TOWN SPORTS INTERNATIONAL INC, S-4, 1997-11-24

TOWN SPORTS INTERNATIONAL INC
S-4, 1997-11-24

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As filed with the Securities and Exchange Commission on November 24, 1997

Registration No. 333-
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TOWN SPORTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

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<S> <C> <C>
NEW YORK 7991 13-2749906
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

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888 SEVENTH AVENUE
NEW YORK, NEW YORK 10106
TELEPHONE: (212) 246-6700
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
------------------------------

C/O MARK SMITH

CHIEF EXECUTIVE OFFICER

TOWN SPORTS INTERNATIONAL, INC.

888 SEVENTH AVENUE

NEW YORK, NEW YORK 10106

TELEPHONE: (212) 246-6700

(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------

COPY TO:

JOSHUA N. KORFF
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Telephone: (212) 446-4800
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective. If the
securities being registered on this Form are being offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
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CALCULATION OF REGISTRATION FEE

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<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE
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Town Sports International's 9 3/4% Senior Notes
due 2004....................................... $85,000,000 $1,000 $85,000,000 $25,757.58
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(1) Estimated solely for the purpose of calculating the registration fee.
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL NOR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 24, 1997

PRELIMINARY PROSPECTUS

OFFER FOR ALL OUTSTANDING 9 3/4% SENIOR NOTES DUE 2004

IN EXCHANGE FOR SERIES B 9 3/4% SENIOR NOTES DUE 2004 OF

TOWN SPORTS INTERNATIONAL

THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,

NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED.

TOWN SPORTS INTERNATIONAL ("TSI" and, collectively with its subsidiaries,
the" Company") hereby offers to exchange an aggregate principal amount of up to
$85,000,000 of its Series B 9 3/4% Senior Notes due 2004 (the "New Notes") for a
like principal amount of its 9 3/4% Senior Notes due 2004 (the "Old Notes")
outstanding on the date hereof upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the "Exchange Offer"). The New Notes and the Old Notes are
collectively hereafter referred to as the "Notes." The terms of the New Notes
are identical in all material respects to those of the Old Notes, except for
certain transfer restrictions and registration rights relating to the Old Notes.
The New Notes will evidence the same debt as the Old Notes and will be issued
pursuant to, and entitled to the benefits of the Indenture governing the Old
Notes dated October 16, 1997 (the "Indenture"). The New Notes will be general
unsecured obligations of the Company and will rank PARI PASSU in right of
payment with all existing and future unsubordinated indebtedness of the Company
and senior in right of payment with all existing and future subordinated
indebtedness of the Company. The Notes will be effectively subordinated in right
of payment to all secured indebtedness of the Company (including indebtedness
incurred under the New Credit Facility). As of August 31, 1997, on a pro forma
basis after giving effect to the Initial Offering (as defined), the Company
would have had approximately $90.0 million in indebtedness outstanding and $13.9
million of availability under the New Credit Facility.

Upon a Change of Control (as defined), (i) the Company will have the option,
at any time on or prior to October 15, 2002, to redeem the Notes in whole but
not in part at a redemption price equal to 100% of the principal amount thereof,
plus the Applicable Premium (as defined) as of, and accrued and unpaid interest,
if any, to the date of redemption and (ii) if the Company does not so redeem the
Notes or if such Change of Control occurs after October 15, 2002, the Company
will be required to make an offer to purchase all outstanding Notes at a price
equal to 101% of the principal amount thereof plus accrued interest to the date
of purchase. See "Description of Notes."

The Company will accept for exchange any and all Notes validly tendered and
not withdrawn prior to 5:00 p.m., New York City time, on , 1997, unless
extended by the Company in its sole discretion (the "Expiration Date").
Notwithstanding the foregoing, the Company will not extend the Expiration Date
beyond , 1997. Tenders of Notes may be withdrawn at any time prior to 5:00
p.m. on the Expiration Date. The Exchange Offer is subject to certain customary
conditions. The Notes were sold by the Company on October 16, 1997 to the
Initial Purchaser (as defined) in a transaction (the "Initial Offering") not
registered under the Securities Act in reliance upon an exemption under the
Securities Act. The Initial Purchaser subsequently placed the Notes with
qualified institutional buyers in reliance upon Rule 144A under the Securities
Act. Accordingly, the Notes may not be reoffered, resold or otherwise
transferred in the United States unless registered under the Securities Act or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The New Notes are being offered hereunder in order
to satisfy certain obligations of the Company and contained in the Registration
Rights Agreement dated October 16, 1997 (the "Registration Rights Agreement"),
among the Company and BT Alex. Brown, Incorporated (the "Initial Purchaser"),
with respect to the Initial Offering. See "The Exchange Offer."

Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by any holder thereof (other than any such
holder that is an "affiliate" of the Company or its subsidiaries within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Notes are acquired in the ordinary course of such holder's business
and such holder has no arrangement or understanding with any person to
participate in the distribution of such Notes. See "The Exchange Offer--Purpose
and Effect of the Exchange Offer" and "The Exchange Offer--Resale of the New
Notes." Each broker-dealer (a "Participating Broker-Dealer") that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of the New Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution."

Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indentures and with respect to transfer under the Securities Act. The Company
will pay all the expenses incurred by it incident to the Exchange Offer. See
"The Exchange Offer."
------------------------------

Prior to the Exchange Offer, there has been no public market for the Old
Notes. If a market for the New Notes should develop, such New Notes could trade
at a discount from their principal amount. The Company currently does not intend
to list the New Notes on any securities exchange or to seek approval for
quotation through any automated quotation system and no active public market for
the New Notes is currently anticipated. There can be no assurance that any
public market for the New Notes will develop. The Exchange Offer is not
conditioned on any minimum principal amount of Old Notes being tendered for
exchange pursuant to the Exchange Offer. See "Risk Factors--Absence of a Public
Market." Moreover, to the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Notes could be adversely affected.

SEE "RISK FACTORS" COMMENCING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT HOLDERS OF OLD NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS , 1997.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
PROSPECTUS, INCLUDING WITHOUT LIMITATION, CERTAIN STATEMENTS UNDER THE
"PROSPECTUS SUMMARY," "THE COMPANY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AND LOCATED
ELSEWHERE HEREIN REGARDING THE COMPANY'S FINANCIAL POSITION AND BUSINESS
STRATEGY, MAY CONSTITUTE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY
BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE
BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE
DISCLOSED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION IN CONJUNCTION WITH
THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND UNDER "RISK
FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.

2
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SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE
INVESTORS ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS OTHERWISE
INDICATED, ALL REFERENCES TO FISCAL YEARS CONTAINED HEREIN SHALL BE DEEMED TO
REFER TO THE APPLICABLE FISCAL YEAR OF THE COMPANY, WHICH ENDS ON MAY 31 OF THE
APPLICABLE CALENDAR YEAR. IN ADDITION, UNLESS OTHERWISE INDICATED, ALL SOURCES
FOR ALL INDUSTRY DATA AND STATISTICS CONTAINED IN OR DERIVED FROM INTERNAL OR
INDUSTRY SOURCES BELIEVED BY THE COMPANY TO BE RELIABLE. AS USED HEREIN, THE
"COMPANY" REFERS TO TOWN SPORTS INTERNATIONAL, INC. AND ITS SUBSIDIARIES.

THE COMPANY

The Company is a leading owner and operator of fitness clubs in the
Northeast and Mid-Atlantic regions of the United States and the largest operator
of fitness clubs in Manhattan. As of August 31, 1997, the Company operated 36
clubs which collectively serve in excess of 90,000 members. The Company's
largest presence is in the New York metropolitan area, where it operates 27
clubs under the tradename "New York Sports Clubs" that collectively serve over
75,000 members. The Company also has a strong presence in the Washington, D.C.
metropolitan area with five clubs operating under the tradename "Washington
Sports Clubs" and has expanded its operations to include the Boston metropolitan
market where it has two clubs. The Company has experienced significant growth
over the past several years through a combination of developing new "greenfield"
club locations and acquiring existing clubs. From May 31, 1995 to August 31,
1997, the Company's club base has grown from 25 clubs to 36 clubs. Over the same
period, the Company's revenues and Adjusted EBITDA (as defined) have increased
from $33.3 million and $3.4 million, respectively, for the year ended May 31,
1995, to $61.4 million and $14.6 million, respectively, for the twelve months
ended August 31, 1997.

The Company's clubs are conveniently located, reasonably priced,
state-of-the-art fitness facilities. The Company employs a regional clustering
strategy providing members access to clubs near both their work and home for a
single membership fee. This strategy allows the Company to maximize revenues by
charging members slightly higher monthly dues for the ability to use more than
one club in the chain and to attract and retain members by offering greater
convenience and a broader range of facilities and services than its smaller
competitors. The Company's regional clustering strategy also allows the Company
to achieve economies of scale with regard to sales, marketing, purchasing and
corporate administrative expenses. In addition, the Company's emphasis on
monthly dues and use of its electronic funds transfer system allows the Company
to generate stable and predictable cash flows and makes the Company less
dependent on new membership sales and price discounting than certain of its
competitors.

Over its 24-year operating history, the Company has developed and refined a
model club format that allows the Company to cost effectively construct and more
efficiently operate its fitness clubs. The Company's model club is 15,000 to
25,000 square feet and features a wide variety of state-of-the-art
cardiovascular and strength-training equipment, as well as exercise studios
offering extensive group fitness programs. Certain clubs also feature additional
amenities, including swimming pools, squash or tennis courts and physical
therapy centers. The Company offers members a variety of other services for
which it receives additional fees, including personal training. The Company's
typical member is 20 to 44 years of age, college educated and earns in excess of
$50,000 per annum.

INDUSTRY OVERVIEW

3
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the general public of the importance of physical exercise. In July 1996, the
Surgeon General issued a report on Physical Activity and Health highlighting the
connection between regular physical exercise and better health. The Company
believes the Surgeon General's report and other medical evidence supporting the
importance of regular physical exercise are leading more Americans to become
increasingly health conscious and to regularly incorporate exercise into their
lives.

The fitness club industry in the United States is highly fragmented.
According to IHRSA, there were more than 13,000 commercial fitness clubs in
operation during 1996. According to Club Industry magazine, however, the ten
largest companies in the industry account only for approximately 15% of all
industry revenue and own less than 10% of all clubs. The Company believes that
independent operators have found it increasingly difficult to compete with
multi-facility operators like the Company that enjoy substantial economies of
scale. Management believes the long-term trend of increasing fitness awareness
and the fragmented nature of the industry make it attractive for continued
investment.

COMPETITIVE STRENGTHS

The Company attributes its opportunities for continued growth and increased
profitability to the following competitive strengths:

STRONG MARKET POSITION. The Company believes it is among the five largest
fitness club operators in the United States, as measured by consolidated
revenues. The Company is the largest operator of fitness clubs in Manhattan with
20 clubs, making it more than twice as large as its nearest competitor. The
Company believes there are only four chains that own and operate more than ten
clubs in the Northeast and Mid-Atlantic markets, and the Company has the
opportunity to maintain, or establish, a leadership position in each of these
markets. The Company attributes its leadership position to the success of its
regional clustering strategy, the consistency of facilities and services
provided by its clubs, and the ability to continue to attract new members by
providing one of the most attractive price/value combinations available in its
markets.

SUCCESSFUL REGIONAL CLUSTERING STRATEGY. The Company believes its regional
clustering strategy allows it to maximize cash flows by providing higher
quality, conveniently located fitness facilities on a cost effective basis. By
operating a group of clubs in a concentrated geographic area, the value of
Company memberships is enhanced by the ability to offer memberships that allow
the member to use any of the Company's clubs at any time ("Passport
Membership"). This membership appeals primarily to consumers who seek the
convenience of having a fitness club near their home and their workplace.
Approximately 55% of all members choose the Passport Membership, and because
these memberships offer broader privileges and greater convenience, they
generate higher monthly dues than single club memberships. Regional clustering
also allows the Company to provide special facilities within the market without
offering them at each location (e.g., squash, tennis, special programs, and
swimming pools). The Company believes its regional clustering strategy allows it
to achieve economies of scale with regard to sales, marketing, purchasing and
corporate administrative expenses.

STABLE CASH FLOWS. The Company believes that its emphasis on affordable
monthly dues and its electronic funds transfer ("EFT") system allows it to
generate stable and predictable cash flows. The Company charges a modest
initiation fee ($115 on average) and monthly dues of $53-$76, depending on the
type of membership plan. The Company believes that its monthly dues structure
gives it a significant competitive advantage in terms of ease of sale and
collection and revenue collected per year and makes the Company less dependent
on new membership sales, and price discounting, than certain of its competitors.
The Company also believes its use of EFT, by which a member's credit card or
bank account is automatically debited for each month's dues, assures a more
stable cash flow, eliminates the traditional accounts receivable function and
minimizes bad-debt write-offs. Approximately 90% of the Company's members pay
their monthly dues through EFT, accounting for more than 70% of monthly
revenues.

4
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PROVEN UNIT OPERATING PERFORMANCE. The Company has established a track
record of consistent growth in revenue and cash flow across its club base. The
Company's 12 wholly-owned clubs in operation at the end of fiscal 1993 generated
revenues and Adjusted EBITDA (before corporate expenses) of $25.0 million and
$8.9 million, respectively, during fiscal 1997 as compared to $20.0 million and
$6.9 million, respectively, during fiscal 1993. Over its 24-year history, the
Company has never closed a club, and in fiscal 1997, each of the clubs that was
in operation for more than six months generated positive Adjusted EBITDA (before
corporate expense) for the year.

EXPERIENCED MANAGEMENT TEAM. The Company believes that it possesses one of
the most experienced management teams in the industry. The Company's five senior
executives have over 60 years of combined experience in the fitness club
industry and have been working together at the Company since 1990. Management
believes that it has the depth, experience and motivation to manage the
Company's internal and external growth. In the aggregate, management owns
approximately 28% of the capital stock of the Company, on a fully-diluted basis.

BUSINESS STRATEGY

The Company intends to significantly increase revenue and cash flow using
the following strategies:

MATURATION OF RECENTLY OPENED CLUBS. Since the beginning of fiscal 1996,
the Company has opened or acquired 12 clubs. Management believes that the
Company's recent financial performance does not yet fully reflect the benefit of
these new clubs. Based on the Company's historical experience, a new club tends
to achieve significant increases in revenues during its first three years of
operation as it reaches maturity. Because there is relatively little incremental
cost associated with such increasing revenues, there is a greater proportionate
increase in profitability. In the aggregate, the 12 clubs opened or acquired
between May 31, 1995 and August 31, 1997 generated revenues and Adjusted EBITDA
(before corporate expenses) of $14.0 million and $3.3 million, respectively,
during the last twelve months ended August 31, 1997. The Company believes that
the revenues and Adjusted EBITDA (before corporate expenses) of these 12 clubs
will significantly increase as the clubs reach maturity.

EXPANSION OF CLUB BASE. Management intends to strengthen the Company's
market position in the Northeast and Mid-Atlantic regions and increase revenues
and cash flow through the opening of new clubs and the acquisition of existing
clubs. Before opening or acquiring a new club, management undertakes a rigorous
process involving site selection, demographic and competitive analysis,
negotiation of lease and acquisition terms and financial modeling to ensure that
a location meets the Company's criteria for a model club. As of August 31, 1997,
the Company had identified over 30 locations in its targeted markets which it
believes possess the criteria for a model club. Because of the Company's
historical success with opening new clubs and the number of opportunities
currently available to increase the club base, the Company expects to open or
acquire approximately 15 clubs by the end of fiscal 1999.

INCREASED VALUE-ADDED SERVICES. In addition to the Company's regional
clustering strategy, the Company has recently focused on increasing the
additional services available to its members. These services, which include
personal training, generate incremental revenues with minimal capital investment
and assist in the process of attracting and retaining members. The increased
emphasis on these value-added services have contributed to the Company's growth,
as non-membership club revenues have increased from $2.4 million, or 7.2% of
revenues in fiscal 1995, to $5.5 million, or 9.0% of revenues in the last twelve
months ended August 31, 1997.

5
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CORPORATE ORGANIZATION

TSI acts primarily as a holding company that derives operating income and
cash-flow from its subsidiaries. TSI also operates one fitness club and owns the
real estate housing that club. Each of TSI's wholly-owned subsidiaries is a
single-purpose subsidiary which enters into leases and/or operates one of the
Company's clubs. In December 1996, TSI consummated a merger (the "Merger")
pursuant to which, among other things, Bruckmann, Rosser, Sherrill & Co., L.P.
and certain of its employees and affiliates (collectively, "BRS") and certain
institutional investors and certain members of TSI's management acquired TSI's
newly authorized Common Stock, Series A Preferred Stock and Series B Preferred
Stock (each as defined). In addition, pursuant to the Merger, TSI instituted a
new option plan granting certain members of TSI's management options to acquire
TSI's newly authorized Series B Preferred Stock and Common Stock. In the
aggregate, management owns approximately 28% of the capital stock of the
Company, on a fully-diluted basis. See "Security Ownership" and "Certain
Relationships and Related Transactions."

The Company is incorporated under the laws of the State of New York. The
Company's principal executive offices are located at 888 Seventh Avenue, New
York, New York 10106, and its telephone number is (212) 246-6700.

THE INITIAL OFFERING

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NOTES............................. $85 million aggregate principal amount of 9 3/4% Senior
Notes due 2004 (the "Old Notes") were sold by the
Company on October 16, 1997 (the "Initial Offering") to
BT Alex. Brown, Incorporated (the "Initial Purchaser")
pursuant to a Purchase Agreement dated October 9, 1997
(the "Purchase Agreement"). The Initial Purchasers
subsequently resold the Notes to qualified institutional
buyers pursuant to Rule 144A under the Securities Act
and to a limited number of institutional accredited
investors who agreed to comply with certain transfer
restrictions and other conditions.

REGISTRATION RIGHTS AGREEMENT..... Pursuant to the Purchase Agreement, the Company and the
Initial Purchaser entered into a Registration Rights
Agreement dated October 16, 1997 (the "Registration
Rights Agreement"), which granted the holder of the
Notes certain exchange and registration rights. The
Exchange Offer is intended to satisfy such exchange
rights which shall then terminate upon the consummation
of the Exchange Offer.
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THE EXCHANGE OFFER

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SECURITIES OFFERED................ Up to $85 million aggregate principal amount of Series B
9 3/4% Senior Notes due 2004 (the "New Notes"). The
terms of the New Notes and the Old Notes are identical
in all material respects, except for certain transfer
restrictions and registration rights relating to the Old
Notes.

THE EXCHANGE OFFER................ The New Notes are being offered in exchange for a like
principal amount of Old Notes. Old Notes may be
exchanged only in integral multiples of $1,000. The
issuance of the New Notes is intended to satisfy
obligations of the Company contained in the Registration
Rights Agreement.
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6
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The Company will issue the New Notes to holders on or
promptly after the Expiration Date.

Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that the New Notes
issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other than
any such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act)
without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that
such New Notes are acquired in the ordinary course of
such holder's business and that such holder does not
intend to participate and has no arrangement or
understanding with any person to participate in the
distribution of such New Notes. See "The Exchange
Offer-- Certain Conditions to the Exchange Offer."

Each Participating Broker-Dealer that receives the New
Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by
delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. The
Prospectus, as it may be amended or supplemented from
time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Notes
received in exchange for Old Notes where such Notes were
acquired by such Participating Broker-Dealer as a result
of market-making activities or other trading activities.
The Company has agreed that, for a period of 180 days
after the Expiration Date, it will make the Prospectus
available to any Participating Broker-Dealer for use in
connection with any such resale. See "Plan of
Distribution."

In addition, to comply with the securities laws of
certain jurisdictions, if applicable, the New Notes may
not be offered for sale unless they have been registered
or qualified for sale in such jurisdiction or an
exemption from registration or qualification is
available and is complied with. The Company has agreed,
pursuant to the Registration Rights Agreement and
subject to certain specified limitations therein, to
register or qualify the New Notes for offer or sale
under the securities of blue sky laws of such
jurisdictions as any holder of the Notes reasonably
requests in writing. If a holder of Old Notes does not
exchange such Old Notes for New Notes pursuant to the
Exchange Offer, such Old Notes will continue to be
subject to the restrictions on transfer contained in the
legend thereon. In general, the Old Notes may not be
offered for sale, unless registered under the Securities
Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and
applicable state securities
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laws. Holders of Old Notes do not have any appraisal or
dissenters' rights under the Delaware General
Corporation Law in connection with the Exchange Offer.
See "The Exchange Offer--Consequences of Failure to
Exchange; Resales of New Notes."

The Old Notes are currently eligible for trading in
Private Offerings, Resales and Trading through Automated
Linkages ("PORTAL") market. Following commencement of
the Exchange Offer but prior to its consummation, the
Old Notes may continue to be traded in the PORTAL
market. Following consummation of the Exchange Offer,
the New Notes will not be eligible for PORTAL trading.

Any holder who tenders in the Exchange Offer with the
intention to participate, or for the purpose of
participating, in a distribution of the New Notes could
not rely on the position of the staff of the Commission
enunciated in no-action letters and, in the absence of
an exemption therefrom, must comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with any resale
transaction. Failure to comply with such requirements in
such instance may result in such holder incurring
liability under the Securities Act for which the holder
is not indemnified by the Company.

EXPIRATION DATE................... 5:00 p.m., New York City time, on , 1997
unless the Exchange Offer is extended, in which case the
term "Expiration Date" means the latest date and time to
which the Exchange Offer is extended.

ACCRUED INTEREST ON THE EXCHANGE
NOTES AND THE NOTES............. Each New Note will bear interest from its issuance date.
Holders of Old Notes that are accepted for exchange will
receive, in cash, accrued interest thereon to, but not
including, the issuance date of the New Notes. Such
interest will be paid with the first interest payment on
the New Notes. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the New
Notes.

CONDITIONS TO THE EXCHANGE
OFFER........................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See "The
Exchange Offer--Conditions."

PROCEDURES FOR TENDERING NOTES.... Each holder of Notes wishing to accept the Exchange
Offer must complete, sign and date the accompanying
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the Notes
and any other required documentation to the Exchange
Agent (as defined) at the address set forth herein. By
executing the Letter of Transmittal, each holder will
represent to the Company that, among other things, the
New Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of the
person receiving such Notes, whether or not such
</TABLE>

8
<PAGE>

<TABLE>
<S> <C>
person is the holder, that neither the holder nor any
such other person has any arrangement or understanding
with any person to participate in the distribution of
the New Notes and that neither the holder nor any such
other person is an "affiliate," as defined under Rule
405 of the Securities Act, of the Company. See "The
Exchange Offer--Purpose and Effect of the Exchange
Offer" and "--Procedures for Tendering."

