness center operations               |                                   | -         |              |           | 141,885      |               |              | 5,491   |       |   | -            |  |   | 147,376  
|Products and services                   |                                   | -         |              |           | 41,857       |               |              | 1,476   |       |   | -            |  |   | 43,333   
|Member processing and                   |                                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|collection centers                      |                                   | -         |              |           | 6,325        |               |              | 5,099   |       |   | -            |  |   | 11,424   
|Advertising                             |                                   | -         |              |           | 17,581       |               |              | 352     |       |   | -            |  |   | 17,933   
|General and administrative              |                                   | 961       |              |           | 6,357        |               |              | 849     |       |   | -            |  |   | 8,167    
|Depreciation and amortization           |                                   | -         |              |           | 18,829       |               |              | 727     |       |   | -            |  |   | 19,556   
|                                        |                                   |           |              |           |              |               |              |         |      
|                                        |                                   | 961       |              |           | 232,834      |               |              | 13,994  |       |   | -            |  |   | 247,789  
|                                        |                                   |           |              |           |              |               |              |         |      
|Operating loss                          |                                   | (961)     |              |           | (1,590)      |               |              | (4,998) |       |   | -            |  |   | (7,549)  
|                                        |                                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|Equity in income (loss) from continuing |                                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|operations of subsidiaries              |                                   | (41,606)  |              |           | -            |               |              | -       |       |   | 41,606       |  |   | -        
|Finance charges earned                  |                                   | -         |              |           | -            |               |              | 18,883  |       |   | -            |  |   | 18,883   
|Interest expense                        |                                   | (10,982)  |              |           | (501)        |               |              | (2,502) |       |   | -            |  |   | (13,985) 
|Other, net                              |                                   | -         |              |           | (55)         |               |              | (61)    |       |   | -            |  |   | (116)    
|                                        |                                   |           |              |           |              |               |              |         |      
|                                        |                                   | (52,588)  |              |           | (556)        |               |              | 16,320  |       |   | 41,606       |  |   | 4,782    
|                                        |                                   |           |              |           |              |               |              |         |      
|Income (loss) from continuing           |                                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|operations before income taxes          |                                   | (53,549)  |              |           | (2,146)      |               |              | 11,322  |       |   | 41,606       |  |   | (2,767)  
|Income tax provision                    |                                   | -         |              |           | (50,782)     |               |              | -       |       |   | -            |  |   | (50,782) 
|                                        |                                   |           |              |           |              |               |              |         |      
|Income (loss) from continuing           |                                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|operations                              |                                   | (53,549)  |              |           | (52,928)     |               |              | 11,322  |       |   | 41,606       |  |   | (53,549) 
|Loss from discontinued operations       |                                   | (504)     | *            |           | -            |               |              | (504)   |       |   | 504          |  |   | (504)    
|                                        |                                   |           |              |           |              |               |              |         |      
|Income (loss) before cumulative         |                                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|effect of changes in accounting         |                                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|principles                              |                                   | (54,053)  |              |           | (52,928)     |               |              | 10,818  |       |   | 42,110       |  |   | (54,053) 
|Cumulative effect of changes in         |                                   |           |              |           |              |               |              |         |       |   |              |  |   |          
|accounting principles                   |                                   | (581,123) | *            |           | (579,471)    |               |              | (1,652) |       |   | 581,123      |  |   | (581,123)
|                                        |                                   |           |              |           |              |               |              |         |      
|Net income (loss)                       | $                                 | (635,176) |              | $         | (632,399)    |               | $            | 9,166   |       | $ | 623,233      |  | $ | (635,176)
|                                        |                                   |           |              |           |              |               |              |         |      

| | * | Equity in
amounts from subsidiaries related to discontinued operations and cumulative
effect of changes in accounting principles.
| | - | ---------------------------------------------------------------------------------------------------------------------------------