UNTENDERED NOTES.................. Following the consummation of the Exchange Offer,
holders of Notes eligible to participate but who do not
tender their Notes will not have any further exchange
rights and such Notes will continue to be subject to
certain restrictions on transfer. Accordingly, the
liquidity of the market for such Notes could be
adversely affected.

CONSEQUENCES OF FAILURE TO
EXCHANGE........................ The Notes that are not exchanged pursuant to the
Exchange Offer will remain restricted securities.
Accordingly, such Notes may be resold only (i) to the
Company, (ii) pursuant to Rule 144A or Rule 144 under
the Securities Act or pursuant to some other exemption
under the Securities Act, (iii) outside the United
States to a foreign person pursuant to the requirements
of Rule 904 under the Securities Act or (iv) pursuant to
an effective registration statement under the Securities
Act. See "The Exchange Offer--Consequences of Failure to
Exchange."

SHELF REGISTRATION STATEMENT...... If any holder of the Notes (other than any such holder
which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) is not
eligible under applicable securities laws to participate
in the Exchange Offer, and such holder has provided
information regarding such holder and the distribution
of such holder's Notes to the Company for use therein,
the Company has agreed to register the Notes on a shelf
registration statement (the "Shelf Registration
Statement") and use its best efforts to cause it to be
declared effective by the Commission as promptly as
practical on or after the consummation of the Exchange
Offer. The Company has agreed to maintain the
effectiveness of the Shelf Registration Statement for,
under certain circumstances, a maximum of two years, to
cover resales of the Notes held by any such holders.

SPECIAL PROCEDURES FOR BENEFICIAL
OWNERS.......................... Any beneficial owner whose Notes are registered in the
name of a broker, dealer, commercial bank, trust company
or other nominee and who wishes to tender should contact
such registered holder promptly and instruct such
registered holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender on
such owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal and
delivering its Notes, either make appropriate arrange-
ments to register ownership of the Notes in such owner's
name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership
may take considerable time. The Company will keep the
Exchange Offer open for
</TABLE>

9
<PAGE>

<TABLE>
<S> <C>
not less than twenty days in order to provide for the
transfer of registered ownership.

GUARANTEED DELIVERY PROCEDURES.... Holders of Notes who wish to tender their Notes and
whose Notes are not immediately available or who cannot
deliver their Notes, the Letter of Transmittal or any
other documents required by the Letter of Transmittal to
the Exchange Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration Date must
tender their Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer-- Guaranteed
Delivery Procedures."

WITHDRAWAL RIGHTS................. Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders."

ACCEPTANCE OF NOTES AND DELIVERY
OF NEW NOTES.................... The Company will accept for exchange any and all Notes
which are properly tendered in the Exchange Offer prior
to 5:00 p.m., New York City time, on the Expiration
Date. The New Notes issued pursuant to the Exchange
Offer will be delivered promptly following the
Expiration Date. See "The Exchange Offer--Terms of the
Exchange Offer."

USE OF PROCEEDS................... There will be no cash proceeds to the Company from the
exchange pursuant to the Exchange Offer.

EXCHANGE AGENT.................... The United States Trust Company of New York is serving
as the Exchange Agent in connection with the Exchange
Offer.

FEDERAL INCOME TAX CONSEQUENCES... The exchange of Notes pursuant to the Exchange Offer
should not be a taxable event for federal income tax
purposes. See "Certain Federal Income Tax
Considerations."
</TABLE>

THE NEW NOTES

<TABLE>
<S> <C>
GENERAL........................... The form and terms of the New Notes are the same as the
form and terms of the Old Notes (which they replace)
except that (i) the New Notes have been registered under
the Securities Act and, therefore, will not bear legends
restricting the transfer thereof and (ii) the holders of
New Notes will not be entitled to certain rights under
the Registration Rights Agreement, including the
provisions providing for an increase in the interest
rate on the Old Notes in certain circumstances relating
to the timing of the Exchange Offer, which rights will
terminate as a general matter when the Exchange Offer is
consummated. See "The Exchange Offer--Purpose and Effect
of the Exchange Offer." The New Notes will evidence the
same debt as the Notes and will be entitled to the
benefits of the Indenture. See "Description of the
Notes."

ISSUER............................ Town Sports International, Inc.

SECURITIES OFFERED................ $85 million aggregate principal amount of Series B
9 3/4% Senior Notes due 2004.
</TABLE>

10
<PAGE>

<TABLE>
<S> <C>
MATURITY DATE..................... October 15, 2004

INTEREST PAYMENT DATES............ Interest on the Notes will accrue from the date of
original issuance (the "Issue Date"). Interest is
payable on April 15 and October 15 of each year,
commencing April 15, 1998.

RANKING........................... The Notes will be unsecured senior obligations of the
Company and will rank PARI PASSU in right of payment
with all existing and future unsubordinated indebtedness
of the Company and senior in right of payment with all
existing and future subordinated indebtedness of the
Company. The Notes will be effectively subordinated in
right of payment to all secured indebtedness of the
Company (including indebtedness incurred under the New
Credit Facility). As of August 31, 1997, on a pro forma
basis after giving effect to the Offering, the Company
would have had approximately $90.0 million of
indebtedness outstanding (and $13.9 million of secured
indebtedness available under the New Credit Facility).

OPTIONAL REDEMPTION............... The Notes will not be redeemable at the option of the
Company prior to October 15, 2001. Thereafter, the Notes
will be redeemable, at the Company's option, in whole or
in part from time to time, at the redemption prices set
forth herein, plus accrued and unpaid interest, if any,
to the date of redemption. In addition, at any time and
from time to time prior to October 15, 2000, TSI may
redeem in the aggregate, with the net proceeds of one or
more Public Equity Offerings, up to 35% of the original
principal amount of the Notes at a redemption price of
109.750% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of redemption.
See "Description of Notes-- Optional Redemption."

CHANGE OF CONTROL................. Upon the occurrence of a Change of Control, (i) the
Company will have the option, at any time on or prior to
October 15, 2002, to redeem the Notes in whole but not
in part at a redemption price equal to 100% of the
principal amount thereof, plus the Applicable Premium as
of, and accrued and unpaid interest, if any, to the date
of redemption and (ii) if the Company does not so redeem
the Notes or if such Change of Control occurs after
October 15, 2002, the Company will be required to make
an offer to purchase all outstanding Notes at a price
equal to 101% of the principal amount thereof plus
accrued interest to the date of purchase. See
"Description of Notes--Change of Control."

CERTAIN COVENANTS................. The Indenture (as defined) under which the Notes will be
issued contains certain covenants that, among other
things, limit the ability of the Company and its
Restricted Subsidiaries (as defined) to incur additional
indebtedness, pay dividends or make certain other
restricted payments, engage in transactions with
affiliates, incur liens and engage in asset sales. The
Indenture will also restrict the ability of the Company
to consolidate or merge with, or transfer all or
substantially all of its assets to,
</TABLE>

11
<PAGE>

<TABLE>
<S> <C>
another person. See "Description of Notes--Certain Cove-
nants."

TRANSFER RESTRICTIONS; ABSENCE
OF A PUBLIC MARKET FOR
THE NOTES COVENANTS............. The New Notes are new securities and there is currently
no established market for the New Notes. Accordingly,
there can be no assurance as to the development or
liquidity of any market for the New Notes. The Initial
Purchasers have advised the Company that they currently
intend to make a market in the New Notes. However, they
are not obligated to do so, and any market-making with
respect to the New Notes may be discontinued without
notice. The Company does not intend to apply for listing
of the New Notes on any national securities exchange or
for their quotation through the National Association of
Securities Dealers Automated Quotation System. See "Risk
Factors-- Transfer Restrictions; Absence of Public
Market."
</TABLE>

For additional information regarding theNew Notes, see "Description of Notes."

The address for the Company is 888 Seventh Avenue, New York, New York 10106
and the telephone number is (212) 246-6700.

RISK FACTORS

Holders of Old Notes should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors under "Risk Factors" beginning on page 15 for risks in connection with
the Exchange offer.

12
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

Set forth below are summary historical consolidated financial data of the
Company for fiscal 1995, 1996 and 1997, the three month periods ended August 31,
1996 and August 31, 1997 and the twelve month period ended August 31, 1997. The
summary historical consolidated financial data as of May 31, 1995, May 31, 1996
and May 31, 1997, and for fiscal 1995, 1996 and 1997 were derived from the
audited Consolidated Financial Statements of the Company. The summary historical
consolidated financial data as of August 31, 1997, for the three month period
ended August 31, 1996 and for the three and twelve month period ended August 31,
1997 were derived from the Unaudited Consolidated Interim Financial Statements
of the Company for such periods, which, in the opinion of the management of the
Company, reflect all normal and recurring adjustments necessary to present
fairly the financial position and results of operations for the periods
presented. The information contained in this table should be read in conjunction
with "Selected Historical Consolidated Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Financial
Statements and accompanying notes thereto appearing elsewhere in this
Registration Statement.

<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
FISCAL YEAR ENDED ENDED
ENDED MAY 31, AUGUST 31, AUGUST 31,
------------------------------- -------------------- --------------
1995 1996 1997 1996 1997 1997
--------- --------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 33,349 $ 43,755 $ 56,567 $ 12,375 $ 17,198 $ 61,390
Operating expenses........................ 33,969 41,626 55,291 11,233 15,078 59,136
Operating income (loss)................... (620) 2,129 1,276 1,142 2,120 2,254
Interest expense, net..................... 654 952 2,455 184 1,144 3,415
Income tax (benefit) provision............ (541) 628 (243) 475 450 (268)
Net income (loss)......................... (733) 549 (936) 483 526 (893)

OTHER DATA:
Adjusted EBITDA(1)........................ $ 3,415 $ 8,302 $ 13,048 $ 2,756 $ 4,355 $ 14,647
Adjusted EBITDA margin.................... 10.2% 19.0% 23.1% 22.3% 25.3% 23.9%
Deferred lease expense(2)................. $ 1,232 $ 1,277 $ 1,620 $ 275 $ 486 $ 1,831
Compensation expense in connection with
stock options........................... 635 1,967 5,933 450 160 5,643
Depreciation and mortization.............. 2,168 2,929 4,219 889 1,589 4,919
Capital expenditures...................... 7,670 5,380 11,110 1,187 1,303 11,226
Wholly-owned clubs operated at end of
period(3)............................... 20 23 28 23 31 31
Total clubs operated at end of
period(4)............................... 25 28 35 28 36 36
Members at end of period(5)............... 45,600 55,500 70,500 55,600 80,500 80,500

PRO FORMA DATA(6):
Cash interest expense(7)........................................ $ 8,852
Ratio of Adjusted EBITDA to cash interest expense............... 1.7x
Net debt(8)..................................................... $ 46,616
Ratio of net debt to Adjusted EBITDA............................ 3.2x
</TABLE>

13
<PAGE>
<TABLE>
<CAPTION>
AS OF AUGUST 31, 1997
---------------------
<S> <C> <C>
AS
ACTUAL ADJUSTED
--------- ----------

<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................................. $ 702 $ 43,402
Total assets............................................................................... 55,874 101,314
Long-term debt, including current installments............................................. 43,905 90,018
Stockholders' deficit...................................................................... (6,265) (6,937)
</TABLE>

- ------------------------

(1) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization, deferred lease expense and compensation expense in
connection with stock options. Adjusted EBITDA is presented because
management believes it provides useful information regarding a company's
ability to incur and/or service debt. Adjusted EBITDA should not be
considered in isolation or as a substitute for net income, cash flows, or
other consolidated income or cash flow data prepared in accordance with GAAP
(as defined) or as a measure of a Company's profitability or liquidity.

(2) Deferred lease expense reflects the difference between accrued rent expense
in accordance with GAAP and cash rent expense actually paid in a given
period, which difference is typically positive in the early years of a lease
and negative in the later years of a lease.

(3) During fiscal 1997, the Company opened or acquired six clubs and merged the
operations and membership of an existing wholly-owned club into one of the
newly opened clubs.

(4) Includes all clubs whether wholly-owned or managed.

(5) Represents members at wholly-owned clubs only.

(6) Information set forth under the caption "Pro Forma Data" has been adjusted
to give effect to the issuance of the Notes offered hereby and the
simultaneous closing of the New Credit Facility.

(7) Cash interest expense is defined as interest expense less amortization of
debt issuance costs.

(8) Net debt is defined as total debt less cash and cash equivalents.

14
<PAGE>
RISK FACTORS

HOLDERS OF OLD NOTES SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS AS WELL
AS THE OTHER INFORMATION AND DATA INCLUDED IN THIS PROSPECTUS IN CONNECTION WITH
THE EXCHANGE OFFER. THE RISK FACTORS SET FORTH BELOW ARE GENERALLY APPLICABLE TO
THE OLD NOTES AS WELL AS THE NEW NOTES.

SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT

The Company is highly leveraged. As of August 31, 1997, on a pro forma basis
after giving effect to the Offering and the net proceeds therefrom, the
Company's total indebtedness would have been approximately $90.0 million. In
addition, subject to restrictions in the New Credit Facility and the Indenture,
the Company may incur up to $13.9 million of borrowings under the New Credit
Facility. See "Description of New Credit Facility" and "Description of Notes."

The level of the Company's indebtedness could have important consequences to
holders of the Notes, including: (i) a substantial portion of the Company's cash
flow from operations will be dedicated to debt service and may not be available
for other purposes; (ii) the Company's leveraged position may impede its ability
to obtain financing in the future for working capital, capital expenditures and
general corporate purposes, including acquisitions, and may impede its ability
to secure favorable lease terms; and (iii) the Company's leveraged financial
position may make it more vulnerable to economic downturns and may limit its
ability to withstand competitive pressures. The Company's ability to pay
interest on the Notes, to repay portions of its long-term indebtedness
(including the Notes and the New Credit Facility) and to satisfy its other debt
obligations will depend upon its future-operating performance and the
availability of refinancing indebtedness, which will be affected by prevailing
economic conditions and financial, business and other factors, certain of which
are beyond the Company's control. The Company believes that, based on its
current level of operations, it will have sufficient capital to carry on its
business and will be able to meet its scheduled debt service requirements.
However, there can be no assurance that the future cash flow of the Company will
be sufficient to meet the Company's obligations and commitments. If the Company
is unable to generate sufficient cash flow from operations in the future to
service its indebtedness and to meet its other commitments, the Company will be
required to adopt one or more alternatives, such as refinancing or restructuring
its indebtedness, selling material assets or operations or seeking to raise
additional debt or equity capital. There can be no assurance that any of these
actions could be effected on a timely basis or on satisfactory terms or that
these actions would enable the Company to continue to satisfy its capital
requirements. In addition, the terms of existing or future debt agreements,
including the Indenture (as defined) and the New Credit Facility, may prohibit
the Company from adopting any of these alternatives. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Description of New Credit
Facility" and "Description of Notes."

RESTRICTIONS IMPOSED BY THE COMPANY'S INDEBTEDNESS

The New Credit Facility requires the Company to maintain specified financial
ratios and tests, among other obligations, including interest coverage and total
leverage ratios. In addition, the New Credit Facility restricts, among other
things, the Company's ability to incur additional indebtedness and restricts the
ability of the Company to dispose of assets, incur additional indebtedness,
incur guarantee obligations, repay indebtedness or amend debt instruments, pay
dividends, create liens on assets, make investments, make acquisitions, engage
in mergers or consolidations or engage in certain transactions with subsidiaries
and affiliates and otherwise restrict corporate activities. A failure to comply
with the restrictions contained in the New Credit Facility could lead to an
event of default thereunder which could result in an acceleration of such
indebtedness. Such an acceleration would constitute an event of default under
the Indenture relating to the Notes. In addition, the Indenture restricts, among
other things, the Company's ability to incur additional indebtedness, make
certain payments and dividends or merge or consolidate. A

15
<PAGE>
failure to comply with the restrictions in the Indenture could result in an
event of default under the Indenture. See "Description of New Credit Facility"
and "Description of Notes."

RANKING; ASSET ENCUMBRANCE

The Notes will be general unsecured senior obligations and will rank PARI
PASSU in right of payment with all existing and future unsubordinated
Indebtedness of the Company, including obligations under the New Credit
Facility. As of August 31, 1997, on a pro forma basis after giving effect to the
Offering, the Company would have had approximately $90.0 million of Indebtedness
outstanding (excluding $1.1 million of outstanding standby letters of credit)
and $13.9 million of secured indebtedness available under the New Credit
Facility. The Notes will be effectively subordinated to all secured Indebtedness
of the Company to the extent of the value of the assets securing such
Indebtedness. The Indebtedness of the Company under the New Credit Facility is
secured by liens upon real property and current assets, including receivables,
inventory, general intangibles and equipment. The Indenture permits the Company
to incur additional Indebtedness under the New Credit Facility. In the event of
a bankruptcy, liquidation or reorganization of the Company, the assets of the
Company will be available to pay obligations on the Notes only after all secured
Indebtedness of the Company has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the Notes then
outstanding.

ACQUISITION AND DEVELOPMENT OF ADDITIONAL CLUBS; RISKS OF CONSTRUCTION DELAYS

Part of the Company's growth strategy is dependent upon the Company's
ability to acquire, develop, own and operate additional fitness clubs in
selected locations in and adjacent to large metropolitan areas within the
Northeast and Mid-Atlantic regions of the United States. The successful
acquisition and development of new fitness clubs will depend on various factors,
including the availability of suitable sites for fitness clubs, the ability of
the Company to negotiate successfully lease and purchase contracts for new
fitness clubs and to meet construction schedules and budgets. As a result of the
foregoing, there can be no assurance that the Company will be able to acquire or
otherwise develop fitness clubs in areas into which it wishes to expand, or
otherwise execute its business strategies, and its ability to grow may be
adversely affected thereby. Even if the Company is able to expand its business,
there can be no assurance that such expansion will be profitable for the
Company.

PERFORMANCE OF RECENT OPENED CLUBS; ATTRACTION AND RETENTION OF MEMBERS.

The Company has opened 12 clubs between May 31, 1995 and August 31, 1997,
which have not yet achieved mature membership levels and have operated at a loss
or at a smaller profit margin than other clubs. The performance of these clubs
(and all other clubs operated by the Company) is dependent on the Company's
ability to attract and retain members and there can be no assurance that it will
be successful in these efforts, or that the membership levels at one or more of
its clubs will not decline. There are numerous factors that could lead to a
decline in membership levels or that could prevent the Company from increasing
its membership at newer clubs, including the public image of the clubs, the
ability of the clubs to deliver quality service at a competitive cost, the
presence of direct and indirect competition in the areas in which the clubs are
located, the public's interest in sports and fitness clubs and general economic
conditions.

GEOGRAPHIC CONCENTRATION

The Company owns and/or manages 27 fitness clubs and a physical therapy
facility in the New York metropolitan market, five fitness clubs in Washington,
D.C., two fitness clubs in Boston, and two fitness clubs in Switzerland. The
Company's geographic concentration in the Northeast and Mid-Atlantic regions and
in particular the New York metropolitan market may expose the Company to adverse
developments related to competition, economic and demographic changes.

16
<PAGE>
HEALTH RISKS

Use of the Company's fitness clubs poses some potential health risks to
members or guests through exertion and use of the Company's services and
facilities including exercise equipment. There can be no assurance that a claim
against the Company for death or an injury suffered by members or their guests
while exercising at a club will not be asserted or that the Company would be
able to successfully defend any claim that might be asserted. The Company
currently maintains general liability coverage; however, there can be no
assurance that the Company will be able to maintain such liability insurance on
acceptable terms in the future or that such insurance will provide adequate
coverage against potential claims.

COMPETITION

The fitness club industry is fragmented and highly competitive. The Company
competes with other fitness clubs, physical fitness and recreational facilities
established by local governments and hospitals and by businesses for their
employees, amenity and condominium clubs, the YMCA and similar organizations
and, to a certain extent, with racquet and tennis and other athletic clubs,
country clubs, weight reducing salons and the home-use fitness equipment
industry. There can be no assurance that the Company will be able to compete
effectively in the future in the markets in which it operates. New competitors,
which may include companies which are larger and have greater resources than the
Company, may enter these markets. Additionally, consolidation in the fitness
club industry could result in increased competition among participants,
particularly large multi-facility operators like the Company.

DEPENDENCE ON KEY PERSONNEL

The Company is dependent on the continued services of its senior management
team. The Company believes the loss of such key personnel could have a material
adverse effect on the Company and there can be no assurance that the Company can
attract and retain sufficient qualified personnel to meet its business needs.
Currently, the Company does not have any long-term employment agreements with
its executive officers. See "Management--Directors and Executive Officers."

GOVERNMENT REGULATION

The operations and business practices of the Company are subject to
regulations at federal, state and, in some cases, local levels. General rules
and regulations of the Federal Trade Commission (the "FTC")' and of state and
local consumer protection agencies, and state statutes apply to the Company's
advertising, sales and other trade practices, including the sale and collection
of memberships Although management is not aware of any proposed changes in any
statutes, rules or regulations, any changes could have a material adverse effect
on the Company's financial condition and results of operations. In addition, the
provision of rehabilitation services is subject to government regulation. See
"Business--Government Regulation."

CONTROLLING SHAREHOLDERS

Bruckmann, Rosser, Sherrill & Co., L.P. ("BRS, L.P.") and Farallon Partners,
L.L.C. ("Farallon") own approximately 62% of the Common Stock of the Company and
collectively have the ability to elect a majority of the Board of Directors and
generally to control the affairs and policies of the Company. .

Circumstances may occur in which the interests of BRS, L.P. and Farallon, in
pursuing acquisitions or otherwise as shareholders of the Company, could be in
conflict with the interests of the holders of the Notes. See "Security
Ownership," "Certain Relationships and Related Transactions" and "Business--
Business Strategy."

17
<PAGE>
LIMITATIONS ON CHANGE OF CONTROL

In the event of a Change of Control, the Company will be required to make an
offer for cash to purchase the Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, thereon to the purchase date. A Change
of Control will result in an event of default under the New Credit Facility and
may result in a default under other indebtedness of the Company that may be
incurred in the future. The New Credit Facility will prohibit the purchase of
outstanding Notes prior to repayment of the borrowings under the New Credit
Facility and any exercise by the holders of the Notes of their right to require
the Company to repurchase the Notes will cause an event of default under the New
Credit Facility. Finally, there can be no assurance that the Company will have
the financial resources necessary to repurchase the Notes upon a Change of
Control. See "Description of Notes--Change of Control."

ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER

Prior to the Exchange Offer, there has not been any public market for the
Notes. The Notes have not been registered under the Securities Act and will be
subject to restrictions on transferability to the extent that they are not
exchange for New Notes by holders who are entitled to participate in this
Exchange Offer. The holders of old Notes (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who are not eligible to participate in the Exchange Offer are entitled to
certain registration rights, and the Company is required to file a Shelf
Registration Statement with respect to such Notes. The New Notes will constitute
a new issue of securities with no established trading market. The Company does
not intend to list the New Notes on any national securities exchange or to seek
the admission thereof to trading in the National Association of Securities
Dealers Automated Quotation System. The Initial Purchaser has advised the
Company that it currently intends to make a market in the New Notes, but it is
not obligated to do so and may discontinue such market making at any time. In
addition, such market making activity will be subject to the limits imposed by
the Securities Act and the Exchange Act and may be limited during the Exchange
Offer and the pendency of the Shelf Registration Statements. Accordingly, no
assurance can be given that an active public market or other market will develop
for the New Notes or as to the liquidity of the trading market for the New
Notes. If a trading market does not develop or is not maintained, holders of the
New Notes may experience difficulty in reselling the New Notes or may be unable
to sell them at all. If a market for the New Notes develops, any such market may
be discontinued at any time.

If a public trading market develops for the New Notes, future trading prices
of the New Notes will depend on many factors, including, among other things,
prevailing interest rates, the Company's operating results and the market for
similar securities. Depending on prevailing interest rates, the market for
similar securities and other factors, including the financial condition of the
Company, the New Notes may trade at a discount from their principal amount.

FORWARD-LOOKING STATEMENTS

This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition, including,
in particular, the likelihood of the Company's success in developing and
expanding its business. These statements are based upon a number of assumptions
and estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. The foregoing description
of risk factors specifies the principal contingencies and uncertainties to which
the Company believes it is subject. Some of these assumptions inevitably will
not materialize, and unanticipated events will occur which will affect the
Company's results.

18
<PAGE>
EXCHANGE OFFER PROCEDURES

Issuance of New Notes in exchange for the Old Notes pursuant to the Exchange
Offer will be made only after a timely receipt by the Company of the Old Notes,
a properly completed and duly executed Letter of Transmittal and all other
required documents. Therefore, holders of the Old Notes desiring to tender such
Notes in exchange for New Notes should allow sufficient time to ensure timely
delivery. The Company is under no duty to give notification of defects or
irregularities with respect to the tenders of Notes for exchange. Notes that are
not tendered or are tendered but not accepted will, following the consummation
of the Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof and, upon consummation of the Exchange Offer, certain
registration rights under the Registration Rights Agreement will terminate. In
addition, any holder of Notes who tenders in the Exchange Offer for the purpose
of participating in a distribution of the New Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transactions. Each Participating Broker-Dealer that
receives New Notes for its own account in exchange for Old Notes, where such
Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of the New Notes. See
"Plan of Distribution." To the extent that Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Notes could be adversely affected. See "The Exchange Offer."

USE OF PROCEEDS

The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the New Notes in the Exchange
Offer. The net proceeds of the Initial Offering (after deducting the discount to
the Initial Purchaser and expenses in connection with the Initial Offering and
certain related transactions) were approximately $81.7 million. Such proceeds
were used as follows: (i) $34.0 million was used by the Company to repay all
outstanding obligations under the Credit Agreement dated as of December 10, 1996
by and among TSI, Bankers Trust Company and the lending institutions from time
to time a party thereto (the "Credit Agreement"); and (ii) $7.5 million was used
to prepay all outstanding obligations under the Subordinated Loan Agreement
dated as of December 10, 1996 between TSI and Canterbury Mezzanine Capital, L.P.
The remainder of the proceeds was retained by the Company for general corporate
purposes, including to fund expansion of the club base.

Concurrently with the Initial Offering, the Company entered into a new
credit facility with a group of lenders (the "New Credit Facility"), which
provides for a $15.0 million revolving credit facility with a scheduled maturity
date of October 15, 2002. See "Description of New Credit Facility."

19
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of
August 31, 1997 and as adjusted to give effect to the Offering and the
application of the proceeds therefrom. This table should be read in conjunction
with the financial statements, and the related notes thereto, included elsewhere
herein. See "Use of Proceeds," "Selected Historical Consolidated Financial Data"
and "Security Ownership."
<TABLE>
<CAPTION>
AS OF AUGUST 31, 1997
----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
--------- -----------

<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................................................. $ 702 $ 43,402
--------- -----------
--------- -----------
Long-term debt (including current installments):
Borrowings under the Existing Credit Agreement.......................................... $ 31,500 $ --
Borrowings under the New Credit Facility(1)............................................. -- --
Notes offered hereby.................................................................... -- 85,000
Capitalized lease obligations........................................................... 2,255 2,255
Notes payable........................................................................... 2,763 2,763
Borrowings under the Subordinated Loan Agreement(2)..................................... 7,387 --
--------- -----------
Total long-term debt.................................................................. 43,905 90,018
Total stockholders' deficit........................................................... (6,265) (6,937)(3)
--------- -----------
Total capitalization...................................................................... $ 37,640 $ 83,081
--------- -----------
--------- -----------
</TABLE>

- ------------------------

(1) Represents a commitment of up to $15.0 million under the New Credit
Facility, utilized only to the extent of outstanding standby letters of
credit of $1.1 million.

(2) Shown net of unamortized original issue discount of $0.1 million.

(3) Reflects the write-off of unamortized original issue discount of $0.1
million and deferred financing costs of $1.1 million relating to debt being
repaid with the net proceeds of the Offering, net of income tax benefit.

20
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

Set forth below are selected historical consolidated financial data and
other financial data of the Company as of the dates and for the periods
presented. The selected historical consolidated financial data as of May 31,
1993, 1994, 1995, 1996 and 1997 and for the fiscal years then ended were derived
from the audited Consolidated Financial Statements of the Company. The selected
historical consolidated financial data as of August 31, 1997 and 1996 and for
each of the three month periods then ended were derived from the unaudited
Consolidated Interim Financial Statements of the Company for such periods,
which, in the opinion of Management, reflect all normal and recurring
adjustments necessary to present fairly the financial position and results of
operations of the unaudited periods. The information contained in this table and
accompanying notes should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Financial
Statements and accompanying notes thereto appearing elsewhere in this
registration statement.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED MAY 31, AUGUST 31,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- ---------

<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary Statement of
Operations Data
Revenues................................ $ 21,935 $ 24,890 $ 33,349 $ 43,755 $ 56,567 $ 12,375 $ 17,198
Operating expenses
Payroll and related................... 10,073 10,799 16,105 18,626 23,321 5,220 7,035
Compensation expense in connection
with stock options.................. -- -- 635 1,967 5,933 450 160
Club operating expenses............... 6,406 8,115 11,740 14,542 18,044 3,651 5,230
General and Administrative............ 1,807 2,359 3,321 3,562 3,774 1,023 1,064
Depreciation and Amortization......... 1,285 1,514 2,168 2,929 4,219 889 1,589
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)................. 2,364 2,103 (620) 2,129 1,276 1,142 2,120
Interest expense, net................... 356 342 654 952 2,455 184 1,144
Income tax (benefit) provision.......... 882 824 (541) 628 (243) 475 450
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)....................... $ 1,126 $ 937 $ (733) $ 549 $ (936) $ 483 $ 526
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------

Other Financial and
Operational Data
Adjusted EBITDA(1)...................... $ 4,068 $ 4,635 $ 3,415 $ 8,302 $ 13,048 $ 2,756 $ 4,355
Adjusted EBITDA margin.................. 18.5% 18.6% 10.2% 19.0% 23.1% 22.3% 25.3%
Deferred lease expense(2)............... $ 419 $ 1,017 $ 1,232 $ 1,277 $ 1,620 $ 275 $ 486
Capital expenditures.................... $ 1,798 $ 5,648 $ 7,670 $ 5,380 $ 11,110 $ 1,187 $ 1,303
Wholly owned clubs operated at end of
period(3)............................. 12 16 20 23 28 23 31
Total clubs operated at end of
period(4)............................. 20 24 25 28 35 28 36
Members at end of period(5)............. 28,000 33,000 45,600 55,500 70,500 55,600 80,500
Ratio (Deficiency) of earnings to fixed
charges(6)............................ 2.3x 1.7x $ (1,516) 1.3x $ (1,345) 2.1x 1.4x
</TABLE>

21
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED MAY 31, AUGUST 31,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- ---------

<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets............................... $ 12,177 $ 18,421 $ 27,275 $ 34,805 $ 52,819 $ 35,665 $ 55,874
Long-term debt, including
current installments..................... 7,098 10,205 10,430 10,453 41,071 10,622 43,905
Stockholders' equity
(accumulated deficit).................... 1,408 2,343 1,986 5,474 (6,951) 5,895 (6,265)
</TABLE>

- ------------------------

(2) Deferred lease expense reflects the difference between accrued rent expense
in accordance with GAAP and cash rent expense, which difference is typically
positive in the early years of a lease and negative in the later years of a
lease.

(3) During fiscal 1997, the Company opened or acquired six clubs and merged the
operations and membership of an existing wholly-owned club into one of the
newly opened clubs, which resulted in a net increase of five wholly-owned
clubs.

(4) Includes all clubs whether wholly-owned or managed.

(5) Represents members at wholly-owned clubs only.

(6) For the purpose of determining the ratio of earnings to fixed charges,
"earnings" consist of income before provision for corporate income taxes and
fixed charges. "Fixed charges" consist of interest expense, which includes
the amortization of deferred debt issuance costs and the interest portion of
the Company's rent expense (assumed to be one third of rent expense).

22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the "Selected
Historical Consolidated Financial Data," and the Financial Statements of the
Company and the notes thereto included elsewhere in this Registration Statement.
This Registration Statement contains, in addition to historical information,
forward-looking statements that include risks and uncertainties. The Company's
actual results may differ materially from those anticipated in these
forward-looking statements.

OVERVIEW

The Company's revenues are principally a function of the number of clubs in
service and the number of total members. As of August 31, 1997, the Company
operated 36 clubs, of which 29 were wholly-owned and consolidated for reporting
purposes. The Company's clubs collectively served in excess of 90,000 members,
of which 80,500 were members at wholly-owned and consolidated clubs. The Company
generates approximately 81% of its revenues from membership dues and
approximately 7% of its revenues from one-time initiation fees. In no event are
revenues recognized before receipt of the underlying cash payment. Initiation
fees, which are paid at the inception of a membership contract, are recognized
on a pro rata basis over the estimated period of the membership (currently 24
months). Initiation fees are matched against sales commissions and other
expenses incurred in deriving the new membership sale. Monthly dues and
non-membership revenues are recognized on a pro-rata basis over the period in
which the services are provided. The Company believes its emphasis on affordable
monthly dues and use of EFT provides the Company with stable and predictable
cash flows and makes the Company less dependent on new membership sales than
certain of its competitors.

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

During the last several years, the Company has substantially increased
revenues and profitability by expanding its club base in the New York,
Washington, D.C. and Boston metropolitan areas. As a result of the Company's
expanding club base and the relatively fixed nature of the Company's operating
costs, the Company's Adjusted EBITDA has increased from $3.4 million in fiscal
1995 to $14.6 million for the twelve-month period ended August 31, 1997 and
Adjusted EBITDA as a percentage of revenues has increased from 10.2% to 23.9%
over the same period.

Management expects the strong growth in revenues and Adjusted EBITDA to
continue as the 12 clubs opened or acquired since the beginning of fiscal 1996
continue to mature. Based on the Company's historical experience, a new club
tends to experience significant increases in revenues during its first three
years of operation as it reaches maturity. Because there is relatively little
incremental cost associated with such increasing revenues, there is a greater
proportionate increase in profitability. In the aggregate, the 12 clubs opened
or acquired since the beginning of fiscal 1996 generated revenue and Adjusted
EBITDA (before corporate expenses) of $14.0 million and $3.0 million,
respectively, in the last twelve months ended August 31, 1997. The Company
believes that the revenues and Adjusted EBITDA (before corporate expenses) of
these 12 clubs will increase significantly as the clubs reach maturity.

In addition, management seeks to strengthen the Company's market position in
the Northeast and Mid-Atlantic regions and increase revenues and cash flow
through the opening of new clubs and the acquisition of existing clubs. As of
August 31, 1997, the Company had identified over 30 locations in its targeted
markets which it believes possess the criteria for a model club. Because of the
Company's historical success with opening new clubs and the number of
opportunities currently available to increase the club base, the Company intends
to open or acquire approximately 15 clubs by the end of fiscal 1999.

23
<PAGE>
RESULTS OF OPERATIONS

THREE MONTHS ENDED AUGUST 31, 1997 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1996

REVENUES. Revenues increased $4.8 million, or 39%, to $17.2 million for the
quarter ended August 31, 1997 from $12.4 million in the quarter ended August 31,
1996. This increase resulted primarily from the continued maturation of the
three clubs opened or acquired in fiscal 1996 (approximately $0.9 million), the
six clubs opened or acquired in fiscal 1997 (approximately $2.3 million), and
the three clubs acquired in fiscal 1998 (approximately $0.9 million). In
addition, revenues increased during the quarter ended August 31, 1997 due to
revenue growth at the Company's mature clubs resulting from membership growth
and dues increases as well as increased sales of personal services such as
private training.

OPERATING EXPENSES. Operating expenses increased $3.8 million, or 34%, to
$15.1 million for the quarter ended August 31, 1997 from $11.2 million in the
quarter ended August 31, 1996. The increase in total operating expenses resulted
primarily from increases in: payroll and related expenses ($1.8 million); club
operating expenses ($1.6 million); and depreciation and amortization ($0.7
million). This increase was primarily attributable to the six clubs opened or
acquired in fiscal 1997 (approximately $2.2 million) and the three clubs
acquired in 1998 (approximately $1.5 million). In addition, general and
administrative expenses were unchanged at approximately $1.0 million for the
quarters ended August 31, 1997 and August 31, 1996.

OPERATING INCOME (LOSS). Operating income (loss) increased $1.0 million, or
86%, to $2.1 million for the quarter ended August 31, 1997 from $1.1 million in
the quarter ended August 31, 1996. Operating income (loss) as a percentage of
revenues increased from 9% in the quarter ended August 31, 1996 to 12% in the
quarter ended August 31, 1997. The increase in operating income and operating
income as a percentage of revenues during the quarter ended August 31, 1997 is
primarily attributable to revenue growth at the 12 clubs opened or acquired
since fiscal 1995.

INTEREST EXPENSE, NET. Interest expense, net, increased $1.0 million to
$1.1 million for the quarter ended August 31, 1997 from $0.2 million in the
quarter ended August 31, 1996, primarily as a result of the Merger during the
1997 fiscal year and the new debt financing structure put in place.

INCOME TAX (BENEFIT) PROVISION. Income tax (benefit) provision remained
unchanged at $0.5 million for the quarters ended August 31, 1997 and 1996.

FISCAL 1997 COMPARED TO FISCAL 1996

REVENUES. Revenues increased $12.8 million, or 29%, to $56.6 million during
fiscal 1997 from $43.8 million in fiscal 1996. This increase resulted primarily
from the continued maturation of four clubs opened or acquired during fiscal
1995 (approximately $1.4 million), the three clubs opened or acquired in fiscal
1996 (approximately $4.3 million), and the six clubs opened or acquired in
fiscal 1997 (approximately $4.3 million). In addition, revenues increased during
fiscal 1997 due to revenue growth at the Company's mature clubs resulting from
membership growth and dues increases as well as increased sales of personal
services such as private training.

OPERATING EXPENSES. Operating expenses increased $13.7 million, or 33%, to
$55.3 million in fiscal 1997 from $41.6 million in fiscal 1996. The increase in
total operating expenses resulted primarily from increases in: payroll and
related expenses ($4.7 million); compensation expense in connection with stock
options ($4.0 million); club operating expenses ($3.5 million); and depreciation
and amortization ($1.3 million). The increase in payroll and related club
operating expenses is primarily attributable to the three clubs opened or
acquired in fiscal 1996 (approximately $2.7 million), and the six clubs opened
or acquired in fiscal 1997 (approximately $5.4 million). The increase in
compensation expense in connection with stock options is attributable to the
adjustment of the Company's stock options to fair market value in connection

24
<PAGE>
with the Merger. In addition, general and administrative expenses increased $0.2
million to $3.8 million in fiscal 1997 from $3.6 million in fiscal 1996.

OPERATING INCOME (LOSS). Operating income (loss) decreased $0.9 million to
$1.3 million in fiscal 1997 from $2.1 million in fiscal 1996. Operating income
as a percentage of sales decreased from 5% in fiscal 1996 to 2% in fiscal 1997.
The decrease in operating income (loss) and operating income as a percentage of
sales during fiscal 1997 is attributable to the above-mentioned increase in
compensation expense in connection with stock options, which was partially
offset by improved operating results at the Company's clubs.

INTEREST EXPENSE, NET. Interest expense, net, increased $1.5 million to
$2.5 million in fiscal 1997 from $1.0 million in fiscal 1996, primarily as a
result of the Merger during fiscal 1997 and the debt incurred to finance the
Merger.

INCOME TAX (BENEFIT) PROVISION. Income tax (benefit) provision decreased
$0.9 million to ($0.2) million in fiscal 1997 from $0.6 million in fiscal 1996,
as a result of the net loss after interest expense in fiscal 1997. The Company's
effective tax rate in fiscal 1996 was negatively impacted by losses at certain
of the Company's clubs incurred in states where the net operating loss could not
be currently utilized. In fiscal 1997 the income tax benefit was reduced by
adjustments to expected tax refunds partly offset by a reduction in the
valuation allowance for the deferred tax assets.

FISCAL 1996 COMPARED TO FISCAL 1995

REVENUES. Revenues increased $10.4 million, or 31%, to $43.8 million during
fiscal 1996 from $33.3 million in fiscal 1995. This increase resulted primarily
from the continued maturation of four clubs opened during fiscal 1994
(approximately $2.7 million), the four clubs opened or acquired in fiscal 1995
(approximately $4.9 million), and the three clubs opened or acquired in fiscal
1996 (approximately $0.9 million). In addition, revenues increased during fiscal
1996 due to revenue growth at the Company's mature clubs resulting from
membership growth and dues increases and increased sales of personal services
such as private training.

OPERATING EXPENSES. Operating expenses increased $7.7 million, or 23%, to
$41.6 million in fiscal 1996 from $34.0 million in fiscal 1995. The increase in
total operating expenses resulted primarily from increases in: payroll and
related expenses ($2.5 million); compensation expense in connection with stock
options ($1.3 million); club operating expenses ($2.8 million); and depreciation
and amortization expense ($0.8 million). The increase in payroll and related and
club operating expenses is primarily attributable to the four clubs opened
during fiscal 1994 (approximately $0.8 million), the four clubs opened or
acquired during fiscal 1995 (approximately $2.9 million) and the three clubs
opened or acquired in fiscal 1996 (approximately $1.8 million). The increase in
compensation expense in connection with stock options is attributable to the
adjustment of the Company's stock options to fair market value. In addition,
general and administrative expenses increased $0.2 million to $3.6 million in
fiscal 1996 from $3.3 million in fiscal 1995.

OPERATING INCOME (LOSS). Operating income (loss) increased $2.7 million to
$2.1 million in fiscal 1996 from ($0.6) million in fiscal 1995. The increase in
operating income (loss) is primarily attributable to the increased revenues
associated with the seven new clubs opened since fiscal 1995. In addition,
operating income (loss) in fiscal 1995 was adversely affected by the opening of
four new clubs during the fourth quarter of fiscal 1994 and two clubs in fiscal
1995. The Company's clubs typically experience significant increases in revenues
and cash flow/profitability during the first three years of operations as they
mature. Because there are usually minimal incremental operating expenses
associated with such increased revenues, once break even is reached there is a
larger proportionate increase in profitability. Due to the fixed cost nature of
its operation, however, the Company's typical club takes six to nine months to
generate positive operating income.

25
<PAGE>
INTEREST EXPENSE, NET. Interest expense, net increased $0.3 million to $1.0
million in fiscal 1997 from $0.7 million in fiscal 1996, primarily to finance
capital expenditures for new clubs opened or acquired in fiscal 1996.

INCOME TAX (BENEFIT) PROVISION. Income tax (benefit) provision increased
$1.2 million to $0.6 million in fiscal 1996 from ($0.5) million in fiscal 1995,
primarily as a result of the move to profitability in fiscal 1996. In fiscal
1996, the company's effective tax rate was negatively affected by net operating
losses incurred by certain clubs located in the states in which the losses could
not currently be utilized.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary cash needs are for capital expenditures, debt service
and working capital. The Company has financed its capital expenditures, debt
service requirements, and working capital primarily through internally generated
cash flow and borrowings under its Existing Credit Agreement together with
capital leases and other notes payable.

Net cash provided by operating activities in the three month period ended
August 31, 1997 was $0.8 million as compared with $0.5 million provided by
operating activities in the three month period ended August 31, 1996. Net cash
provided by operating activities for the fiscal year ended May 31, 1997 was
$12.0 million as compared with $5.7 million provided by operating activities for
the fiscal year ended May 31, 1996. The increase primarily reflects continued
maturation of recently opened facilities. Net cash provided by operating
activities for the fiscal year ended May 31, 1996 was $5.7 million as compared
with $3.3 million provided by operating activities for the fiscal year ended May
31, 1995. The increase primarily reflects continued maturation of recently
opened facilities.

The Company invested $7.7 million, $5.4 million and $11.1 million in capital
expenditures during fiscal years 1995, 1996 and 1997, and $1.3 million during
the three months ended the August 31, 1997. The Company estimates that it will
invest a total of approximately $15.0 million in capital expenditures during the
balance of fiscal 1998 and approximately $20.0 million in capital expenditures
during fiscal 1999 to open or acquire approximately 15 new clubs and to maintain
existing clubs.