---

##### Index

|                                            |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|------------------------------------------- | --------------------------------- | -------- | ------------ | --------- | ------------ | ------------- | ------------ | -------- | ----- | - | ------------ |  | - | --------
|                                            | Three Months Ended March 31, 2004
|                                            |                                  
|                                            |                                   |          |              | Guarantor |              | Non-Guarantor |              |          |       |   | Consolidated
|                                            | Parent                            |          | Subsidiaries |           | Subsidiaries |               | Eliminations |          | Total
|                                            |                                   |          |              |           |              |               |              |          |      
|OPERATING:                                  |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|Net income (loss)                           | $                                 | (13,785) |              | $         | (13,745)     |               | $            | 14,975   |       | $ | (1,230)      |  | $ | (13,785)
|Adjustments to reconcile to                 |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|cash provided                              |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|Depreciation and amortization,              |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|including amortization                      |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|included in interest expense                |                                   | 572      |              |           | 18,460       |               |              | 909      |       |   | -            |  |   | 19,941  
|Change in operating assets                  |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|and liabilities                             |                                   | (1,857)  |              |           | 26,926       |               |              | (22,087) |       |   | -            |  |   | 2,982   
|Change in affiliate payable                 |                                   | 9,185    |              |           | (19,157)     |               |              | 8,742    |       |   | 1,230        |  |   | -       
|Stock-based compensation                    |                                   | 235      |              |           | -            |               |              | -        |       |   | -            |  |   | 235     
|                                            |                                   |          |              |           |              |               |              |          |      
|Cash provided by (used in)                  |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|operating activities                        |                                   | (5,650)  |              |           | 12,484       |               |              | 2,539    |       |   | -            |  |   | 9,373   
|                                            |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|INVESTING:                                  |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|Purchases and construction                  |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|of property and equipment                   |                                   | -        |              |           | (9,914)      |               |              | (50)     |       |   | -            |  |   | (9,964) 
|Other                                       |                                   | -        |              |           | -            |               |              | (117)    |       |   | -            |  |   | (117)   
|                                            |                                   |          |              |           |              |               |              |          |      
|Cash used in investing activities           |                                   | -        |              |           | (9,914)      |               |              | (167)    |       |   | -            |  |   | (10,081)
|                                            |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|FINANCING:                                  |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|Debt transactions                          |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|Net borrowings under revolving              |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|credit agreement                            |                                   | 8,000    |              |           | -            |               |              | -        |       |   | -            |  |   | 8,000   
|Net repayments of other                     |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|long-term debt                              |                                   | (2,335)  |              |           | (4,254)      |               |              | (1,985)  |       |   | -            |  |   | (8,574) 
|Debt issuance and refinancing               |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|costs                                       |                                   | (325)    |              |           | -            |               |              | -        |       |   | -            |  |   | (325)   
|                                            |                                   |          |              |           |              |               |              |          |      
|Cash provided by (used in)                  |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|debt transactions                           |                                   | 5,340    |              |           | (4,254)      |               |              | (1,985)  |       |   | -            |  |   | (899)   
|                                            |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|Equity transactions                        |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|Proceeds from issuance of                   |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|common stock under stock                    |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|purchase and option plans                   |                                   | 310      |              |           | -            |               |              | -        |       |   | -            |  |   | 310     
|                                            |                                   |          |              |           |              |               |              |          |      
|Cash provided by (used in)                  |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|financing activities                        |                                   | 5,650    |              |           | (4,254)      |               |              | (1,985)  |       |   | -            |  |   | (589)   
|                                            |                                   |          |              |           |              |               |              |          |      
|                                            |                                   |          |              |           |              |               |              |          |       |   |              |  |   |         
|Increase (decrease) in cash and equivalents |                                   | -        |              |           | (1,684)      |               |              | 387      |       |   | -            |  |   | (1,297) 
|Cash and equivalents, beginning of period   |                                   | -        |              |           | 12,895       |               |              | 1,515    |       |   | -            |  |   | 14,410  
|                                            |                                   |          |              |           |              |               |              |          |      
|Cash and equivalents, end of period         | $                                 | -        |              | $         | 11,211       |               | $            | 1,902    |       | $ | -            |  | $ | 13,113  
|                                            |                                   |          |              |           |              |               |              |          |      