The Company incurred significant indebtedness in connection with the Merger.
At August 31, 1997, on a pro forma basis, after giving effect to the issuance of
the Notes offered hereby, the Company would have had approximately $90.0 million
of outstanding indebtedness, consisting of $85.0 million of the Notes and $5.0
million in capitalized leases and notes payable. The Company believes that cash
generated from operations, together with the excess cash generated from the net
proceeds of the Offering and amounts available under the New Credit Facility,
will be adequate to meet its capital expenditures, debt service requirements,
and working capital needs for the foreseeable future. The Company will have
approximately $13.9 million in availability under the New Credit Facility. The
New Credit Facility will mature on May 31, 2002 and has no scheduled interim
amortization requirements. The Company's future operating performance and
ability to service or refinance the Notes and to extend or refinance the New
Credit Facility will be subject to future economic conditions generally and to
financial, business and other factors, many of which are beyond the Company's
control. See "Description of New Credit Facility."

INFLATION

The Company believes that inflation has not had a material impact on its
results of operations for the three years ended May 31, 1997.

RECENT ACCOUNTING PRONOUNCEMENTS

During February 1997, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 will require the Company to replace the current presentation of the
per share data with "basic" and "diluted" per share. SFAS No. 128 will be
adopted by the Company for periods ending after May 31, 1998, and for all
periods presented the Company will provide "basic" and "diluted" per share data.
Based on management's current estimates, the future adoption of SFAS 128 is not
expected to have a material impact on per share data.

26
<PAGE>
BUSINESS

GENERAL

Over its 24 year operating history, the Company has developed and refined a
model club format that allows the Company to cost effectively construct and more
efficiently operate its fitness clubs. The Company's model club is 15,000 to
25,000 square feet and features a wide variety of state-of-the-art
cardiovascular and strength-training equipment, as well as exercise studios
offering extensive group fitness programs. Certain clubs also feature additional
amenities, including swimming pools, squash or tennis courts and physical
therapy centers. The Company offers members a variety of other services for
which it receives additional fees, including personal training. The Company's
typical member is 20 to 44 years of age, college educated and earns in excess of
$50,000 per annum.

INDUSTRY OVERVIEW

According to the International Health, Racquet & Sportsclub Association
("IHRSA"), the industry's leading trade organization, revenues generated by the
United States fitness club industry increased at a compound annual rate of 9.4%
from $5.5 billion in 1991 to $8.6 billion in 1996. Over the same period,
memberships in all clubs have grown at a 4.5% compound annual growth rate, from
16.7 million to 20.8 million. Both fitness club revenues and memberships have
benefited from the increasing awareness among the general public of the
importance of physical exercise. In July 1996, the Surgeon General issued a
report on Physical Activity and Health highlighting the connection between
regular physical exercise and better health. The Company believes the Surgeon
General's report and other medical evidence supporting the importance of regular
physical exercise are leading more Americans to become increasingly health
conscious and to regularly incorporate exercise into their lives.

27
<PAGE>
revenue and own less than 10% of all clubs. The Company believes that
independent operators have found it increasingly difficult to compete with
multi-facility operators like the Company that enjoy substantial economies of
scale. Management believes the long-term trend of increasing fitness awareness
and the fragmented nature of the industry make it attractive for continued
investment.

COMPETITIVE STRENGTHS

The Company attributes its opportunities for continued growth and increased
profitability to the following competitive strengths:

PROVEN UNIT OPERATING PERFORMANCE. The Company has established a track
record of consistent growth in revenue and cash flow across its club base. The
Company's 12 wholly-owned clubs in operation at the end of fiscal 1993 generated
revenues and Adjusted EBITDA (before corporate expenses) of $25.0 million and
$8.9 million, respectively, during fiscal 1997 as compared to $20.0 million and
$6.9 million, respectively, during fiscal 1993. Over its 24-year history, the
Company has never closed a club, and in fiscal 1997, each of the clubs that was
in operation for more than six months generated positive Adjusted EBITDA (before
corporate expense) for the year.

28
<PAGE>
EXPERIENCED MANAGEMENT TEAM. The Company believes that it possesses one of
the most experienced management teams in the industry. The Company's five senior
executives have over 60 years of combined experience in the fitness club
industry and have been working together at the Company since 1990. Management
believes that it has the depth, experience and motivation to manage the
Company's internal and external growth. In the aggregate, management owns
approximately 28% of the capital stock of the Company, on a fully-diluted basis.

BUSINESS STRATEGY

The Company intends to significantly increase revenue and cash flow using
the following strategies:

FACILITIES AND SERVICES

Approximately 30 of the Company's existing clubs are based on the Company's
model club format, which will serve as a basis for new clubs developed or
acquired by the Company. This model draws on the Company's historical experience
and has been refined through the operation and results of recently opened clubs.
However, because the Company typically builds new clubs in existing buildings
designed for office, retail or other uses (e.g., parking garage, nightclub, and
banking), its model club is tailored for each space.

The main characteristics of the prototype club include:

LOCATION: The Company's clubs are typically located in well-established,
higher-income residential, commercial or mixed urban neighborhoods within major
metropolitan areas capable of supporting the

29
<PAGE>
development of a cluster of clubs. Clubs must have relatively high "retail"
visibility and should be close to transportation hubs.

CLUB SIZE: The Company's clubs range from 15,000 to 25,000 square feet. The
optimal size is determined based on expected membership size, peak member usage
at maturity and occupancy costs. Membership for each club ranges from 2,500 to
4,500 at maturity.

DEMOGRAPHICS: Although club members represent a cross-section of the
population in a given geographic market, the Company's typical member is between
the ages of 20 and 44, college educated and earns in excess of $50,000 per
annum.

FACILITIES/SERVICES: The Company's facilities include state-of-the-art
cardiovascular equipment, including Lifecycles, StairMasters, treadmills, and
elliptical motion machines; strength equipment and free weights, including
Nautilus, Cybex, Icarian and Hammer Strength machines; group exercise and
cycling studio(s); Cardio-Theater entertainment systems; locker rooms, including
shower facilities, towel service, other amenities such as saunas and steamrooms;
and a small retail shop. Personal training services are offered at all locations
and massage is offered at most clubs, each at an additional charge. Additional
services and facilities such as physical therapy programs, child care, swimming
pools, tennis courts or squash courts, and climbing walls are available in
certain locations.

CAPITAL INVESTMENT: The initial development of a new club costs
approximately $100 per square foot. This includes all hard and soft construction
costs, fitness equipment, furniture and fixtures, and all other start-up costs.
In general, approximately 65% of the costs are for construction, 25% for fitness
equipment, furniture and fixtures, and the remainder for miscellaneous costs.

MEMBERSHIP PROGRAMS AND REVENUE COLLECTION

The Company offers three principal types of memberships:

(1) The Passport Membership is the Company's highest priced membership, and
it entitles the member to use any Company club at any time. This membership is
held by approximately 55% of current members.

(2) The Gold membership allows the member to use his/her "home" club at any
time, and to use other clubs at off-peak times only. This membership is held by
approximately 40% of current members.

(3) The Off-Peak membership, which is the least expensive category,
restricts use to off-peak times at any Company club. Five percent (5%) of the
Company's members hold this type of membership.

To join a Company club, a new member signs a membership agreement which
obligates the member to pay the Club a one-time initiation fee and monthly dues.
The initiation fee averages $120 for the New York Sports Clubs and averages $55
for the other U.S. clubs. Club dues currently average approximately $70 per
month in the New York area clubs and $60 in other areas. The Company believes
that its monthly dues strategy gives it a significant competitive advantage in
terms of ease of sale and collection, revenue collected per year, and length of
membership. In addition, it enables the Company to increase its dues in an
efficient and consistent manner.

Approximately 90% of all memberships continue from month-to-month until the
member makes an affirmative decision to cancel the membership. The average
length of a club membership is approximately 24 months. The membership agreement
provides that monthly dues will be collected by EFT based on credit card or bank
account debit authorization contained in the agreement. The monthly dues and EFT
system assures a stable cash flow for the Company, eliminates the traditional
accounts receivable function, and minimizes bad-debt write-offs. During the
first week of each month the Company receives, on a consolidated basis, by wire
transfer, the dues for that month. In fiscal 1997, the Company collected average
annual revenue of approximately $890 per member, which typically places the
membership cost in the mid-

30
<PAGE>
price range for the markets served by the Company. Now exceeding $4.2 million
per month, the total EFT has increased by $1.9 million since May 31, 1995. While
the Company strongly encourages monthly dues memberships, approximately 10% of
the Company's members (often corporate group members) purchase paid-in-full
defined term memberships of one year.

PHYSICAL THERAPY SERVICES

The Company operates a stand-alone physical therapy facility in New York
City on behalf of the Hospital for Joint Diseases, which is part of the New York
University Hospital Group (the "Hospital"). The Company was paid approximately
$0.9 million for these management services in fiscal year 1997, and expects to
be paid a similar amount in fiscal year 1998. Pursuant to the existing
management and other agreements between the Company and the Hospital, the
Company is responsible for all payroll and occupancy expenses of the facility,
as well as certain other expenses. The term of these agreements is currently
month-to-month, but the Company is renegotiating the agreements and expects to
extend the respective terms for at least two years.

Six of the Company's clubs offer physical therapy services on-site. These
services are provided by unaffiliated sub-tenants or licensees of the Company,
including Health South at one Manhattan location. The Company believes that
these facilities attract new club members and provide valuable services to
existing members.

MARKET AND MEMBERSHIP DEMOGRAPHICS

The Company's clubs are typically located in well-established, higher-income
residential, commercial or mixed urban areas with a significant population of
young (25 to 44 years of age) professionals. They are broadly positioned as
conveniently located clubs for men and women of all ages and levels of fitness,
offering mid-priced memberships for quality facilities, equipment, and programs.
Club members represent a cross-section of the population in a given geographic
market, but they are primarily individuals in the 20 to 44 year-old age group.
Approximately 60% of all members are above the age of thirty years and the
median age is approximately 35 years. The total membership is composed of
slightly more women than men (53% to 47%). A majority of members are college
educated, and have income in excess of $50,000 per year. The Company believes
that its typical member has incorporated fitness into his/her lifestyle.

Despite the higher transient segment of the population that exists in the
urban markets served by the Company, the Company's overall cancellation rates
are in line with the Northeast U.S. industry average, based on IHRSA's Industry
Data Survey (1996). While the Company's cancellation rates at mature clubs vary
from month-to month and club-to-club, due to seasonality and other factors, they
tend to fluctuate in a predictable range of 3.5% to 4.0% per month. Newer clubs
have far lower rates. Cancellation rates generally increase as a club membership
base grows and then stabilizes as a club reaches maturity.

The Company believes that approximately 55% of cancellations result from
factors which are beyond its control, primarily member relocation, but also
medical and payment issues. The Company closely monitors and manages its member
attrition. Efforts to reduce member turnover are ongoing.

SALES AND MARKETING

The Company employs in excess of 95 "in-club" membership consultants whose
sole responsibility is the sale of club memberships. Most of the clubs have
street frontage and high visibility which attracts substantial retail traffic.
In addition, the clubs have significant advertising and market visibility as a
result of the Company's clustering strategy. The Company promotes the clubs
aggressively through television and print advertising, billboards, direct mail,
public relations campaigns, special events (e.g., as primary sponsor of a health
and fitness products and services exposition), and special offers such as
free-trial periods. In addition, the Company has developed three worldwide web
sites which describe all of the club facilities and locations and act as a
source for promotion on line. The Company's marketing and public

31
<PAGE>
relations efforts are often supported by innovative fitness programs and
products developed by the Company. For example, the Company has an exclusive
relationship with the New York City Ballet for the co-development of class
exercise programs for club use.

The Company's experience has been that membership levels at new clubs
generally increase for a period of three years or more before reaching a
relatively stable level. The Company considers clubs which have reached this
level to be "mature" clubs. At mature clubs, referrals from existing club
members are a primary source of new members.

The Company also pursues an active corporate and group sales program. Given
heightened concern about health care costs, and the increased interest in
preventive health care on the part of businesses, insurance companies, health
maintenance organizations, and the government, the Company has placed increased
emphasis on its corporate sales efforts.

The clustering of clubs strengthens the Company's sales and marketing
efforts. By operating a group of clubs in a concentrated geographic area, the
value of Company memberships is enhanced by the ability to offer Passport
Memberships, which allow the member to use any Company club (including clubs in
other areas) at any time. This membership appeals primarily to consumers who
seek the convenience of having a fitness club near their home and their
workplace. Approximately 55% of all members choose the Passport Membership, and
because these memberships offer broader privileges and greater convenience, they
are sold at a premium over single-club prices. Clustering also allows the
Company to provide special facilities within the market without offering them at
each location (e.g., squash, tennis, special programs, and swimming pools).

The Company believes that its approach of providing the best price/value
combination to a broad customer base enables the Company to generate
significantly higher revenue per square foot than the industry standard, while
also reducing the risks associated with targeting a narrow market. While IHRSA
statistics show that U.S. fitness-only clubs generate approximately $63 in
revenue per square foot, the Company's mature clubs generate two-to-three times
that amount.

INFORMATION SYSTEMS

The Company believes it has been an industry leader in the use of computer
technology since it adopted the EFT system for monthly dues collection in the
mid-1980's. In August 1997, the Company collected revenue from over 70,000 bank
and credit card accounts belonging to members of its wholly-owned clubs. The
Company believes that it now has the third largest monthly revenue from EFT in
the fitness club industry.

The Company applies information technology in virtually every area of the
business, including business development, sales and marketing, staffing and
other operational systems. The Company has underway a multi-year information
technology project that has implemented, among other things, the industry's
first multi-site online contracting system designed to control membership
pricing and streamline the creation, processing and management of the Company's
sales contracts for new members, as well as the associated sales compensation
system. Other elements of this project will include the development and
implementation of (a) a computerized photo and card-swipe system for member
check-in, (b) automated updates and changes to existing member records and (c)
extensive club site development databases, class exercise scheduling and payroll
system and personal training revenue tracking and payroll system, as part of a
larger fitness programming project. The Company believes that its information
management systems, which are proprietary in many respects, produce a
substantial competitive advantage.

32
<PAGE>
MANAGED CLUBS

As of August 31, 1997, 31 of the existing clubs were wholly-owned by the
Company and five were managed and/or partly-owned by the Company (the "Managed
Clubs"). The Managed Clubs are controlled by the Company, which acts as either
general partner or managing agent, and are operated by the Company in the same
manner as wholly owned clubs, subject to certain rights held by the Company's
partners or the club owners, according to the applicable partnership or
management agreements. As partner or manager, the Company receives a share of
club cash flow, which varies from club to club, but is typically approximately
50%. These amounts appear on the Company's income statements as management fees
or as share of net income in equity investments. However, the gross revenue
generated by the Managed Clubs (approximately $10.0 million per year) is not
consolidated for financial statement purposes.

The Company acquired two Managed Clubs during fiscal 1995 and two Managed
Clubs at the outset of fiscal 1998 which were originally party to a management
agreement with the Company. In the future, the Company may seek to acquire
Managed Clubs, if such opportunities arise.

COMPETITION

The Company is one of the largest fitness club operators in the country and
the largest in Manhattan measured by number of clubs. The Company believes its
clustering strategy results in its strong position in the New York and
Washington, D.C. markets. The Company's clubs compete with numerous regional and
local club operators, as well as with physical fitness and recreational
facilities established by governments and businesses for their employees,
amenity and condominium clubs, the YMCA and similar organization and to a
certain extent, racquet clubs and tennis and other athletic clubs, weight
reducing salons, and the home-use fitness equipment industry. Neither of the two
largest fitness club operators in the United States, Bally Total Fitness and
Fitness Holdings, have a significant presence in the Company's targeted market
segments. The Company estimates that as of August 31, 1997 there were more than
200 competitive clubs in the New York metropolitan market, 100 clubs in the
Washington, D.C. market, and 70 clubs in the Boston market. See "Risk
Factors--Competition."

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

INTELLECTUAL PROPERTY

The Company has registered, and is in the process of registering, various
trademarks and service marks with the U.S. Patent and Trademark Office,
including New York Sports Clubs, Washington Sports Clubs, Boston Sports Clubs,
TSI, and Town Sports International, Inc.

EMPLOYEES

At August 31, 1997, the Company had approximately 2,100 employees, of which
approximately 680 were employed full-time. Approximately 90 employees were
corporate personnel working in the Manhattan or the Washington, D.C. offices.
The Company is not a party to any collective bargaining agreement with its
employees. The Company has never experienced any significant labor shortages nor
had any difficulty in obtaining adequate replacements for departing employees
and considers its relations with its employees to be good. The Company believes
that it offers its employees benefits (including health, dental, disability,
life insurance and 401(k) plans) which are superior to those generally offered
by its competitors.

33
<PAGE>
PROPERTIES AND FACILITIES

CLUB LOCATIONS. In the New York City and Washington, D.C. markets, the
Company has created clusters of clubs in the higher-income urban areas and their
commuter suburbs in accordance with the Company's operating strategy of offering
the consumer the convenience and value of multiple locations and reciprocal use
privileges and maximizing efficiencies through centralized management control of
standardized facilities and services.

CLUB LOCATIONS AS OF AUGUST 31, 1997

<TABLE>
<CAPTION>
FISCAL
YEAR
FIRST
LOCATION ADDRESS OWNERSHIP STRUCTURE OPERATED
- --------------------------------- ----------------------------------------- ------------------------ -----------
<S> <C> <C> <C>
1 Manhattan 404 Fifth Avenue at 37th Street Wholly Owned 1974
2 Manhattan 151 East 86th Street Wholly Owned 1976
3 Washington, DC 214 D Street, S.E. Part Owned/Managed 1979
4 Manhattan 61 West 62nd Street Wholly Owned 1985
5 Brooklyn, NY 110 Boerum Place Wholly Owned 1986
6 Manhattan 614 Second Avenue at 34th Street Wholly Owned 1986
7 Basel, Switzerland St. Johanns-Vorstadt 41 Managed 1987
8 Zurich, Switzerland Glarnischstrasse 35 Managed 1987
9 Great Neck, NY 15 Barstow Road Managed 1989
10 East Brunswick, NJ 8 Cornwall Court Wholly Owned 1990
11 Manhattan 30 Cliff Street Wholly Owned 1990
12 Manhattan 380 Madison Avenue at 46th Street Wholly Owned 1990
13 Manhattan 151 Reade Street Wholly Owned 1990
14 Washington, DC 1835 Connecticut Avenue, N.W. Part Owned/Managed 1990
15 Manhattan 1601 Broadway at 48th Street Wholly Owned 1992
16 Boston, MA 561 Boylston Street Wholly Owned 1992
17 Manhattan 50 West 34th Street Wholly Owned 1993
18 Washington, DC 1990 M Street, N.W. Wholly Owned 1993
19 Bethesda, MD 4903 Elm Street Wholly Owned 1994
20 Washington, DC 2251 Wisconsin Avenue, N.W. Wholly Owned 1994
21 Manhattan 349 East 76th Street Wholly Owned 1994
22 Manhattan 248 West 80th Street Wholly Owned 1994
23 Manhattan 502 Park Avenue at 59th Street Wholly Owned 1995
24 Manhattan 117 Seventh Avenue S. at 10th Street Wholly Owned 1995
25 Scarsdale, NY 696 White Plains Road Wholly Owned 1996
26 Manhattan 303 Park Avenue S. at 23rd Street Wholly Owned 1996
27 Manhattan 30 Wall Street Wholly Owned 1996
28 Manhattan 575 Lexington Avenue at 51st Street Wholly Owned 1997
29 Manhattan 278 Eighth Avenue at 23rd Street Wholly Owned 1997
30 Manhattan 1635 Third Avenue at 91st Street Wholly Owned 1997
31 Mamaroneck, NY 124 Palmer Avenue Wholly Owned 1997
32 Manhattan 200 Madison Avenue at 36th Street Wholly Owned 1997
33 Manhattan 131 East 31st Street at Lexington Avenue Wholly Owned 1997
34 Forest Hills, NY 69-33 Austin Street Wholly Owned 1997
35 Princeton, NJ 301 North Harrison Street Wholly Owned 1997
36 Allston, MA 15 Gorham Street Wholly Owned 1998
Under Construction
37 Manhattan 633 Third Avenue at 41st Street Wholly Owned 1998
38 North Bethesda, MD 10,400 Old Georgetown Road Wholly Owned 1998
</TABLE>

34
<PAGE>
TSI owns the 151 East 86th Street location, which houses a Company club and
a retail tenant that generated $0.5 million of rental income for the Company
during the fiscal year ended May 31, 1997. All other clubs occupy leased space
pursuant to long-term leases (generally 15 to 25 years, including options). In
the next seven fiscal years (ending May 31, 2004), only three of the Company's
leases will expire without any renewal option.

The Company leases approximately 15,000 square feet of office space in New
York City, and 3,000 square feet of office space in Washington, D.C., for
administrative, accounting and general corporate purposes. The Company also
leases warehouse and commercial space in Long Island City, New York, for storage
purposes and for the operation of a centralized laundry facility for certain New
York clubs.

GOVERNMENT REGULATION

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

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

Under so-called state "cooling-off" statutes, a member has the right to
cancel his or her membership for a period of three to ten days (depending on the
applicable state law) and, in such event, is entitled to a refund of any down
payment made. In addition, the Company's membership contracts provide that a
member may cancel his or her membership at any time for death, medical reasons
or relocation a certain distance from the nearest club. The specific procedures
for cancellation in these circumstances vary due to differing state laws. In
each instance, the canceling member is entitled to a refund of prepaid amounts
only. Furthermore, where permitted by law, a cancellation fee is due to the
Company upon cancellation and the Company may offset such amount against any
refunds owed.

LEGAL PROCEEDINGS

The Company is a party to various litigation matters incidental to the
conduct of its business. Management does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on the financial condition or results of operations of the Company.

35
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the names, ages as of August 31, 1997, and a
brief account of the business experience of each person who is a director or
executive officer of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Mark Smith........................................... 38 Chief Executive Officer and Director

Robert Giardina...................................... 39 President and Chief Operating Officer

Alexander Alimanestianu.............................. 38 Executive Vice President, Development

Richard Pyle......................................... 38 Executive Vice President and Chief Financial Officer

Deborah Smith........................................ 38 Senior Vice President--Operations

Leslie Kimerling..................................... 35 Senior Vice President--Information Management and
Planning

Keith Alessi......................................... 42 Director

Paul Arnold.......................................... 51 Director

Bruce Bruckmann...................................... 43 Director

Stephen Edwards...................................... 34 Director

Jason Fish........................................... 39 Director
</TABLE>

MARK SMITH joined the Company in 1985, and was appointed Chief Executive
Officer in 1995. Prior to this appointment, he held the position of Executive
Vice President of Development and International Operations. Mr. Smith has also
served as a director of the Company since December 1996. Mr. Smith has had
primary responsibility for the development and/or acquisition of more than 25
new Company clubs since 1990, as well as responsibility for the Company's
Managed Clubs in Switzerland. Before joining the Company, Mr. Smith was a
chartered accountant with Coopers & Lybrand in New York City, London and New
Zealand, and a professional squash player.