---

##### Index

|                                            |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|------------------------------------------- | -------------------------------------------- | -------- | ------------ | --------- | ------------ | ------------- | ------------ | -------- | ----- | - | ------------ |  | - | --------
|                                            | Three Months Ended March 31, 2003 (Restated)
|                                            |                                             
|                                            |                                              |          |              | Guarantor |              | Non-Guarantor |              |          |       |   | Consolidated
|                                            | Parent                                       |          | Subsidiaries |           | Subsidiaries |               | Eliminations |          | Total
|                                            |                                              |          |              |           |              |               |              |          |      
|OPERATING:                                  |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|Net income (loss) before cumulative         |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|effect of changes in accounting             |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|principles                                  | $                                            | (54,053) |              | $         | (52,928)     |               | $            | 10,818   |       | $ | 42,110       |  | $ | (54,053)
|Adjustments to reconcile to                 |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|cash provided                              |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|Depreciation and amortization,              |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|including amortization                      |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|included in interest expense                |                                              | 708      |              |           | 18,895       |               |              | 965      |       |   | -            |  |   | 20,568  
|Change in operating assets                  |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|and liabilities                             |                                              | 5,128    |              |           | 63,739       |               |              | (17,892) |       |   | -            |  |   | 50,975  
|Change in net affiliate balances            |                                              | 55,679   |              |           | (14,751)     |               |              | 1,182    |       |   | (42,110)     |  |   | -       
|                                            |                                              |          |              |           |              |               |              |          |      
|Cash provided by (used in)                  |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|operating activities                        |                                              | 7,462    |              |           | 14,955       |               |              | (4,927)  |       |   | -            |  |   | 17,490  
|                                            |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|INVESTING:                                  |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|Purchases and construction                  |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|of property and equipment                   |                                              | -        |              |           | (7,562)      |               |              | (39)     |       |   | -            |  |   | (7,601) 
|Other                                       |                                              | -        |              |           | -            |               |              | (403)    |       |   | -            |  |   | (403)   
|                                            |                                              |          |              |           |              |               |              |          |      
|Cash used in investing activities           |                                              | -        |              |           | (7,562)      |               |              | (442)    |       |   | -            |  |   | (8,004) 
|                                            |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|FINANCING:                                  |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|Debt transactions                          |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|Net repayments under revolving              |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|credit agreement                            |                                              | (3,000)  |              |           | -            |               |              | -        |       |   | -            |  |   | (3,000) 
|Net borrowings (repayments) of              |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|other long-term debt                        |                                              | (4,835)  |              |           | (1,240)      |               |              | 2,323    |       |   | -            |  |   | (3,752) 
|Debt issuance and refinancing               |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|costs                                       |                                              | -        |              |           | -            |               |              | (107)    |       |   | -            |  |   | (107)   
|                                            |                                              |          |              |           |              |               |              |          |      
|Cash provided by (used in)                  |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|debt transactions                           |                                              | (7,835)  |              |           | (1,240)      |               |              | 2,216    |       |   | -            |  |   | (6,859) 
|                                            |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|Equity transactions                        |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|Proceeds from issuance of                   |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|common stock under stock                    |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|purchase and option plans                   |                                              | 373      |              |           | -            |               |              | -        |       |   | -            |  |   | 373     
|                                            |                                              |          |              |           |              |               |              |          |      
|Cash provided by (used in)                  |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|financing activities                        |                                              | (7,462)  |              |           | (1,240)      |               |              | 2,216    |       |   | -            |  |   | (6,486) 
|                                            |                                              |          |              |           |              |               |              |          |      
|                                            |                                              |          |              |           |              |               |              |          |       |   |              |  |   |         
|Increase (decrease) in cash and equivalents |                                              | -        |              |           | 6,153        |               |              | (3,153)  |       |   | -            |  |   | 3,000   
|Cash and equivalents, beginning of period   |                                              | -        |              |           | 9,198        |               |              | 1,688    |       |   | -            |  |   | 10,886  
|                                            |                                              |          |              |           |              |               |              |          |      
|Cash and equivalents, end of period         | $                                            | -        |              | $         | 15,351       |               | $            | (1,465)  |       | $ | -            |  | $ | 13,886  
|                                            |                                              |          |              |           |              |               |              |          |      



---

##### Index

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

## Comparison of
the Three Months Ended March 31, 2004 and 2003

Net revenue for the first quarter of 2004 was $244.7 million compared to $240.2
million in the 2003 quarter. This represents a 2% increase in total net revenue
or $4.5 million. This increase in total net revenue resulted from the following:

| |  | Membership
revenue decreased to $184.2 million from $185.5 million in the 2003 quarter, a
decrease of $1.3 million (1%) from the prior year quarter.                                                                 
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                      
| |  | Products and services
revenue increased to $55.7 million from $49.9 million in the first quarter of
2003, an increase of $5.8 million (12%), primarily reflecting the continued
growth of personal training services.
| |   |                                                                                                                                                                                                                      
| |  | Miscellaneous revenue of
$4.8 million was flat compared to the prior year quarter.                                                                                                                                   

The weighted-average number of fitness centers increased to 418 from 412 in the
first quarter of 2003, an increase of 1%. Our operations are subject to
seasonal factors and, therefore, the results of operations for the three months
ended March 31, 2004 and 2003 are not necessarily indicative of the results
of operations for the full year.

Gross committed membership fees is a measure which includes the total potential
future value of all initial membership fee revenue, dues revenue, earned finance
charges and membership-related products and services revenue from new membership
sales originations in a period. It is measured on a gross basis before
consideration of any uncollectible amounts. We track gross committed membership
revenue as an indicator of the success of our current sales activities and
believe it to be a useful measure to allow investors to understand current
trends in membership sales.

The following table shows new membership originations and other key data for the
quarter ended March 31, 2004 and 2003 (in thousands, except months and location
data):

|                                             |                    |         |  |   |        
|-------------------------------------------- | ------------------ | ------- |  | - | -------
|                                             | Three months ended
|                                             | March 31          
|                                             |                   
|                                             |                    | 2004    |  |   | 2003   
|                                             |                    |         | 
|New joining members                          |                    | 325     |  |   | 244    
|Average committed monthly fee (dollars)      | $                  | 38.53   |  | $ | 41.74  
|Average committed duration (in months)       |                    | 30.0    |  |   | 30.4   
|Gross committed membership fees              | $                  | 375,614 |  | $ | 309,789
|                                             |                    |         |  |   |        
|Supplemental operating data:                 |                    |         |  |   |        
|Weighted average fitness centers (locations) |                    | 418     |  |   | 412    
|Members (end of period)                      |                    | 4,029   |  |   | 3,970  



---

##### Index

Gross committed membership fees originated during the first three months of 2004
increased 21% compared to the prior year quarter, with a 15% increase at same
clubs. The number of new members joining increased 33% during the first three
months of 2004 compared to the prior year quarter, with a 26% increase at same
clubs. The average committed duration of memberships originated during the first
three months of 2004 decreased 1% compared to the prior year quarter. The gross
committed monthly membership fees per member originated during the first three
months of 2004 averaged $38.53 versus $41.74 in the prior year quarter, an 8%
decrease. The decrease in the monthly average membership price is due to an
increase in the sale of multiple person family memberships.