ROBERT GIARDINA has served as President and Chief Operating Officer of the
Company since 1992. Mr. Giardina joined the Company in 1981 (when the Company
had 4 clubs) after six years of employment with other fitness club companies.
With over 20 years of experience in the club industry, Mr. Giardina has
expertise in virtually every aspect of facility management and club operations.
In addition to operations, Mr. Giardina has primary responsibility for sales and
marketing.

ALEXANDER ALIMANESTIANU joined the Company in 1990, and became Executive
Vice President, Development in 1995. From 1990 to 1995, Mr. Alimanestianu served
as Vice President and Senior Vice President. Before joining the Company, he
worked as a corporate attorney for six years with one of the Company's outside
law firms. Mr. Alimanestianu has been involved in the development or acquisition
of 30 of the Company's clubs.

RICHARD PYLE, a British chartered accountant, joined the Company in 1987 and
has been chiefly responsible for the Company's financial matters since that
time, as a Vice President in 1988, Senior Vice President in 1992 and Executive
Vice President in 1995, successively. Before joining the Company, Mr. Pyle
worked in public accounting (in the U.S., Bermuda, Spain and in England)
specializing in the hospitality industry, and as the corporate controller for a
British public company in the leisure industry.

36
<PAGE>
DEBORAH SMITH joined the Company in 1985, and served as Vice President
before her appointment as a Senior Vice President of Operations in 1995. Ms.
Smith has been responsible for the startup and operation of Company clubs in New
York, Switzerland, Maryland and Washington, D.C. She oversees club operations in
all U.S. geographic areas.

LESLIE KIMERLING joined the Company in 1994 and became Senior Vice President
in 1995 with responsibility for the development of the Company's information
management and planning capabilities. Prior to joining the Company, Ms.
Kimerling was a management consultant for four years.

KEITH ALESSI has served as a director of the Company since April, 1997. Mr.
Alessi is president, chief executive officer and a director of Jackson Hewitt,
the second largest tax preparation service in the United States. Mr. Alessi is
also a director of Cort Business Services, Inc. and Shoppers Food Warehouse
Corp.

PAUL ARNOLD has served as a director of the Company since April, 1997. Mr.
Arnold is president and CEO of Cort Business Services, a leading national
supplier of high end rental furniture.

BRUCE BRUCKMANN has served as a director of the Company since December 1996.
Since 1994, Mr. Bruckmann has served as a principal of BRS. From 1983 until
1994, Mr. Bruckmann served as an officer and subsequently a Managing Director of
Citicorp Venture Capital, Ltd. ("CVC"). Mr. Bruckmann is currently a director of
Jitney Jungle Stores of America, Inc., Mohawk Industries, Inc., AmeriSource
Distribution Corporation, Chromcraft Revington Corporation, Cort Business
Services, Inc. and Anvil Knitwear, Inc. and a director of several private
companies.

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

JASON M. FISH has been a director of the Company since December 1996. Mr.
Fish has been a Managing Member of Farallon Capital Management, L.L.C.
("FCMLLC") and Farallon Partners, L.L.C., Farallon's two management entities,
since April 1996. He was a General Partner of the Farallon investment
partnerships and a Managing Director of FCMLLC's predecessor, Farallon Capital
Management, Inc., from 1990 to 1996.

COMPENSATION OF DIRECTORS

The Company may compensate directors for services provided in such capacity.
In addition to reimbursement for all reasonable out-of-pocket expenses in
connection with their travel, directors who are not executives of the Company or
officers of BRS or Farallon are paid $1,500 for each board meeting they attend
in person, $500 for each committee meeting they attend in person and $500 for
each telephonic meeting.

37
<PAGE>
SUMMARY COMPENSATION TABLE

The following summarizes, for the fiscal year indicated, the principal
components of compensation for the Company's Chief Executive Officer (the "CEO")
and the four highest compensated executive officers (collectively, the "named
executive officers"). The compensation set forth below fully reflects
compensation for work performed on behalf of the Company.

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------------------ AWARDS
OTHER COMMON STOCK
ANNUAL UNDERLYING
FISCAL COMPENSATION OPTIONS/ SARS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) ($) (#)
- ----------------------------------------- ----------- ---------- ---------- ----------------- -------------------------
<S> <C> <C> <C> <C> <C>
Mark Smith, Chief Executive Officer...... 1997 $ 350,000 $ 176,000 -- 8,830
Robert Giardina, President and Chief
Operating Officer...................... 1997 $ 331,948 $ 118,000 -- 8,829
Richard Pyle, Executive Vice President
and Chief Financial Officer............ 1997 $ 181,941 $ 85,000 -- 8,828
Alexander Alimanestianu, Executive Vice
President, Development................. 1997 $ 178,711 $ 85,000 -- 8,828
Deborah Smith, Senior Vice
President--Operations.................. 1997 $ 136,990 $ 63,475 -- 5,350
</TABLE>

- ------------------------

(1) Includes annual bonus payments under the Company's Annual Bonus Plan.

OPTION/SAR GRANTS DURING FISCAL 1997

The following discloses options on the Company's Class A Common Stock
granted during fiscal 1997 to the named executive officers.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE APPRECIATION
SECURITIES OPTIONS/ FOR OPTION TERM
UNDERLYING SARS ------------------------------
OPTIONS/ GRANTED TO 5%
SAR'S EMPLOYEES EXERCISE ANNUAL 10%
GRANTED (#) IN FISCAL OR BASE EXPIRATION GROWTH RATE ANNUAL GROWTH
NAME (1) YEAR (%) PRICE ($) DATE ($) RATE ($)
- -------------------------------------------- ------------- ----------- ----------- ----------- ------------- ---------------
Mark Smith.................................. 8,830 15.45 1.00 12-31-06 14,383 22,903
Robert Giardina............................. 8,829 15.45 1.00 12-31-06 14,382 22,900
Richard Pyle................................ 8,828 15.45 1.00 12-31-06 14,380 22,898
Alexander Alimanestianu..................... 8,828 15.45 1.00 12-31-06 14,380 22,898
Deborah Smith............................... 5,350 9.36 1.00 12-31-06 8,715 13,877
</TABLE>

- ------------------------

(1) All of such options were granted under the 1996 Common Stock Option Plan (as
defined). The options granted under the 1996 Common Stock Option Plan are
subject to vesting over five years subject to certain performance targets
and repurchase provisions upon termination of employment.

38
<PAGE>
Pursuant to the Merger, certain options on the Company's Common and
Preferred Stock were converted into new options on the Company's Series B
Preferred Stock. The following table sets forth the holdings of such options by
the named executive officers.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES EXERCISE OR POTENTIAL
UNDERLYING BASE PRICE EXPIRATION REALIZABLE
NAME OPTIONS(#) ($) DATE VALUE ($)(1)
- ---------------------------------------------------------- ----------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
Mark Smith................................................ 42,812 $ 10.00 12-31-21 1,070,289
Robert Giardina........................................... 32,793 10.00 12-31-21 819,829
Richard Pyle.............................................. 27,569 10.00 12-31-21 689,225
Alexander Alimanestianu................................... 27,199 10.00 12-31-21 679,983
Deborah Smith............................................. 9,530 10.00 12-31-21 238,257
</TABLE>

- ------------------------

(1) Based upon the liquidation preference of the Series B Preferred Stock. Does
not include dividends accruing at a rate of 14% per annum on the difference
between the exercise price and the liquidation value.

AGGREGATED OPTION/SAR EXERCISES DURING 1997 AND 1997 YEAR-END OPTION/SAR VALUES

The following summarizes exercises of stock options (granted in prior years)
by the named executive officers during fiscal 1997, as well as the number and
value of all unexercised options held by the named executive officers at the end
of fiscal 1997.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
FY-END (#) AT FY-END($)
----------------------- -------------------------
SHARES
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
ON REALIZED UNEXERCISABLE UNEXERCISABLE
EXERCISE(#) ($)(1) ----------------------- -------------------------
NAME COMMON COMMON COMMON PREFERRED COMMON PREFERRED
- ------------------------------------------------ --------- --------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mark Smith...................................... 2,404 66,110 1,766/7,064 42,812/0 512/2,048 1,070,289/0
Robert Giardina................................. 31,252 921,193 1,766/7,063 32,793/0 512/2,048 819,829/0
Richard Pyle.................................... 1,548 42,570 1,766/7,062 27,569/0 512/2,048 689,225/0
Alexander Alimanestianu......................... 1,527 41,992 1,766/7,062 27,199/0 512/2,048 679,983/0
Deborah Smith................................... 578 15,895 1,070/4,280 9,530/0 310/1,241 238,257/0
</TABLE>

- ------------------------

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The current members of the Compensation Committee are Bruce Bruckmann,
Stephen Edwards and Mark Smith.

MANAGEMENT EQUITY AGREEMENTS

Simultaneously with the Merger, the Company entered into Executive Stock
Agreements with certain of the officers and other key employees of the Company.
Pursuant to the Executive Stock Agreements, the executives each have purchased
shares of Common Stock and/or shares of Series B Preferred of the Company at a
purchase price of $1.00 per share of Common Stock and $35.00 per share of Series
B Preferred Stock. Upon the termination of an executive's employment, a portion
of the Common Class A shares purchased by each executive are subject to
repurchase by the Company, BRS or Farallon (the

39
<PAGE>
"Restricted Shares"). The Common Class A Restricted Shares vest over the course
of a five year period, or fully upon a sale of the Company or an initial public
offering of the Company's shares.

1996 COMMON STOCK OPTION PLAN

In December 1996, the Company adopted the 1996 Common Stock Option Plan (the
"Common Plan") designed to advance the Company's best interests by providing
additional incentives to executive and other key employees of the Company. The
Common Plan provides for aggregate option grants of 57,142 shares of the Common
Stock of the Company. The administration of the Common Plan, the selection of
participants, and the form and the amounts of the grants is within the sole
discretion of the Compensation Committee of the Board, subject to the
limitations of the Common Plan. As of August 31, 1997, option to purchase an
aggregate of 57,142 shares of the Common Stock at an exercise price of $1.00
were outstanding under the Common Plan.

1996 PREFERRED STOCK OPTION PLAN

In December 1996, the Company adopted the 1996 Preferred Stock Option Plan
(the "Preferred Plan") designed to advance the Company's best interests by
providing additional incentives to executive and other key employees of the
Company. The Preferred Plan provides for aggregate options grants of 164,782.56
Series B Preferred Shares of the Company. The administration of the Preferred
Plan, the selection of participants, and the form and the amounts of the grants
is in the sole discretion of the Board, subject to any limitations in the
Preferred Plan or in any option agreement. As of August 31, 1997, options to
purchase an aggregate of 164,782.56 shares of Preferred Stock at an exercise
price of $10.00 were outstanding under the Preferred Plan.

COMPANY BENEFIT PLANS

In April 1996, the Company implemented a 401(k) salary deferral plan (the
"Plan") which is available to eligible employees, as defined. The Plan provides
for the Company to make discretionary contributions. However, the Company
elected not to make contributions for either fiscal 1997 or 1996.

40
<PAGE>
SECURITY OWNERSHIP

The following table sets forth (as of August 31, 1997) certain information
with respect to the beneficial ownership of the Common Stock and Preferred Stock
by (i) any person or group who beneficially owns more than 5% of any class of
TSI's voting securities, (ii) each named executive officer and director of the
Company, and (iii) all Directors and named executive officers of the Company as
a group.

<TABLE>
<CAPTION>
PERCENTAGE SERIES A SERIES B
OF COMMON PREFERRED PREFERRED
NAME COMMON STOCK STOCK STOCK STOCK
- --------------------------------------------------------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Bruckmann, Rosser, Sherrill & Co., L.P. (1)
126 East 56th Street, 29th Floor New York,
New York 10022......................................... 504,456.01 49.9% 104,330.35 --
Farallon Partners, L.L.C. (2)
One Maritime Plaza, Suite 1325
San Francisco, California 94111........................ 198,461.00 19.6% 41,045.46 --
Canterbury Mezzanine Capital, L.P. (3)
600 Fifth Avenue, 23rd Floor New York,
New York 10020......................................... 124,022.00 11.0% -- --

EXECUTIVE OFFICERS AND DIRECTORS
Mark Smith (4)........................................... 67,891.00 6.7% -- 42,811.56
Robert Giardina (4)...................................... 52,417.00 5.2% -- 32,793.16
Richard Pyle (4)......................................... 44,348.00 4.4% -- 27,569.00
Alexander Alimanestianu (4).............................. 43,777.00 4.3% -- 27,199.32
Deborah Smith (4)........................................ 16,978.00 1.7% -- 9,530.28
Bruce C. Bruckmann (5)................................... 517,231.29 51.2% 106,972.50 --
Stephen Edwards (6)...................................... 504,456.01 49.9% 104,330.35 --
Jason Fish (7)........................................... 198,461.00 19.6% 41,045.46 --
Directors and Officers as a group
(8 persons)(8)......................................... 928,328.01 91.2% 14,017.96 140,452.50
</TABLE>

- ------------------------

(1) Excludes shares held individually by Mr. Bruckmann and other individuals
(and affiliates thereof), each of whom are employed by BRS.

(2) Includes shares held by each of Farallon Capital Partners, L.P., Farallon
Capital Institutional Partners, L.P., Farallon Capital Institutional
Partners II, L.P. and R.R. Capital Partners, L.P. (the "Farallon Entities").
Farallon Partners, L.L.C. is the general partner of each of the Farallon
Entities. Farallon Partners, L.L.C. disclaims beneficial ownership of such
shares.

(3) Includes a warrant to purchase 114,022 shares of Common Stock with an
exercise price of $.01 per share and an expiration date of December 10,
2006.

(4) Includes options to acquire, exercisable within sixty days, Common Stock,
and options, exercisable within sixty days, to acquire Series B Preferred
Stock, pursuant to the Company's 1996 Common Stock Option Plan and 1996
Preferred Stock Option Plan, respectively, each of which were approved and
instituted contemporaneously with the Merger. Messrs. Smith, Giardina,
Alimanestianu, and Pyle each hold options on 1,766 shares of Common Stock,
and Ms. Smith holds options on 1,070 shares of Common Stock. All shares of
Series B Preferred Stock beneficially owned by such persons are in the form
of options. The address for each of these named executive officers is the
same as the address of the Company's principal executive offices.

(5) Includes shares held by BRS, and certain other family members of Mr.
Bruckmann. Mr. Bruckmann disclaims beneficial ownership of such shares held
by BRS.

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<PAGE>
(6) Includes shares held by BRS. Mr. Edwards disclaims beneficial ownership of
such shares.

(7) Includes shares held by each of the Farallon Entities. Mr. Fish is a
managing member of Farallon Partners, L.L.C., which is the general partner
of each of the Farallon Entities. Mr. Fish disclaims beneficial ownership of
such shares.

(8) Includes (i) shares held by BRS, which may be deemed to be owned
beneficially by Messrs. Bruckmann and Edwards, and (ii) shares held by the
Farallon Entities, which may be deemed to be owned beneficially by Mr. Fish.
Excluding the shares beneficially owned by BRS and Farallon, Farallon, the
directors and named executive offices as a group beneficially own (i)
276,431.28 shares of Common Stock (which represents approximately 23.3% of
the Common Stock on a fully diluted basis), (ii) 3,824.15 shares of Series A
Preferred Stock, and (iii) 140,452.50 shares of Series B Preferred Stock.

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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

RECAPITALIZATION

In December 1996, the Company consummated the Merger pursuant to which,
among other things, (i) all shares of TSI's preferred stock outstanding prior to
the Merger ("Old Preferred Stock") were redeemed or converted into shares of
TSI's then authorized common stock ("Old Common Stock"), (ii) all shares of Old
Common Stock (other than shares held by certain members of TSI's management
team) were exchanged for cash, (iii) Bruckmann, Rosser, Sherrill & Co., L.P. and
certain of its employees and affiliates (collectively, "BRS"), Farallon Capital
Partners, L.P, Farallon Capital Institutional Partners, L.P., RR Capital
Partners, L.P., and Farallon Capital Institutional Partners II, L.P.
(collectively, "Farallon"), and certain members of TSI's management acquired
TSI's, newly authorized common stock, par value $0.001 per share ("Common
Stock"), Series A Preferred Stock ("Series A Preferred") and Series B Preferred
Stock ("Series B Preferred"). In addition, pursuant to the Merger, TSI
instituted a new option plan granting certain members of TSI's management
options to acquire TSI's newly authorized Series B Preferred Stock (the "Series
B Preferred") and Common Stock.

SHAREHOLDERS AGREEMENT

In connection with the Merger, the Company, BRS, Farallon, Canterbury
Mezzanine Capital, L.P. ("Canterbury"), and certain of the members of TSI's
management, entered into a Shareholders Agreement, dated as of December 10, 1996
(as amended, the "Shareholders Agreement"). The Shareholders Agreement provides,
among other things, for the following: (i) an agreement by all parties to vote
their Common Stock so as to cause the Board of Directors of the Company to
consist of six members, two of whom shall be selected by BRS (currently, Messrs.
Bruckmann and Edwards), one of whom shall be selected by Farallon (currently,
Mr. Fish), one of whom shall be the Chief Executive Officer of the Company
(currently, Mr. Smith), and two of whom shall be elected by a majority vote of
the holders of the Common Stock (currently, Messrs. Arnold and Alessi), (ii)
certain restrictions on transfer of the Common Stock, including, but not limited
to, provisions providing that (A) the Company and certain holders of the Common
Stock will have limited rights of first offer in any proposed third party sale
of Common Stock by any of the Company's shareholders, and (B) certain holders of
the Common Stock will have limited participation rights in any proposed third
party sale of Common Stock by BRS, (iii) certain limited preemptive rights to
the Company's shareholders with respect to any issuance or sale of Common Stock
by the Company, and (iv) an agreement by all parties that, upon approval of a
sale of all Common Stock or a sale of all or substantially all of the Company's
assets by the Company's Board of Directors and BRS, such parties will consent to
and raise no objections against such sale and sell its Common Stock in such
sale, if so required. Messrs. Arnold and Alessi have, subsequent to the Merger,
agreed to become bound by the Shareholders Agreement as a party thereto.

REGISTRATION RIGHTS AGREEMENT

In connection with the Merger, the parties to the Shareholders Agreement
contemporaneously entered into a Registration Rights Agreement, dated December
10, 1996 (as amended, the "Shareholder Registration Rights Agreement"). Pursuant
to the terms of the Shareholder Registration Rights Agreement, BRS, Farallon,
and Canterbury have the right to require the Company, at the expense of the
Company and subject to certain limitations, to register under the Securities Act
all or part of the shares of Common Stock (the "Registrable Securities") held by
them. BRS is entitled to demand up to three long-form registrations at any time
and unlimited short-form registrations. Farallon is entitled to demand one
long-form registration (but only one year after the Company has consummated an
initial registered public offering of its Common Stock) and up to three
short-form registrations. Canterbury is entitled to demand up to two short-form
registrations.

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<PAGE>
All holders of Registrable Securities are entitled to an unlimited number of
"piggyback" registrations, with the Company paying all expenses of the offering,
whenever the Company proposes to register its Common Stock under the Securities
Act. Each such holder is subject to certain pro rata limitations on its ability
to participate in such a "piggyback" registration. In addition, pursuant to the
Shareholder Registration Rights Agreement, the Company has agreed to indemnify
all holders of Registrable Securities against certain liabilities, including
certain liabilities under the Securities Act.

PROFESSIONAL SERVICES AGREEMENT AND TRANSACTION FEES

In connection with the Merger, Bruckmann, Rosser, Sherrill & Co., Inc. ("BRS
Co."), an affiliate of BRS, and the Company entered into a Professional Services
Agreement, whereby BRS Co. agreed to provide certain advisory and consulting
services to the Company. In exchange for such services, BRS Co. receives an
annual fee of $0.25 million per calendar year while they own at least 20% of the
outstanding Common Stock of the Company. The Company also paid BRS Co. and
Farallon transaction fees of $0.6 million and $0.2 million, respectively for
investment banking advisory services rendered to the Company in connection with
the Merger.

DESCRIPTION OF NEW CREDIT FACILITY

Concurrently with the Initial Offering, TSI amended and restated its
Existing Credit Agreement, dated as of December 10, 1996 by and among TSI,
Bankers Trust Company, and certain lenders from time to time a party thereto
(the "New Credit Facility"). The following is a summary description of the
principal terms of the New Credit Facility and is subject to, and qualified in
its entirety by reference to, the New Credit Facility, copies of which are
available upon request to the Company. See "Available Information".

STRUCTURE. The New Credit Facility provides for, subject to certain terms
and conditions, a $15.0 million revolving credit facility. The New Credit
Facility has a final scheduled maturity date of October 15, 2002 and does not
require scheduled interim reductions. The New Credit Facility requires, under
certain circumstances, TSI to make mandatory prepayments and commitment
reductions. In addition, TSI may make optional prepayments and commitment
reductions pursuant to the terms of the New Credit Facility.

SECURITY. The New Credit Facility is collateralized by a pledge of all the
capital stock owned by the Company and a first priority security interest in
certain property of the Company (including receivables, equipment, owned real
estate, inventory, trademark and copyrights).

INTEREST RATES. Borrowings under the New Credit Facility accrue interest at
either the Alternate Base Rate (the "Alternate Base Rate") plus 1.50% or a rate
equal to the Eurodollar borrowing rate plus 2.50% at the option of TSI.

COVENANTS. The New Credit Facility contains certain covenants that, among
other things, restrict the ability of TSI and its subsidiaries to dispose of
assets, incur additional indebtedness, incur guarantee obligations, repay
indebtedness or amend debt instruments, pay dividends, create liens on assets,
make investments, make acquisitions, engage in mergers or consolidations, or
engage in certain transactions with subsidiaries and affiliates and otherwise
restrict corporate activities. In addition, the New Credit Facility requires TSI
to comply with certain financial ratios and coverage tests.