Fitness center operating expenses increased $9.8 million (7%) from the first
quarter of 2003, reflecting increases in occupancy, insurance, and sales
compensation costs. Sales compensation costs increased as a result of the
increase in gross committed membership fees noted above. Products and services
expenses decreased $1.1 million (3%) due to reducing the number of memberships
containing nutritional products and personal training in addition to cost
controls implemented during the later half of 2003. The operating margin from
products and services increased to $13.5 million in the first quarter of 2004
from the prior year quarter of $6.6 million, a 105% increase with a margin of
24% in the 2004 quarter compared to 13% in the prior year. Member processing and
collection center expenses increased $1.3 million (11%) from first quarter 2003,
reflecting higher costs of operations. Advertising expenses increased $1.9
million (11%) compared to the prior year quarter as a result of a planned
increase in expenditures related to our new marketing approaches to increase
gross committed membership fees. General and administrative expenses increased
$2.5 million (30%) compared to the prior quarter reflecting increased insurance,
compensation, and professional fee related costs. Depreciation and amortization
expense decreased $.5 million (2%) compared to the prior year quarter reflecting
our strategy of reduced capital spending.

The operating loss for the first quarter of 2004 was $17.0 million compared to
an operating loss of $7.5 million in the first quarter of 2003. This increase of
$9.5 million was due to a $4.5 million increase in net revenue (2%), offset by
an increase in operating costs and expenses before depreciation and amortization
of $14.4 million (6%) and a decrease in depreciation and amortization of $.5
million.



---

##### Index

EBITDA from continuing operations is defined as net income (loss) before
depreciation and amortization, income taxes and interest expense (and cumulative
effect of accounting change and loss from discontinued operations where
applicable). EBITDA as adjusted additionally excludes stock-based compensation
and other, net. EBITDA as adjusted was $22.5 million for the first quarter of
2004 versus $30.9 million for the prior year quarter. We believe this
information is useful given the significance of our depreciation and
amortization and because of our highly leveraged financial position. The table
below includes a reconciliation of net loss to EBITDA from continuing
operations and EBITDA as adjusted.

|                                        |                    |          |  |   |          
|--------------------------------------- | ------------------ | -------- |  | - | ---------
|                                        | Three months ended
|                                        | March 31          
|                                        |                   
|                                        |                    | 2004     |  |   | 2003     
|                                        |                    |          | 
|Net loss                                | $                  | (13,785) |  | $ | (635,176)
|Add:                                    |                    |          |  |   |          
|Depreciation and amortization           |                    | 19,106   |  |   | 19,556   
|Interest expense                        |                    | 16,536   |  |   | 13,985   
|Income tax provision                    |                    | 300      |  |   | 50,782   
|Loss from discontinued operations       |                    | -        |  |   | 504      
|Cumulative effect of accounting changes |                    | -        |  |   | 581,123  
|                                        |                    |          | 
|EBITDA from continuing operations       |                    | 22,157   |  |   | 30,774   
|Add:                                    |                    |          |  |   |          
|Stock-based compensation                |                    | 235      |  |   | -        
|Other, net                              |                    | 114      |  |   | 116      
|                                        |                    |          | 
|EBITDA as adjusted                      | $                  | 22,506   |  | $ | 30,890   
|                                        |                    |          | 

Finance charges earned in excess of interest expense totaled $3.6 million in the
first quarter of 2004, a decrease of $1.3 million in the prior year quarter
resulting principally from a higher cost of capital following our debt
refinancing in July 2003.

The Company has reported as discontinued operations an internet-based start-up
company which was liquidated in the second quarter of 2003. As a result, a loss
from discontinued operations of $.5 million was recorded during the first
quarter of 2003 related to the liquidation of this company.



---

##### Index

## Liquidity and Capital Resources

Cash flows from operating activities were $9.4 million in the first three months
of 2004, compared to $17.5 million in the 2003 period. Free cash flow (cash
provided from operations, less cash used in investing activities) was a
deficit of $.7 million for the three months ended March 31, 2004, compared to
free cash flow of $9.5 million in the first three months of 2003. This decrease
was primarily due to a change in the timing of interest payments resulting from
the refinancing of a portion of our long-term debt in 2003. We are disclosing
free cash flow because management believes that it is an important measure of
liquidity and investors are focused on our ability to reduce our overall debt.
The following table is a reconciliation of cash provided by operating activities
to free cash flow (deficit) for the three months ended March 31, 2004 and 2003
(in thousands):

|                                        |                    |          |  |   |        
|--------------------------------------- | ------------------ | -------- |  | - | -------
|                                        | Three months ended
|                                        | March 31          
|                                        |                   
|                                        |                    | 2004     |  |   | 2003   
|                                        |                    |          | 
|Cash provided by operating activities   | $                  | 9,373    |  | $ | 17,490 
|Less: Cash used in investing activities |                    | (10,081) |  |   | (8,004)
|                                        |                    |          | 
|Free cash flow (deficit)                | $                  | (708)    |  | $ | 9,486  
|                                        |                    |          | 

Capital expenditures totaled $10.1 million in the first three months of 2004
compared to $8.0 million in the 2003 period. Capital expenditures for 2004 are
expected to be less than $45 million.

In July 2003, the Company completed the refinancing of its existing $132 million
term loan and $56 million outstanding on its revolving credit agreement by
issuing $235 million in aggregate principal of 10 1⁄2% Senior Notes due 2011
in two offerings under Rule 144A and Regulation S under the Securities Act of
1933, as amended. The Company also entered into a new $100 million Senior
Secured Revolving Credit Facility due 2008. In addition, in 2003 the Company
paid down $55 million on its $155 million Securitization Series 2001-1 and
extended the revolving period on the balance of $100 million through July 2005.
Monthly amortization on the Series 2001-1 of $5 million begins in November 2004.
The amount available under the revolving credit facility is reduced by any
outstanding letters of credit, which cannot exceed $30 million. As of April 30,
2004, the Company had outstanding $6 million in letters of credit and
availability of $47.1 million on its $100 million revolving credit line. As of
March 31, 2004, our debt service requirements, including interest, through March
31, 2005 were approximately $106.4 million, including $25 million in principal
payments on the securitization. We expect to refinance the securitization
facility prior to the beginning of the amortization period, although there are
no assurances that the refinancing will be completed. We believe that we will be
able to satisfy these short-term requirements for debt service and capital
expenditures out of available cash balances, cash flow from operations and
borrowings on the revolving credit facility.

On September 8, 2003, the Company entered into interest rate swap agreements
whereby the fixed interest commitment on $200 million of outstanding principal
of the Companys 9.875% Senior Subordinated Notes due 2007 was swapped
for a variable rate commitment based on the LIBOR rate plus 6.01%. As a result,
interest expense for the 2004 quarter was reduced by approximately $1.3 million.



---

##### Index

## 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 3.  
Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risk from changes in the interest rates on
certain of its outstanding debt. The outstanding loan balance under its bank
credit facility and the Series 2001-1 accounts receivable-backed variable
funding certificates bear interest at variable rates based upon prevailing
short-term interest rates in the United States and Europe.

The Company has an 8.5% interest rate cap on the Series 2001-1 accounts
receivable-backed variable funding certificates which covers the outstanding
$100 million (as of March 31, 2004) of principal through its original principal
repayment schedule. Additionally, on $100 million of the variable funding
certificates which were refinanced, the Company has purchased a 7.75% rate cap
extending through the refinanced period. The Company has also entered into
interest rate swap agreements whereby the fixed interest commitment on $200
million of outstanding principal on the Companys 9.875% Senior
Subordinated Notes, due 2007, was swapped for a variable rate commitment based
on the LIBOR rate, plus 6.01% (7.245% at March 31, 2004).

## Item 4.  
Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Companys Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the Commissions rules and forms, and that such
information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Acting Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under
the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and the Companys
Acting Chief Financial Officer, of the effectiveness of the design and operation
of the Companys disclosure controls and procedures as of March 31, 2004,
the end of the quarter covered by this Report. Based on that evaluation,
including the consideration of the matters described below, the Companys
Chief Executive Officer and Acting Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective at the
reasonable assurance level as of March 31, 2004.