EVENTS OF DEFAULT. The New Credit Facility also includes customary events
of default. The occurance of any such events of default could result in
acceleration of the Company's obligations under the New Credit Facility and
foreclosure on the collateral securing such obligations, which could have a
material adverse effect on holders of the New Notes.

44
<PAGE>
DESCRIPTION OF NOTES

GENERAL

The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes will have been registered under the
Securities Act and thus will not bear legends restricting their transfer
pursuant to the Securities Act and (ii) holders of New Notes will not be
entitled to certain rights of holders of the Old Notes under the Registration
Rights Agreement which will terminate upon the consummation of the Exchange
Offer. The Old Notes have been, and the New Notes are to be, issued under an
indenture (the "Indenture"), dated as of October 16, 1997, between the Company
and United States Trust Company of New York, as Trustee (the "Trustee"). The
following summary of certain provisions of the Indenture and the Notes, copies
of which are available upon request to the Company at the address set forth
under "Available Information", does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, the Trust Indenture Act of
1939, as amended (the "TIA"), and to all of the provisions of the Indenture,
including the definitions of certain terms therein and those terms made a part
of the Indenture by reference to the TIA as in effect on the date of the
Indenture. As used in this "Description of Notes" section, the "Company" means
Town Sports International, Inc. The definitions of certain capitalized terms
used in the following summary are set forth below under "--Certain Definitions."

The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be presented
for registration or transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. The Company may change
any Paying Agent and Registrar without notice to holders of the Notes (the
"Holders"). The Company will pay principal (and premium, if any) on the Notes at
the Trustee's corporate office in New York, New York. At the Company's option,
interest may be paid at the Trustee's corporate trust office or by check mailed
to the registered address of Holders. Any Notes that remain outstanding after
the completion of the Exchange Offer, together with the Exchange Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture.

PRINCIPAL, MATURITY AND INTEREST

The Notes are unsecured senior obligations of the Company and are limited in
aggregate principal amount to $125.0 million, of which $85.0 million will be
issued in the Offering. The Notes will mature on October 15, 2004. Interest on
the Notes will accrue at the rate of 9 3/4% per annum and will be payable
semiannually in cash on each April 15 and October 15, commencing on April 15,
1998, to the persons who are registered Holders at the close of business on the
April 1 and October 1 immediately preceding the applicable interest payment
date. Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from and including the
date of issuance.

The Notes will not be entitled to the benefit of any mandatory sinking fund.

REDEMPTION

OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's option,
in whole at any time or in part from time to time, on and after October 15,
2001, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if

45
<PAGE>
redeemed during the twelve-month period commencing on October 15 of the year set
forth below, plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption:

<TABLE>
<CAPTION>
YEAR PERCENTAGE
- -------------------------------------------------------------------------------------- -----------
<S> <C>
2001.................................................................................. 104.875%
2002.................................................................................. 102.438%
2003 and thereafter................................................................... 100.000%
</TABLE>

Optional Redemption upon Public Equity Offerings. At any time, or from time
to time, on or prior to October 15, 2000, the Company may, at its option, use
the net cash proceeds of one or more Public Equity Offerings (as defined below)
to redeem up to 35% of the Notes issued under the Indenture at a redemption
price equal to 109.750% of the principal amount thereof plus accrued and unpaid
interest thereon, if any, to the date of redemption; provided that at least 65%
of the principal amount of Notes issued under the Indenture remains outstanding
immediately after any such redemption. In order to effect the foregoing
redemption with the proceeds of any Public Equity Offering, the Company shall
make such redemption not more than 120 days after the consummation of any such
Public Equity Offering.

As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.

At any time on or prior to October 15, 2002, the Notes may also be redeemed
as a whole but not in part at the option of the Company upon the occurrence of a
Change of Control, upon not less than 30 nor more than 60 days' prior notice
(but in no event more than 90 days after the occurrence of such Change of
Control) mailed by first-class mail to each Holder's registered address, at a
redemption price equal to 100% of the principal amount thereof plus the
Applicable Premium as of, and accrued but unpaid interest, if any, to, the date
of redemption (the "Redemption Date") (subject to the rights of Holders on the
relevant record date to receive interest due on the relevant interest payment
date).

"Applicable Premium" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the principal amount of such Note and (ii) the excess
of (A) the present value at such time of (1) the redemption price of such Note
at October 15, 2002 (such redemption price being described under "-- Optional
Redemption") plus (2) all required interest payments (excluding accrued but
unpaid interest) due on such Note through October 15, 2002, computed using a
discount rate equal to the Treasury Rate plus 75 basis points, over (B) the
principal amount of such Note.

"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H. 15(519)
which has become publicly available at least two Business Days prior to the
Redemption Date (or, if such Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly equal to the
period from the Redemption Date to October 15, 2002, provided, however, that if
the period from the Redemption Date to October 15, 2002 is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from the Redemption Date to October 15, 2002 is
less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.

SELECTION AND NOTICE OF REDEMPTION

46
<PAGE>
securities exchange, on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided, however, that no Notes of a
principal amount of $1,000 or less shall be redeemed in part; provided, further,
that if a partial redemption is made with the proceeds of a Public Equity
Offering, selection of the Notes or portions thereof for redemption shall be
made by the Trustee only on a pro rata basis or on as nearly a pro rata basis as
is practicable (subject to DTC procedures), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.

CHANGE OF CONTROL

The Indenture will provide that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest to the date of purchase.

Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 45 days from the date such notice
is mailed, other than as may be required by law (the "Change of Control Payment
Date"). Holders electing to have a Note purchased pursuant to a Change of
Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.

If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.

Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on
its property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the Holders of Notes protection in all circumstances from the adverse aspects of
a highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.

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<PAGE>
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.

CERTAIN COVENANTS

The Indenture will contain, among others, the following covenants:

LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not,
and will not permit any of the Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company may incur Indebtedness
(including, without limitation, Acquired Indebtedness) if on the date of the
incurrence of such Indebtedness, after giving effect to the incurrence thereof,
the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.00
to 1.00.

The Company will not, directly or indirectly, in any event incur any
Indebtedness which by its terms (or by the terms of any agreement governing such
Indebtedness) is subordinated to any other Indebtedness of the Company unless
such Indebtedness is also by its terms (or by the terms of any agreement
governing such Indebtedness) made expressly subordinate to the Notes to the same
extent and in the same manner as such Indebtedness is subordinated pursuant to
subordination provisions that are most favorable to the holders of any other
Indebtedness of the Company.

LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause
or permit any of the Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock, (c) make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for
value, prior to any scheduled maturity, scheduled or mandatory repayment or
scheduled sinking fund payment, any Indebtedness of the Company or its
Subsidiaries that is subordinate or junior in right of payment to the Notes, or
(d) make any Investment (other than Permitted Investments) (each of the
foregoing actions set forth in clauses (a), (b), (c) and (d) being referred to
as a "Restricted Payment"), if at the time of such Restricted Payment or
immediately after giving effect thereto, (i) a Default or an Event of Default
shall have occurred and be continuing or (ii) the Company is not able to incur
at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the covenant described under "-- Limitation on Incurrence of
Additional Indebtedness" or (iii) the aggregate amount of Restricted Payments
(including such proposed Restricted Payment) made subsequent to the Issue Date
(the amount expended for such purposes, if other than in cash, being the fair
market value of such property as determined reasonably and in good faith by the
Board of Directors of the Company) shall exceed the sum of without duplication:
(w) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated
Net Income shall be a loss, minus 100% of such loss) of the Company earned
subsequent to the Issue Date and on or prior to the date the Restricted Payment
occurs (the "Reference Date") (treating such period as a single accounting
period); plus (x) 100% of the aggregate net cash proceeds received by the
Company from any Person (other than a Subsidiary of the Company) from the
issuance and sale subsequent to the Issue Date and on or prior to the Reference
Date of Qualified Capital Stock of the

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<PAGE>
Company; plus (y) without duplication of any amounts included in clause (iii)(x)
above, 100% of the aggregate net cash proceeds of any equity contribution
received by the Company from a holder of the Company's Capital Stock; plus (z)
an amount equal to the sum of (1) the net reduction in Investments in
Unrestricted Subsidiaries resulting from dividends, repayments of loans or
advances or other transfers of assets by any Unrestricted Subsidiary to the
Company or any Restricted Subsidiary or the receipt of proceeds by the Company
or any Restricted Subsidiary from the sale or other disposition of any portion
of the Capital Stock of any Unrestricted Subsidiary, in each case occurring
subsequent to the Issue Date, and (2) the consolidated net Investments on the
date of Revocation made by the Company or any of the Restricted Subsidiaries in
any Subsidiary of the Company that has been designated an Unrestricted
Subsidiary after the Issue Date upon its redesignation as a Restricted
Subsidiary in accordance with the covenant described under "--Limitation on
Designations of Unrestricted Subsidiaries."

Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend or
redemption payment within 60 days after the date of declaration of such dividend
if the dividend or redemption payment, as the case may be, would have been
permitted on the date of declaration; (2) if no Default or Event of Default
shall have occurred and be continuing, the acquisition of any shares of Capital
Stock of the Company, either (i) solely in exchange for shares of Qualified
Capital Stock of the Company or (ii) through the application of net proceeds of
a substantially concurrent sale for cash (other than to a Restricted Subsidiary
of the Company) of shares of Qualified Capital Stock of the Company; (3) if no
Default or Event of Default shall have occurred and be continuing, the
acquisition of any Indebtedness of the Company or a Subsidiary of the Company
that is subordinate or junior in right of payment to the Notes either (i) solely
in exchange for shares of Qualified Capital Stock of the Company, or (ii)
through the application of net proceeds of a substantially concurrent sale for
cash (other than to a Restricted Subsidiary of the Company) of (A) shares of
Qualified Capital Stock of the Company or (B) Refinancing Indebtedness; and (4)
so long as no Default or Event of Default shall have occurred and be continuing,
repurchases by the Company of Capital Stock of the Company or options to
purchase Capital Stock of the Company, stock appreciation rights or any similar
equity interest in the Company from directors and employees of the Company or
any of its Subsidiaries or their authorized representatives upon the death,
disability or termination of employment of such employees, in an aggregate
amount not to exceed $0.5 million in any calendar year; and (5) so long as no
Default or Event of Default shall have occurred and be continuing, repurchases
by the Company of shares of its Series B Preferred Stock held by directors and
employees of the Company pursuant to provisions thereof requiring the redemption
thereof at the election of the holders thereof at any time following an initial
public offering of the Company. In determining the aggregate amount of
Restricted Payments made subsequent to the Issue Date in accordance with clause
(iii) of the immediately preceding paragraph, amounts expended pursuant to
clauses (1), (2)(ii), (3)(ii)(A), (4) and (5) above shall be included in such
calculation.

Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations may
be based upon the Company's latest available internal quarterly financial
statements.

LIMITATION ON ASSET SALES. The Company will not, and will not permit any of
the Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 80% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition; provided, however, that the amount of (A) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet or the notes thereto), of the Company or any Restricted
Subsidiary (other than liabilities that are by their terms subordinated to the

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Notes) that are assumed by the transferee in such Asset Sale and from which the
Company or such Restricted Subsidiary is released and (B) any notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are immediately converted by the Company or such Restricted
Subsidiary into cash or Cash Equivalents (to the extent of the cash or Cash
Equivalents received), shall be deemed to be cash for the purposes of this
provision; and (iii) upon the consummation of an Asset Sale, the Company shall
apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds
relating to such Asset Sale within 360 days of receipt thereof either (A) to
prepay any Indebtedness ranking at least pari passu with the Notes (including
amounts under the Credit Facility) and, in the case of any such Indebtedness
under any revolving credit facility, effect a permanent reduction in the
availability under such revolving credit facility, (B) to make an investment in
properties and assets that replace the properties and assets that were the
subject of such Asset Sale or in properties and assets that will be used in the
business of the Company and the Restricted Subsidiaries as existing on the Issue
Date or in businesses reasonably related thereto ("Replacement Assets"), or (C)
a combination of prepayment and investment permitted by the foregoing clauses
(iii)(A) and (iii)(B). On the 361st day after an Asset Sale or such earlier
date, if any, as the Board of Directors of the Company or of such Restricted
Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset
Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next
preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate
amount of Net Cash Proceeds which have not been applied on or before such Net
Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and
(iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount")
shall be applied by the Company or such Restricted Subsidiary to make an offer
to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer
Payment Date") not less than 45 nor more than 60 days following the applicable
Net Proceeds Offer Trigger Date, from all Holders on a pro rata basis, that
amount of Notes equal to the Net Proceeds Offer Amount at a price equal to 100%
of the principal amount of the Notes to be purchased, plus accrued and unpaid
interest thereon, if any, to the date of purchase; provided, however, that if at
any time any non-cash consideration received by the Company or any Restricted
Subsidiary, as the case may be, in connection with any Asset Sale is converted
into or sold or otherwise disposed of for cash (other than interest received
with respect to any such non- cash consideration), then such conversion or
disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant. The
Company may defer the Net Proceeds Offer until there is an aggregate unutilized
Net Proceeds Offer Amount equal to or in excess of $5 million resulting from one
or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer
Amount, not just the amount in excess of $5 million, shall be applied as
required pursuant to this paragraph).

In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and the Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or the Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.

Notwithstanding the two immediately preceding paragraphs, the Company and
the Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 80% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value; provided that any consideration not
constituting Replacement Assets received by the Company or any of the Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the provisions of
the two preceding paragraphs.

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Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 30 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.

The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.

LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances
or to pay any Indebtedness or other obligation owed to the Company or any other
Restricted Subsidiary; or (c) transfer any of its property or assets to the
Company or any other Restricted Subsidiary, except for such encumbrances or
restrictions existing under or by reason of: (1) applicable law; (2) the
Indenture and the Notes; (3) customary non-assignment provisions of any contract
or any lease governing a leasehold interest of any Restricted Subsidiary; (4)
any instrument governing Acquired Indebtedness, which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any Person,
other than the Person or the properties or assets of the Person so acquired
(including, but not limited to, such Person's direct and indirect Subsidiaries);
(5) agreements existing on the Issue Date to the extent and in the manner such
agreements are in effect on the Issue Date; or (6) an agreement governing
Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred
pursuant to an agreement referred to in clause (2), (4) or (5) above; provided,
however, that the provisions relating to such encumbrance or restriction
contained in any such Indebtedness are no less favorable to the Company in any
material respect as determined by the Board of Directors of the Company in its
reasonable and good faith judgment than the provisions relating to such
encumbrance or restriction contained in agreements referred to in such clause
(2), (4) or (5).

LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will
not permit any of the Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary) or permit
any Person (other than the Company or a Wholly Owned Restricted Subsidiary) to
own any Preferred Stock of any Restricted Subsidiary.

LIMITATION ON LIENS. The Company will not, and will not cause or permit any
of the Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens upon any property or assets of the
Company or any of the Restricted Subsidiaries whether owned on the Issue Date or
acquired after the Issue Date, or any proceeds therefrom, or assign or otherwise
convey any right to receive income or profits therefrom unless (i) in the case
of Liens securing Indebtedness that is expressly subordinate or junior in right
of payment to the Notes, the Notes are secured by a Lien on such property,
assets or proceeds that is senior in priority to such Liens and (ii) in all
other cases, the Notes are secured on an equal and ratable basis, except for (a)
Liens existing as of the Issue Date to the extent and in the manner such Liens
are in effect on the Issue Date; (b) Liens securing Indebtedness under the
Credit Facility; (c) Liens securing the Notes; (d) Liens of the Company or a
Restricted Subsidiary on assets of any Restricted Subsidiary of the Company; (e)
Liens securing Refinancing Indebtedness which is incurred to Refinance any
Indebtedness which has been secured by a Lien permitted under the Indenture and
which

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has been incurred in accordance with the provisions of the Indenture; provided,
however, that such Liens (A) are no less favorable to the Holders and are not
more favorable to the lienholders with respect to such Liens than the Liens in
respect of the Indebtedness being Refinanced and (B) do not extend to or cover
any property or assets of the Company or any of the Restricted Subsidiaries not
securing the Indebtedness so Refinanced; (f) Liens in favor of the Company; and
(g) Permitted Liens.

MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary to sell, assign, transfer, lease,
convey or otherwise dispose of) all or substantially all of the Company's assets
(determined on a consolidated basis for the Company and the Restricted
Subsidiaries) whether as an entirety or substantially as an entirety to any
Person unless: (i) either (1) the Company shall be the surviving or continuing
corporation or (2) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, transfer, lease, conveyance or other disposition the
properties and assets of the Company and of the Restricted Subsidiaries
substantially as an entirety (the "Surviving Entity") (x) shall be a corporation
organized and validly existing under the laws of the United States or any State
thereof or the District of Columbia and (y) shall expressly assume, by
supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (i) (2) (y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, (1) shall have a Consolidated Net Worth
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction and (2) shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant described under "--Limitation on Incurrence of Additional
Indebtedness"; (iii) immediately before and immediately after giving effect to
such transaction and the assumption contemplated by clause (i) (2) (y) above
(including, without limitation, giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred and any Lien granted in
connection with or in respect of the transaction), no Default or Event of
Default shall have occurred or be continuing; and (iv) the Company or the
Surviving Entity shall have delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that such consolidation, merger, sale,
assignment, transfer, lease, conveyance or other disposition and, if a
supplemental indenture is required in connection with such transaction, such
supplemental indenture comply with the applicable provisions of the Indenture
and that all conditions precedent in the Indenture relating to such transaction
have been satisfied.

For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.

The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the Surviving Entity shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under the Indenture and the
Notes with the same effect as if such Surviving Entity had been named as such.

LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any of the Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate

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Transaction"), other than (x) Affiliate Transactions permitted under paragraph
(b) below and (y) Affiliate Transactions on terms that are no less favorable
than those that might reasonably have been obtained in a comparable transaction
at such time on an arm's-length basis from a Person that is not an Affiliate of
the Company or such Restricted Subsidiary. All Affiliate Transactions (and each
series of related Affiliate Transactions which are similar or part of a common
plan) involving aggregate payments or other property with a fair market value in
excess of $2.5 million shall be approved by the Board of Directors of the
Company or such Restricted Subsidiary, as the case may be, such approval to be
evidenced by a Board Resolution stating that such Board of Directors has
determined that such transaction complies with the foregoing provisions. If the
Company or any Restricted Subsidiary enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an aggregate fair market value of more than $10.0 million, the Company or such
Restricted Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain an opinion stating that such transaction or series of related
transactions are fair to the Company or the relevant Restricted Subsidiary, as
the case may be, from a financial point of view, from an Independent Financial
Advisor.

(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary as determined in good faith by the Company's Board of Directors; (ii)
transactions exclusively between or among the Company and any of the Restricted
Subsidiaries or exclusively between or among such Restricted Subsidiaries,
provided such transactions are not otherwise prohibited by the Indenture; (iii)
Restricted Payments permitted by the Indenture; and (iv) advisory fees pursuant
to the Professional Services Agreement between the Company and BRS Group in
effect on the issue date.

LIMITATION OF GUARANTEES BY RESTRICTED SUBSIDIARIES. The Company will not
permit any Restricted Subsidiary, directly or indirectly, by way of the pledge
of any intercompany note or otherwise, to assume, guarantee or in any other
manner become liable with respect to any Indebtedness of the Company (other than
Indebtedness incurred under the Credit Facility) unless, in any such case (a)
such Restricted Subsidiary executes and delivers a supplemental indenture to the
Indenture, providing a guarantee of payment of the Notes by such Restricted
Subsidiary in the form required by the Indenture (the "Guarantee") and (b) if
such assumption, guarantee or other liability of such Restricted Subsidiary is
provided in respect of Indebtedness that is expressly subordinated to the Notes,
the guarantee or other instrument provided by such Restricted Subsidiary in
respect of such subordinate Indebtedness shall be subordinated to the Guarantee
pursuant to subordination provisions not less favorable to the Holders of the
Notes than those contained in the indenture or similar document governing such
subordinated Indebtedness.

Notwithstanding the foregoing, any such Guarantee by a Restricted Subsidiary
of the Notes shall provide by its terms that it shall be automatically and
unconditionally released and discharged, without any further action required on
the part of the Trustee or any Holder, upon: (i) the unconditional release of
such Restricted Subsidiary from its liability in respect of the Indebtedness in
connection with which such Guarantee was executed and delivered pursuant to the
preceding paragraph; or (ii) any sale or other disposition (by merger or
otherwise) to any Person which is not a Restricted Subsidiary of the Company, of
all of the Company's Capital Stock in, or all or substantially all of the assets
of, such Restricted Subsidiary; provided, however, that (a) such sale or
disposition of such Capital Stock or assets is otherwise in compliance with the
terms of the Indenture and (b) such assumption, guarantee or other liability of
such Restricted Subsidiary has been released by the holders of the other
Indebtedness so guaranteed.

REPORTS TO HOLDERS. The Company will deliver to the Trustee within 15 days
after the filing of the same with the Commission, copies of the quarterly and
annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section 13
or 15(d) of the Exchange Act. The Indenture further provides that,
notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will file
with the Commission, upon the earlier of the effectiveness of the Exchange Offer
Registration

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Statement and 150 days following the Issue Date, and provide the Trustee and
Holders with such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will
also comply with the other provisions of TIA Section 314(a).

LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Company may
designate any Subsidiary of the Company (other than a Subsidiary of the Company
which owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:

(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and

(b) the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the sum of (i)
fair market value of the Capital Stock of such Subsidiary owned by the
Company and the Restricted Subsidiaries on such date and (ii) the aggregate
amount of other Investments of the Company and the Restricted Subsidiaries
in such Subsidiary on such date; and

(c) the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "--Limitation on Incurrence of Additional Indebtedness" at
the time of Designation (assuming the effectiveness of such Designation).

In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "--Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount. The Indenture will further provide that the
Company shall not, and shall not permit any Restricted Subsidiary to, at any
time (x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including of any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except, in the case of
clause (x) or (y), to the extent permitted under the covenant described under
"--Limitation on Restricted Payments."

The Indenture will further provide that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"),
whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if:

(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and

(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at such
time, have been permitted to be incurred for all purposes of the Indenture.

All Designations and Revocations must be evidenced by Board Resolutions of
the Company certifying compliance with the foregoing provisions.