During 2003 the Company changed its accounting methods effective January 1, 2003
related to the recognition of revenue from membership contracts, membership
origination costs, and asset retirement obligations. In applying the new method
of membership revenue accounting, in consultation with its independent auditors,
it was determined that the methods and processes related to accounting for the
deferral of revenue related to prepayments of non-obligatory dues revenue
resulted in errors. As a result, the Company has presented restated financial
statements contained in its 2003 Annual Report on Form 10-K/A correcting the
errors in prior periods, and has been informed by its independent auditors that
the processes and methods giving rise to the errors are indicative of a material
weakness in internal accounting control with respect to such processes and
methods. The Company has made changes to its systems and processes related to
the deferral of prepayments of non-obligatory dues revenue, and believes its
current controls over such systems and processes are effective at the
reasonable assurance level.



---

##### Index

# BALLY TOTAL FITNESS HOLDING CORPORATION

As a result of the changes in accounting effective January 1, 2003, the Company
has developed new procedures and controls regarding membership revenue
recognition, membership origination costs and asset retirement obligations.
Other than the changes enumerated here, there were no other significant changes
in the Companys internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation
and there were no significant deficiencies or material weaknesses that required
corrective actions.

# PART II.  
OTHER INFORMATION

## Item 2.  
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None.

## Item 5.  
Other Information

As previously reported, as of March 25, 2004, Ernst & Young LLP resigned as
independent auditors for the Company effective as of the filing with the
Commission of this Quarterly Report on Form 10-Q for the quarter ending March
31, 2004.

Ernst & Young LLPs reports on the Companys financial statements
for the years ended December 31, 2003 and 2002 (as restated) did not contain an
adverse opinion or a disclaimer of opinion, and were not qualified or modified
as to uncertainty, audit scope, or accounting principles.

In connection with its audits of the financial statements of the Company as of
December 31, 2003 and 2002 and for the years then ended and through May 10,
2004, there were no disagreements with Ernst & Young LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Ernst & Young LLP, would have caused them to make reference thereto in their
report on the Companys financial statements for such years.

During 2003 the Company changed its accounting methods effective January 1, 2003
related to the recognition of revenue from membership contracts, membership
origination costs, and asset retirement obligations. In applying the new method
of membership revenue accounting, in consultation with its independent auditors,
it was determined that the methods and processes related to accounting for the
deferral of revenue related to prepayments of non-obligatory dues revenue
resulted in errors. As a result, the Company has presented restated financial
statements contained in its 2003 Annual Report on Form 10-K/A correcting the
errors in prior periods, and has been informed by its independent auditors that
the processes and methods giving rise to the errors are indicative of a material
weakness in internal accounting control with respect to such processes and
methods.

The Company has made changes to its systems and processes related to the
deferral of prepayments of non-obligatory dues revenue, and believes its current
controls over such systems and processes are effective.

During the years ended December 31, 2003 and 2002 and through May 10, 2004,
there have been no other reportable events (as defined in Regulation S-K Item
304(a)(1)(v)).

As of May 10, 2004, the Audit Committee has not engaged a new auditor for the
Company but is in the process of reviewing proposals from various firms.



---

##### Index

The Company has received a letter from Ernst & Young LLP addressed to the
Commission stating that it agrees with the above statement, except for the
statements contained in the fifth and seventh paragraphs above, with which it
has no basis to agree or disagree. A copy of that letter is filed as
Exhibit 16 to this report.

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

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

| | Exhibit 16         Letter re change in certifying accountant.
| | -------------------------------------------------------------

| | Exhibit 31.1     Certification of the Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | Exhibit 31.2     Certification of the Acting Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | Exhibit 32.1     Certification of the Chief Executive
Officer and Acting Chief Financial Officer 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:
| | --- | --------------------

| | 1. | On
March 12, 2004 we filed a Current Report on Form 8-K attaching a press
release announcing our earnings for the year ended December 31, 2003.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------



---

##### 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/ William G. Fanelli
| | --- | ----------------------

| |                                                      
| | -----------------------------------------------------
| | William G. Fanelli                                   
| | Senior
Vice President, Acting Chief Financial Officer
| | (principal financial officer)