EVENTS OF DEFAULT

The following events are defined in the Indenture as "Events of Default":

(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days;

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(ii) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered pursuant
to a Change of Control Offer or a Net Proceeds Offer);

(iii) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period of
30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Notes
(except in the case of a default with respect to the covenant described
under "--Certain Covenants--Merger, Consolidation and Sale of Assets," which
will constitute an Event of Default with such notice requirement but without
such passage of time requirement);

(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount of
any Indebtedness of the Company or any Restricted Subsidiary, or the
acceleration of the final stated maturity of any such Indebtedness if the
aggregate principal amount of such Indebtedness, together with the principal
amount of any other such Indebtedness in default for failure to pay
principal at final maturity or which has been accelerated, aggregates $2.5
million or more at any time;

(v) one or more judgments in an aggregate amount in excess of $2.5
million shall have been rendered against the Company or any of the
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non- appealable; or

(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.

If an Event of Default (other than an Event of Default specified in clause
(vi) above relating to the Company) shall occur and be continuing, the Trustee
or the Holders of at least 25% in principal amount of outstanding Notes may
declare the principal of and accrued interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default, and the same shall become immediately due and
payable. If an Event of Default specified in clause (vi) above relating to the
Company occurs and is continuing, then all unpaid principal of, and premium, if
any, and accrued and unpaid interest on all of the outstanding Notes shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder.

The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.

The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.

Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable

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indemnity. Subject to all provisions of the Indenture and applicable law, the
Holders of a majority in aggregate principal amount of the then outstanding
Notes have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee.

Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.

LEGAL DEFEASANCE AND COVENANT DEFEASANCE

The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes, except for (i) the rights of Holders to receive payments in respect of
the principal of, premium, if any, and interest on the Notes when such payments
are due, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payments, (iii) the
rights, powers, trust, duties and immunities of the Trustee and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, reorganization and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.

In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an
officers' certificate stating that the deposit was not

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made by the Company with the intent of preferring the Holders over any other
creditors of the Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others; (vii) the Company shall
have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that all conditions precedent provided for or relating to
the Legal Defeasance or the Covenant Defeasance have been complied with; (viii)
the Company shall have delivered to the Trustee an opinion of counsel to the
effect that after the 91st day following the deposit, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; and (ix)
certain other customary conditions precedent are satisfied. Notwithstanding the
foregoing, the opinion of counsel required by clauses (ii)(A) and (iii) above
need not be delivered if all the Notes not theretofore delivered to the Trustee
for cancellation (i) have become due and payable, (ii) will become due and
payable on the maturity date within one year, or (iii) are to be called for
redemption within one year under arrangements satisfactory to the Trustee for
the giving of notice of redemption by such Trustee in the name, and at the
expense, of the Company.

SATISFACTION AND DISCHARGE

The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.

MODIFICATION OF THE INDENTURE

From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such change does not,
in the opinion of the Trustee, adversely affect the rights of any of the Holders
in any material respect. In formulating its opinion on such matters, the Trustee
will be entitled to rely on such evidence as it deems appropriate, including,
without limitation, solely on an opinion of counsel. Other modifications and
amendments of the Indenture may be made with the consent of the Holders of a
majority in principal amount of the then outstanding Notes issued under the
Indenture, except that, without the consent of each Holder affected thereby, no
amendment may: (i) reduce the amount of Notes whose Holders must consent to an
amendment; (ii) reduce the rate of or change or have the effect of changing the
time for payment of interest, including defaulted interest, on any Notes; (iii)
reduce the principal of or change or have the effect of changing the fixed
maturity of any Notes, or change the date on which any Notes may be subject to
redemption or repurchase, or reduce the redemption or repurchase price therefor;
(iv) make any Notes payable in money other than that stated in the Notes; (v)
make any change in provisions of the Indenture protecting the right of each
Holder to receive payment of principal of and interest on such Note on or after
the due date thereof or to bring suit to enforce such payment, or permitting
Holders of a majority in principal amount of Notes to waive Defaults or Events
of Default; (vi) amend, change or modify in any material respect the obligation
of the Company to make and consummate a Change of Control Offer in the event of
a Change of Control or make and consummate a Net Proceeds Offer with respect to
any Asset Sale that has been consummated or modify any of the provisions or
definitions with respect thereto; or (vii) modify or change any provision of the
Indenture or the related definitions affecting the ranking of the Notes in a
manner which adversely affects the Holders.

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GOVERNING LAW

The Indenture will provide that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.

THE TRUSTEE

The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.

The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company or of a
Subsidiary of the Company, to obtain payments of claims in certain cases or to
realize on certain property received in respect of any such claim as security or
otherwise. Subject to the TIA, the Trustee will be permitted to engage in other
transactions; provided that if the Trustee acquires any conflicting interest as
described in the TIA, it must eliminate such conflict or resign.

CERTAIN DEFINITIONS

Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.

"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Company or any of the Restricted
Subsidiaries or assumed in connection with the acquisition of assets from such
Person and in each case not incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
or such acquisition, merger or consolidation.

"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.

"Affiliate Transaction" has the meaning set forth under "--Certain
Covenants--Limitation on Transactions with Affiliates."

"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary in any other Person pursuant to which such Person shall become a
Restricted Subsidiary or shall be merged with or into the Company or any
Restricted Subsidiary, or (b) the acquisition by the Company or any Restricted
Subsidiary of the assets of any Person (other than a Restricted Subsidiary)
which constitute all or substantially all of the assets of such Person or
comprises any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.

"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
the Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Restricted Subsidiary of (a) any Capital
Stock of any Restricted

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Subsidiary; or (b) any other property or assets of the Company or any Restricted
Subsidiary other than in the ordinary course of business; provided, however,
that Asset Sales shall not include (i) a transaction or series of related
transactions for which the Company or the Restricted Subsidiaries receive
aggregate consideration of less than $1.0 million, (ii) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of the Company as permitted under "--Certain Covenants--Merger,
Consolidation and Sale of Assets," (iii) disposals or replacements of obsolete
equipment in the ordinary course of business, (iv) the sale, lease, conveyance,
disposition or other transfer by the Company or any Restricted Subsidiary of
assets or property to the Company or one or more Restricted Subsidiaries and (v)
any Restricted Payment.

"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.

"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.

"BRS Group" means, Bruckmann, Rosser, Sherill & Co., Inc. and its
Affiliates.

"Business Day" means a day other than a Saturday, Sunday or other day in
which commercial banking institutions (including, without limitation, the
Federal Reserve System) are authorized or required by law to close in New York
City.

"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.

"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.

"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250.0 million; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.

"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group"), together with any Affiliates thereof (whether
or not otherwise in compliance with the provisions of the Indenture); (ii) the
approval by the holders of Capital Stock of the

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Company of any plan or proposal for the liquidation or dissolution of the
Company (whether or not otherwise in compliance with the provisions of the
Indenture); (iii) any Person or Group, other than a Permitted Holder, shall
become the owner, directly or indirectly, beneficially or of record, of shares
representing more than 50% of the aggregate ordinary voting power represented by
the issued and outstanding Capital Stock of the Company; or (iv) the replacement
of a majority of the Board of Directors of the Company over a two- year period
from the directors who constituted the Board of Directors of the Company at the
beginning of such period, and such replacement shall not have been approved by a
vote of at least a majority of the Board of Directors of the Company then still
in office who either were members of any such Board of Directors at the
beginning of such period or whose election as a member of any such Board of
Directors was previously so approved.

"Change of Control Offer" has the meaning set forth under "--Change of
Control."

"Change of Control Payment Date" has the meaning set forth under "--Change
of Control."

"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.

"Company" means Town Sports International, Inc., a New York corporation.

"Consolidated EBITDA" means, for any period, the sum (without duplication)
of (i) Consolidated Net Income and (ii) to the extent Consolidated Net Income
has been reduced thereby, (A) all income taxes of the Company and the Restricted
Subsidiaries paid or accrued in accordance with GAAP for such period (other than
income taxes attributable to extraordinary, unusual or nonrecurring gains or
losses or taxes attributable to sales or dispositions outside the ordinary
course of business), (B) Consolidated Interest Expense and (C) Consolidated
Non-cash Charges less any non- cash items increasing Consolidated Net Income for
such period, all as determined on a consolidated basis for the Company and the
Restricted Subsidiaries in accordance with GAAP.

"Consolidated Fixed Charge Coverage Ratio" means the ratio of Consolidated
EBITDA during the four full fiscal quarters (the "Four Quarter Period") ending
on or prior to the date of the transaction giving rise to the need to calculate
the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to
Consolidated Fixed Charges for the Four Quarter Period. In addition to and
without limitation of the foregoing, for purposes of this definition,
"Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after
giving effect on a pro forma (including any pro forma expense and cost
reductions calculated on a basis consistent with Regulation S-X under the
Securities Act) basis for the period of such calculation to (i) the incurrence
or repayment of any Indebtedness of the Company or any of the Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of the
Company or one of the Restricted Subsidiaries (including any Person who becomes
a Restricted Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness and also including
any Consolidated EBITDA attributable to the assets which are the subject of the
Asset Acquisition or Asset Sale during the Four Quarter Period) occurring during
the Four Quarter Period or at any time subsequent to the last day of the Four
Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or
Asset Acquisition (including the incurrence, assumption or liability for any
such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period. If the

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Company or any of the Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding sentence shall give effect to the
incurrence of such guaranteed Indebtedness as if the Company or any such
Restricted Subsidiary had directly incurred or otherwise assumed such guaranteed
Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding
Indebtedness determined on a fluctuating basis as of the Transaction Date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.

"Consolidated Fixed Charges" means, with respect to the Company for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of the Company (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local tax
rate of such Person, expressed as a decimal.

"Consolidated Interest Expense" means, with respect to the Company for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount, (b) the net costs under
Interest Swap Obligations, (c) all capitalized interest and (d) the interest
portion of any deferred payment obligation; and (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by the Company and the Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP.

"Consolidated Net Income" means, with respect to the Company, for any
period, the aggregate net income (or loss) of the Company and the Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
or losses from Asset Sales or abandonments or reserves relating thereto, (b)
after-tax items classified as extraordinary or nonrecurring gains or losses, (c)
the net income (or loss) of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary or is
merged or consolidated with the Company or any Restricted Subsidiary, (d) the
net income (but not loss) of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that Restricted Subsidiary
of that income is restricted by a contract, operation of law or otherwise, (e)
the net income of any Person, other than the Company or a Restricted Subsidiary,
except to the extent of cash dividends or distributions paid to the Company or
to a Restricted Subsidiary by such Person, (f) income or loss attributable to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued) and (g) in the case of a successor to the Company by consolidation
or merger or as a transferee of the Company's assets, any net income of the
successor corporation prior to such consolidation, merger or transfer of assets.

"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person; provided that the Consolidated Net Worth of any Person
shall exclude the effect of any non-cash charges relating to the acceleration of
stock options or similar securities of such Person or another Person with which
such Person is merged or consolidated.

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"Consolidated Non-cash Charges" means, with respect to the Company, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
the Company and the Restricted Subsidiaries reducing Consolidated Net Income of
the Company for such period, determined on a consolidated basis in accordance
with GAAP (including deferred rent but excluding any such charge which requires
an accrual of or a reserve for cash charges for any future period).

"Covenant Defeasance" has the meaning set forth under "--Legal Defeasance
and Covenant Defeasance."

"Credit Facility" means the amended and restated Credit Agreement dated as
of the Issue Date by and among the Company, Bankers Trust Company and certain
lenders from time to time a party thereto, together with the related documents
thereto (including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder or adding Subsidiaries of the Company as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.

"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.

"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.

"Designation" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."

"Designation Amount" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."

"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Notes.

"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.

"Exchange Offer Registration Statement" means the registration statement
filed by the Company pursuant to the Registration Rights Agreement.

"Farallon" means Farallon Partners, L.L.C. and Affiliates.

"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company.

"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date. All
ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP applied on a consistent basis,

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except that calculations made for purposes of determining compliance with the
terms of the covenants and with other provisions of the Indenture shall be made
without giving effect to (i) the deduction or amortization of any premiums, fees
and expenses incurred in connection with any financings or any other permitted
incurrence of Indebtedness and (ii) depreciation, amortization or other expenses
recorded as a result of the application of purchase accounting in accordance
with Accounting Principles Board Opinion Nos. 16 and 17.

"incur" has the meaning set forth under "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness."

"Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 160 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below, (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) which are secured by any lien on any property or asset
of such Person, the amount of such Obligation being deemed to be the lesser of
the fair market value of such property or asset or the amount of the Obligation
so secured, (viii) all Obligations under currency agreements and interest swap
agreements of such Person and (ix) all Disqualified Capital Stock issued by such
Person with the amount of Indebtedness represented by such Disqualified Capital
Stock being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed repurchase price. For purposes hereof, the
"maximum fixed repurchase price" of any Disqualified Capital Stock which does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Disqualified Capital Stock as if such Disqualified Capital Stock
were purchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Disqualified Capital Stock, such fair
market value shall be determined reasonably and in good faith by the Board of
Directors of the Company. The amount of Indebtedness of any Person at any date
shall be the outstanding balance on such date of all unconditional Obligations
as described above, and the maximum liability upon the occurrence of the
contingency giving rise to the Obligation, on any contingent Obligations at such
date; provided, however, that the amount outstanding at any time of any
Indebtedness incurred with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP.

"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.

"Initial Purchaser" means BT Alex. Brown.

"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.

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"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and the Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. If the Company or any Restricted Subsidiary
sells or otherwise disposes of any Common Stock of any direct or indirect
Restricted Subsidiary such that, after giving effect to any such sale or
disposition, it ceases to be a Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Common Stock of such Restricted Subsidiary
not sold or disposed of.

"Issue Date" means the date of original issuance of the Notes.

"Legal Defeasance" has the meaning set forth under "--Legal Defeasance and
Covenant Defeasance."

"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).

"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of the Restricted Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions), (b) taxes paid or payable after taking into account any
reduction in consolidated tax liability due to available tax credits or
deductions and any tax sharing arrangements, (c) repayment of Indebtedness that
is required to be repaid in connection with such Asset Sale and (d) appropriate
amounts to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale.

"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.

"Permitted Holder" means any of BRS Group, Farallon and their respective
Affiliates.

"Permitted Indebtedness" means, without duplication, each of the following:

(i) Indebtedness under the Notes and the Indenture incurred as of the
Issue Date;

(ii) Indebtedness incurred pursuant to the Credit Facility in an
aggregate principal amount at any time outstanding not to exceed $25
million, less any required permanent repayments under all revolving credit
facilities in accordance with the provisions set forth under "Certain
Covenants-- Limitation on Asset Sales" (which are accompanied by a
corresponding permanent commitment reduction) thereunder;

(iii) other Indebtedness (including Capitalized Lease Obligations) of the
Company and the Restricted Subsidiaries outstanding on the Issue Date;

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(iv) Purchase Money Indebtedness of the Company and Capitalized Lease
Obligations of the Company and, to the extent constituting Acquired
Indebtedness, of the Restricted Subsidiaries in an aggregate amount for all
Indebtedness incurred pursuant to this subclause (iv) not to exceed $20
million outstanding at any one time;

(v) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of the Restricted Subsidiaries; provided, however, that
such Interest Swap Obligations are entered into to protect the Company and
the Restricted Subsidiaries from fluctuations in interest rates on
Indebtedness incurred in accordance with the Indenture to the extent the
notional principal amount of such Interest Swap Obligation does not exceed
the principal amount of the Indebtedness to which such Interest Swap
Obligation relates;

(vi) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and the
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;

(vii) Indebtedness of a Restricted Subsidiary to the Company or to a
Restricted Subsidiary for so long as such Indebtedness is held by the
Company or a Restricted Subsidiary, in each case subject to no Lien held by
a Person other than the Company or a Restricted Subsidiary; provided that if
as of any date any Person other than the Company or a Restricted Subsidiary
owns or holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such Indebtedness;

(viii) Indebtedness of the Company to a Restricted Subsidiary for so long
as such Indebtedness is held by a Restricted Subsidiary, in each case
subject to no Lien; provided that (a) any Indebtedness of the Company to any
Restricted Subsidiary is unsecured and subordinated, pursuant to a written
agreement, to the Company's obligations under the Indenture and the Notes
and (b) if as of any date any Person other than a Restricted Subsidiary owns
or holds any such Indebtedness or any Person holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the Company;

(ix) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within two business days of incurrence;

(x) Indebtedness of the Company or any of the Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or similar requirements in the ordinary course of business;

(xi) Refinancing Indebtedness; and

(xii) additional Indebtedness of the Company in an aggregate principal
amount not to exceed $10 million at any one time outstanding.

"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary in any Person that is or will become immediately after
such Investment a Restricted Subsidiary or that will merge or consolidate into
the Company or a Restricted Subsidiary, (ii) Investments in the Company by any
Restricted Subsidiary; provided that any Indebtedness incurred by the Company
evidencing such Investment by a Restricted Subsidiary is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture; (iii) investments in cash and Cash
Equivalents;

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(iv) loans and advances to employees and officers of the Company and the
Restricted Subsidiaries in the ordinary course of business for bona fide
business purposes not in excess of $5.0 million at any one time outstanding; (v)
Currency Agreements and Interest Swap Obligations entered into in the ordinary
course of the Company's or a Restricted Subsidiary's businesses and otherwise in
compliance with the Indenture; (vi) other Investments, including Investments in
Unrestricted Subsidiaries not to exceed $5.0 million at any one time
outstanding; (vii) Investments in securities of trade creditors or customers
received pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers; and (viii)
Investments made by the Company or the Restricted Subsidiaries as a result of
consideration received in connection with an Asset Sale made in compliance with
the covenant described under "--Certain Covenants--Limitation on Asset Sales."

"Permitted Liens" means the following types of Liens:

(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or the Restricted Subsidiaries shall
have set aside on its books such reserves as may be required pursuant to
GAAP;

(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;

(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);

(iv) judgment Liens not giving rise to an Event of Default;

(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company or
any of the Restricted Subsidiaries;

(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation;

(vii) purchase money Liens to finance property or assets of the Company
or any Restricted Subsidiary acquired after the Issue Date; provided,
however, that (A) the related purchase money Indebtedness shall not exceed
the cost of such property or assets and shall not be secured by any property
or assets of the Company or any Restricted Subsidiary other than the
property and assets so acquired and (B) the Lien securing such Indebtedness
shall be created within 90 days of such acquisition;

(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;

(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;

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(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of the Restricted Subsidiaries, including rights of offset and
set-off;

(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;

(xii) Liens securing Indebtedness under Currency Agreements; and

(xiii) Liens securing Acquired Indebtedness incurred in accordance with
the covenant described under "--Certain Covenants--Limitation on Incurrence
of Additional Indebtedness"; provided that (A) such Liens secured such
Acquired Indebtedness at the time of and prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary and were not
granted in connection with, or in anticipation of, the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary and (B) such
Liens do not extend to or cover any property or assets of the Company or of
any of the Restricted Subsidiaries other than the property or assets that
secured the Acquired Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of the Company or a Restricted Subsidiary and are no
more favorable to the lienholders than those securing the Acquired
Indebtedness prior to the incurrence of such Acquired Indebtedness by the
Company or a Restricted Subsidiary.

"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.

"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.

"Purchase Money Indebtedness" means Indebtedness of the Company or its
Restricted Subsidiaries incurred for the purpose of financing all or any part of
the purchase price or the cost of installation, construction or improvement of
any property.

"Public Equity Offering" has the meaning set forth under
"--Redemption--Optional Redemption Upon Public Equity Offerings."

"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.

"Reference Date" has the meaning set forth under "--Certain
Covenants--Limitation on Restricted Payments."

"Refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.

"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of Indebtedness incurred in accordance with the covenant
described under "--Certain Covenants--Limitation on Incurrence of Additional
Indebtedness" (other than pursuant to clause (ii), (iv), (v), (vi), (vii),
(viii), (ix), (x) or (xii) of the definition of Permitted Indebtedness), in each
case that does not (1) result in an increase in the aggregate principal amount
of Indebtedness of such Person as of the date of such proposed Refinancing (plus
the amount of any premium required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable expenses incurred
by the Company or any Restricted Subsidiary in connection with such Refinancing)
or (2) create Indebtedness with (A) a Weighted Average Life to Maturity that is
less than the Weighted Average Life to Maturity of the Indebtedness being
Refinanced or (B) a final maturity earlier than the final maturity of the
Indebtedness being Refinanced; provided that (x) if such Indebtedness being
Refinanced is Indebtedness of the Company or a Guarantor, then such Refinancing
Indebtedness shall be Indebtedness solely of the

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Company or such Guarantor, as the case may be, and (y) if such Indebtedness
being Refinanced is subordinate or junior to the Notes, then such Refinancing
Indebtedness shall be subordinate to the Notes at least to the same extent and
in the same manner as the Indebtedness being Refinanced.

"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the Issue Date between the Company and the Initial Purchaser.

"Replacement Assets" means assets of a kind used or usable in the business
of the Company and its Restricted Subsidiaries as conducted on the date of the
relevant Asset Sale.

"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board Resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "--Certain Covenants-- Limitation
on Designations of Unrestricted Subsidiaries." Any such Designation may be
revoked by a Board Resolution of the Company delivered to the Trustee, subject
to the provisions of such covenant.

"Revocation" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."

"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.

"Significant Subsidiary" shall have the meaning set forth in Rule 1.02(w) of
Regulation S- X under the Securities Act.

"Subsidiary", with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.

"Surviving Entity" has the meaning set forth under "--Certain
Covenants--Merger, Consolidation and Sale of Assets."

"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries." Any such
designation may be revoked by a Board Resolution of the Company delivered to the
Trustee, subject to the provisions of such covenant.

"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.

"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which all the outstanding voting securities (other than in the case of a foreign
Restricted Subsidiary, directors' qualifying shares or an immaterial amount of
shares required to be owned by other Persons pursuant to applicable law) are
owned by the Company or another Wholly Owned Restricted Subsidiary.

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THE EXCHANGE OFFER

TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES

Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration date" means 5:00 P.M., New
York City time, on , 1997; PROVIDED, HOWEVER, that if the Company has extended
the period of time for which the Exchange Offer is open, the term "Expiration
Date" means the latest time and date to which the Exchange Offer is extended.

As of the date of this Prospectus, $85.0 million aggregate principal amount
of the Old Notes are outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about 1997, to all holders of Old
Notes known to the Company. The Company's obligation to accept Old Notes for
exchange pursuant to the Exchange offer is subject to certain conditions as set
forth under "--Certain Conditions to the Exchange Offer" below.

The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for any exchange of any Old Notes, by giving notice of
such extension to the holders thereof. During any such extension, all Old Notes
previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by the Company. Any Old Notes not accepted for exchange
for any reason will be returned without expense to the tendering holder thereof
as promptly as practicable after the expiration or termination of the Exchange
Offer.

The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below under "--Certain Conditions to the Exchange Offer." The Company
will give notice of any extension, amendment, non-acceptance or termination to
the holders of the Old Notes as promptly as practicable, such notice in the case
of any extension to be issued no later than 9:00 A.M., New York City time, on
the next business day after the previously scheduled Expiration Date.

PROCEDURES FOR TENDERING OLD NOTES

The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to United States Trust Company of New
York (the "Exchange Agent") at one of the addresses set forth below under
"Exchange Agent" on or prior to the Expiration Date. In addition either (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal or (ii) a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or the holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
HOLDER, IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL

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CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS
OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.

Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by registered holder of the Old Notes who has
not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below). In the event that signatures are
required to be guaranteed, such guarantees must be by a firm that is a member or
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program or the Stock Exchange Medallion
Program or by an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (collectively, "Eligible Institutions"). If Old
Notes are registered in the name of a person other than a signer of the Letter
of Transmittal, the Old Notes surrendered for exchange must be endorsed by or be
accompanied by a written instrument or instruments of transfer or exchange, in
satisfactory form as determined by the Company in its sole discretion, duly
executed by, the registered holder with the signature thereon guaranteed by an
Eligible Institution.

All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date. The
interpretation of the terms and conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
Letter of Transmittal and the instructions thereto) by the Company shall be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Notes for exchange must be cured within such
reasonable period of time as the Company shall determine. Neither the Company,
the Exchange Agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to any tender of Old
Notes for exchange, nor shall any of them incur any liability for failure to
give such notification. The Exchange Offer is subject to certain customary
conditions relating to compliance with any applicable law, or any applicable
interpretation by any staff of the Commission, or any order of any governmental
agency or court of law. See "--Certain Conditions to the Exchange Offer".

If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
do so must be submitted.

By tendering, each holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the holder and any beneficial holder, that
neither the holder nor any such beneficial holder has an arrangement or
understanding with any person to participate in the distribution of such New
Notes and that neither the holder nor any such person is an "affiliate," as
defined under Rule 405 of the Securities Act of the Company. If the holder is a
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer, it must acknowledge that it acquired the Old Notes for its own
account as the result of market-making activities or other trading activities,
and must agree that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes.

ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES

For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. For purposes of the Exchange Offer, the

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Company shall be deemed to have accepted properly tendered Old Notes for
exchange when and if the Company has given oral and written notice thereof to
the Exchange Agent.

In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's accountant the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described below, such non-exchanged Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as practicable
after the expiration of the Exchange Offer.

BOOK-ENTRY TRANSFER

Any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "Exchange Agent" on or prior to the Expiration
Date or the guaranteed deliver procedures described below must be complied with.

GUARANTEED DELIVERY PROCEDURES

If a registered holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be affected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent receives from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram ,telex,
facsimile and transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within five New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates for all physically tendered Old Notes,
in proper form for transfer or a confirmation of book-entry transfer of such Old
Notes into the Exchange Agent's account at the Book-Entry Transfer Facility (a
"Book-Entry Confirmation"), as the case may be ,and any other documents required
by the Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent and (iii) the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and all other documents required by the Letter of Transmittal are
received by the Exchange Agent within five NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.

WITHDRAWAL OF TENDERS

Tenders of Old Notes may be withdrawn at any time prior to 5:00 P.M., New
York City time on the Expiration Date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the Exchange Agent at one of
the addresses set forth below under "Exchange Agent." Any such notice of

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withdrawal must specify the name of the person having tendered the Old Notes to
be withdrawn, identify the Old Notes to be withdrawn (including the principal
amount of such Old Notes), and (where certificates for Old Notes have been
transmitted) specify the name in which such Old Notes are registered, if
different from that of the withdrawing holder. If certificates for Old Notes
have been delivered or otherwise identified to the Exchange Agent, then, prior
to the release of such certificates, the withdrawing holder must also submit the
serial number of the particular certificates to be withdrawn and a signed notice
of withdrawal with signatures guaranteed by an Eligible Institution unless such
holder is an Eligible Institution. If Old Notes have been tendered pursuant to
the procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange which are not exchanged for any reason will be returned to the holder
thereof without cost to such holder (or, in the case of Old Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book entry transfer described above, such Old Notes
will be credited to an account maintained with such Book-Entry Transfer Facility
for the Old Notes) as soon as practicable after withdrawal, rejection of tender
or termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "--Procedures for
Tendering Old Notes" above at any time on or prior to the Expiration Date.

CERTAIN CONDITIONS TO THE EXCHANGE OFFER

Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer if at any time
before the Expiration Date, the Company determines that the Exchange Offer
violates applicable law, any applicable interpretation of the staff of the
Commission or any order of any governmental agency or court of competent
jurisdiction.

The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.

In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
prior to the Expiration Date any stop order shall be threatened or in effect
with respect to the Registration Statement of which this Prospectus constitutes
a part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended (the "TIA"). In any such event, the Company is required to use
every reasonable effort to obtain the withdrawal of any stop order at the
earliest possible time.

EXCHANGE AGENT

United States Trust Company of New York has been appointed as the Exchange
Agent for the Exchange Offer. All executed Letters of Transmittal should be
directed to the Exchange Agent at the address set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or of
the Letter of Transmittal and requests for Notices of Guaranteed Delivery should
be directed to the Exchange Agent addressed as follows:

72
<PAGE>
United States Trust

Company of New York

114 West 47 Street

New York, NY 10036

Via Facsimile: (212) 852-1626

Confirm by Telephone: (212) 852-1614

For Information: (212) 858-2103

DELIVERY OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.

FEES AND EXPENSES

The Company will not make any payments to brokers, dealers or other
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.

The expenses to be incurred in connection with the Exchange Officer will be
paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs among others.

ACCOUNTING TREATMENT

The New Notes will be recorded at the same carrying value as the Old Notes,
which is the principal amount as reflected in the Company's accounting records
on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized. The expenses of the Exchange Offer will be
capitalized for accounting purposes.

TRANSFER TAXES

Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct the
Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.

CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF NEW NOTES

Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to the exemptions from, or
in transactions not subject to, the registration requirements of, the Securities
Act and applicable state securities law. Old Notes not exchanged pursuant to the
Exchange Offer will continue to accrue interest at 11% per annum and will
otherwise remain outstanding in accordance with their terms. Holders of Old
Notes do not have any appraisal or dissenters' rights under the Delaware General
Corporation Law in connection with the Exchange Offer. In general, the Old Notes
may not be offered or sold unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. To the extent that Old
Notes are exchanged for New Notes, the market for the Old Notes may be adversely
affected. The Company does not currently anticipate that it will registered the
Old Notes under the Securities Act. However, (i) if the Initial Purchasers so
request with respect to Old Notes not eligible to be exchanged for New Notes in
the Exchange Offer and held by them following consummation of the Exchange Offer
or (ii) if any holder of Old Notes is not eligible to participate in the
Exchange Offer, or, in the case of any holder of Old Notes

73
<PAGE>
that participates in the Exchange Offer, does not receive freely tradable New
Notes in exchange for Old Notes, the Company is obligated to file a Registration
Statement on the appropriate form under the Securities Act relating to the Old
Notes held by such persons.

Based on certain interpretive letters issue by the staff of the Commission
to third parties in unrelated transactions, it is the Company's view that New
Notes issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than (i) any such holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or (ii) any broker-dealer that purchases Notes from the Company
to resell pursuant to Rule 144A or any other available exemption) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders have no intention, or any arrangement
or understanding with any person, to participate in the distribution of such New
Notes. If any holder has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer,
such holder (i) could not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction. A broker-dealer who holds Old Notes that were acquired for
its own account as a result of market-making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and must,
therefore, deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of New Notes. Each such broker-dealer that
acquired New Notes as a result of market-making activities or other trading
activities, must acknowledge in the Letter of Transmittal that it will delivery
a prospectus in connection with any resale of such New Notes. See "Plan of
Distribution."

In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the New Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the New Notes for offer or
sale under the securities or blue sky laws of such jurisdictions as any holder
of the Notes reasonably requests in writing.

74
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following is a discussion of certain material United States federal
income tax consequences of the acquisition, ownership and disposition of the
Notes. Unless otherwise stated, this discussion is limited to the tax
consequences to those persons who are original owners of the Notes and who hold
such Notes as capital assets. As used in this discussion, a "U.S. Holder" means
any beneficial owner of a Note that is for United States federal income tax
purposes (i) a citizen or resident of the United States, (ii) a corporation
created or organized under the laws of the United States or of any political
subdivision thereof or (iii) a person otherwise subject to United States federal
income taxation on its worldwide income regardless of the sources of such
income. This discussion does not address specific tax consequences that may be
relevant to particular persons (including, for example, foreign persons,
financial institutions, broker-dealers, insurance companies, tax-exempt
organizations, and persons in special situations, such as those who hold Notes
as part of a straddle, hedge, conversion transaction, or other integrated
investment) except where otherwise specifically stated. This discussion does not
address the tax consequences to persons that have a functional currency other
than the United States dollar. In addition, this discussion does not address
United States federal alternative minimum tax consequences or any aspect of
state, local or foreign taxation. This discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury Department
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change, possibly on a
retroactive basis.

PROSPECTIVE TENDERERS OF THE OLD NOTES ARE URGED TO CONSULT THEIR TAX
ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THEM OF
ACQUIRING, OWNING AND DISPOSING OF THE NOTES, AS WELL AS THE APPLICATION OF
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.

DEBT CHARACTERIZATION AND INTEREST INCOME

The Company and each Holder will agree to treat the Notes as indebtedness
for federal income tax purposes, and the following discussion assumes that such
treatment is correct. If the Notes were not respected as debt, they likely would
be treated as equity ownership interests in the Company. In such event, the
Company would not be entitled to claim a deduction for interest payable on the
Notes. As a result, the Company's after-tax cash flow and, consequently, its
ability to make payments with respect to the Notes could be reduced.

A Holder will recognize ordinary income when it receives or accrues interest
on the Notes in accordance with such Holder's method of tax accounting. A Holder
may be entitled to treat interest income on the Notes as "investment income" for
purposes of computing certain limitations concerning the deductibility of
investment interest expense.

The Notes are not expected to be issued with "original issue discount"
within the meaning of Section 1273 of the Code ("OID"). A Holder who purchases a
Note after the initial distribution thereof at a discount that exceeds a
statutorily defined de minimus amount will be subject to the "market discount"
rules of the Code, and a Holder who purchases a Note at a premium will be
subject to the bond premium amortization rules of the Code.

DISPOSITION OF NOTES

Upon the sale, exchange or retirement of a Note, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized on
the sale, exchange or retirement (other than amounts representing accrued and
unpaid interest) and such Holder's adjusted tax basis in the Note. A U.S.
Holder's adjusted tax basis in a Note will be equal to such Holder's cost for
the Note, (i) increased by any interest that has accrued on the Note since the
last interest payment date, as well as any OID, market discount and gain
previously included by such Holder in income with respect to the Note, and (ii)
decreased by any bond premium previously amortized and any principal payments
previously received

75
<PAGE>
by such Holder with respect to such Note. Subject to the market discount rules,
any such gain or loss will be capital gain or loss, long- or short-term
depending upon whether the U.S. Holder has held the Note for more than one year.
Subject to certain limited exceptions, capital losses cannot be used to offset
ordinary income.

A cash basis holder that sells a Note between interest payment dates will be
required to treat an amount equal to accrued but unpaid interest through the
date of sale as ordinary interest income, and to add such amount to its basis in
the Offered Note.

THE EXCHANGE BY A U.S. HOLDER OF AN OLD NOTE FOR A NEW NOTE PURSUANT
TO THE EXCHANGE OFFER SHOULD NOT CONSTITUTE A TAXABLE EXCHANGE.

TAX CONSEQUENCES TO FOREIGN HOLDERS

For purposes of this discussion, a "Foreign Holder" is any beneficial owner
that is not a U.S. Holder, and a "Holder" is any U.S. Holder or Foreign Holder.

A Foreign Holder generally will not be subject to United States federal
income taxes on payments of principal or interest on the Notes so long as the
Foreign Holder (i) is not actually or constructively a "10 percent shareholder"
of the Company or a "controlled foreign corporation" with respect to which the
Company is "related" (directly or indirectly) through stock ownership within the
meaning of the Code, and (ii) provides an appropriate statement, signed under
penalties of perjury, certifying that the beneficial owner of the Note is a
foreign person and providing that foreign person's name and address. If the
information provided in this statement changes, the foreign person must so
inform the Company within 30 days of such change. The statement generally must
be provided in the year a payment of principal or interest occurs or in either
of the two preceding years. If the foregoing conditions are not satisfied, then
interest paid on the Notes will be subject to United States withholding tax at a
rate of 30 percent, unless such rate is reduced or eliminated pursuant to an
applicable tax treaty.

Any capital gain a Foreign Holder realizes on the sale, redemption,
retirement or other taxable disposition of an Offered Note will be exempt from
United States federal income and withholding tax, provided that (i) the gain is
not effectively connected with the Foreign Holder's conduct of a trade or
business in the United States, and (ii) in the case of a Foreign Holder that is
an individual, the Foreign Holder is not present in the United States for 183
days or more in the taxable year.

If the interest gain or other income a Foreign Holder recognizes on an
Offered Note is effectively connected with the Foreign Holder's conduct of a
trade or business in the United States, the Foreign Holder (although exempt from
the withholding tax previously discussed if an appropriate statement is
furnished) generally will be subject to United States federal income tax on the
interest, gain or other income at regular federal income tax rates. In addition,
if the Foreign Holder is a foreign corporation, it may be subject to a branch
profits tax equal to 30 percent of its "effectively connected earnings and
profits", as adjusted for certain items, unless it qualifies for a lower rate
under an applicable tax treaty.

INFORMATION REPORTING AND BACKUP WITHHOLDING

The Company will be required to report annually to the IRS and to each
Holder of record, the amount of interest paid on the Offered Notes (and the
amount of interest withheld for federal income taxes, if any) for each calender
year, except as to certain Holders (generally, corporations, tax-exempt
organizations, qualified pension and profit-sharing trusts, individual
retirement accounts, or nonresident aliens who provide certification as to their
status). Each Holder (other than Holders who are not subject to the reporting
requirements) will be required to provide to the Company, under penalties of
perjury, certain information relating to backup withholding. Should a Holder
that is required to provide such information fail to do so, the Company will be
required to withhold 31% of the interest otherwise payable to such

76
<PAGE>
Holder and to remit the withheld amount to the IRS as a credit against the
Holder's federal income tax liability.

PLAN OF DISTRIBUTION

Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a Prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer to use in connection with any such resale. In
addition, until , 1998 (90 days after the date of this Prospectus), all
dealers effecting transactions in the New Notes may be required to deliver a
Prospectus.

The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on such resale of New Notes and any commissions or
concessions received by any such person may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a Prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.

For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to an Broker-Dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including expenses of one counsel for the
holders of the Old Notes) other than commissions or concessions of any brokers
or dealers and will indemnify the holders of the Old Notes (including any
Broker-Dealers) against certain liabilities, including liabilities under the
Securities Act.

LEGAL MATTERS

The validity of the New Notes offered hereby will be passed upon for the
Company by Kirkland & Ellis, New York, New York.

EXPERTS

The consolidated balance sheets as of May 31, 1997 and 1996, the
consolidated statements of operations, stockholders' equity (deficit) and cash
flows, and the financial statement schedule for each of the three years in the
period ended May 31, 1997, included in this Registration Statement, have been
included herein in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (the "Exchange Offer
Registration Statement," which term shall

77
<PAGE>
encompass all amendments, exhibits, annexes and schedules thereto) pursuant to
the Securities Act, and the rules and regulations promulgated thereunder,
covering the New Notes being offered hereby. This Prospectus does not contain
all the information set forth in the Exchange Offer Registration Statement. For
further information with respect to the Company, and the Exchange Offer,
reference is made to the Exchange Offer Registration Statement. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Exchange Offer
Registration Statement, reference is made to the exhibit for a more complete
description of the document or matter involved, and each such Statement shall be
deemed qualified in its entirety by such reference. The Exchange Offer
Registration Statement, including the exhibits thereto, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Commission at Seven World Trade Center, Suite 1300, New York, New
York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of such Web site is:
http://www.sec.gov.

As a result of the Exchange Offer, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information with the Commission. In the event the
Company ceases to be subject to the informational requirements of the Exchange
Act, the Company will be required under the Indenture to continue to file with
the Commission the annual and quarterly reports, information, documents or other
reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-K,
which would be required pursuant to the information requirements of the Exchange
Act. The Company will also furnish such other reports as may be required by law.

78
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of independent accountants.......................................................................... F-2

Consolidated balance sheets at May 31, 1996 and 1997
and (unaudited) at August 31, 1997....................................................................... F-3

Consolidated statements of operations for the years ended
May 31, 1995, 1996, and 1997............................................................................. F-4

Consolidated statements of operations (unaudited)
for the three months ended August 31, 1996, and 1997..................................................... F-5

Consolidated statements of stockholders' equity (deficit)
for the years ended May 31, 1995, 1996, and 1997 and
(unaudited) for the three months ended August 31, 1997................................................... F-6

Consolidated statements of cash flows for the years
ended May 31, 1995, 1996 and 1997........................................................................ F-7

Consolidated statements of cash flows (unaudited)
for the three months ended August 31, 1996, and 1997..................................................... F-8

Notes to consolidated financial statements................................................................. F-9
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of

Town Sports International, Inc.:

We have audited the accompanying consolidated balance sheets of TOWN SPORTS
INTERNATIONAL, INC. and SUBSIDIARIES as of May 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended May 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Town Sports
International, Inc. and Subsidiaries as of May 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended May 31, 1997, in conformity with
generally accepted accounting principles.

Coopers & Lybrand L.L.P.

New York, New York

July 24, 1997.

F-2
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MAY 31, 1996 AND 1997 AND AUGUST 31, 1997
ALL FIGURES $'000, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
-------------------- -------------
1996 1997 1997
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents....................................................... $ 928 $ 2,468 $ 702
Accounts receivable............................................................. 485 228 292
Inventory....................................................................... 288 327 403
Prepaid expenses................................................................ 881 448 715
Prepaid corporate income taxes.................................................. 358 202 --
Advances and amounts due from affiliated companies.............................. 539 129 289
--------- --------- -------------
Total current assets.......................................................... 3,479 3,802 2,401

Fixed assets, net................................................................. 23,634 34,214 37,848
Investments in, and amounts due from, affiliated companies........................ 350 420 27
Intangible assets, net............................................................ 372 4,425 5,079
Deferred tax asset................................................................ 3,914 5,972 6,225
Deferred membership costs......................................................... 2,683 3,530 3,835
Other assets...................................................................... 373 456 459
--------- --------- -------------
Total assets.................................................................. $ 34,805 $ 52,819 $ 55,874
--------- --------- -------------
--------- --------- -------------

<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
<S> <C> <C> <C>
Current liabilities:
Current portion of long-term debt and capital lease obligations................. $ 1,318 $ 1,924 $ 3,178
Accounts payable and accrued expenses........................................... 3,207 5,715 4,455
Deferred revenue................................................................ 3,002 4,599 4,889
--------- --------- -------------
Total current liabilities..................................................... 7,527 12,238 12,522

Long-term debt and capital lease obligations...................................... 9,135 39,147 40,727
Deferred lease liabilities........................................................ 4,989 6,625 7,111
Deferred revenue.................................................................. 813 1,036 1,063
Other liabilities................................................................. 746 724 716
--------- --------- -------------
Total liabilities............................................................. 23,210 59,770 62,139
--------- --------- -------------
Commitments and contingencies (Notes 6, 7, 8 and 12)
Series B redeemable, convertible, preferred stock, $.01 par value; authorized
368,333 shares issued and outstanding at May 31, 1996........................... 6,121 -- --
--------- --------- -------------
Stockholders' equity (deficit):
Series A preferred stock, $1.00 par value; at liquidation value; authorized
200,000 shares, 152,455 shares issued and outstanding at May 31 and August 31,
1997............................................................................ -- 16,250 16,784
Series A preferred stock, $.10 par value; $496 liquidation value; 496 shares
issued and outstanding at May 31, 1996.......................................... -- -- --
Series B preferred stock, $1.00 par value; at liquidation value; authorized
200,000 shares, 3,857 issued and outstanding at May 31 and August 31, 1997...... -- 144 148
Class A voting common stock, $.001 par value; authorized 1,150,000 shares,
1,010,000 issued and outstanding at May 31 and August 31, 1997.................. -- 1 1
Class A voting common stock, $.01 par value; 576,306 shares issued and outstanding
at May 31, 1996................................................................. 6 -- --
Class B non-voting common stock, $.01 par value; authorized 500,000 shares, none
issued and outstanding.......................................................... -- -- --
Class B convertible non-voting common stock, $.01 par value; 2,351 shares issued
and outstanding at May 31, 1996................................................. -- -- --
Paid-in capital................................................................... 5,126 -- 160
Retained earnings (accumulated deficit)........................................... 342 (23,346) (23,358)
--------- --------- -------------
Total stockholders' equity (deficit).......................................... 5,474 (6,951) (6,265)
--------- --------- -------------
Total liabilities and stockholders' equity (deficit).......................... $ 34,805 $ 52,819 $ 55,874
--------- --------- -------------
--------- --------- -------------
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED MAY 31, 1995, 1996 AND 1997
ALL FIGURES $'000, EXCEPT SHARE DATA

<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Revenues:
Club operations.............................................................. $ 30,438 $ 40,796 $ 54,164
Management fees.............................................................. 1,810 1,746 1,288
Rental income................................................................ 831 882 936
Share of net income in affiliated companies.................................. 270 331 179
--------- --------- ----------
33,349 43,755 56,567
--------- --------- ----------
Operating expenses:
Payroll and related.......................................................... 16,105 18,626 23,321
Compensation expense incurred in connection with stock options............... 635 1,967 5,933
Club operating............................................................... 11,740 14,542 18,044
General and administrative................................................... 3,321 3,562 3,774
Depreciation and amortization................................................ 2,168 2,929 4,219
--------- --------- ----------
33,969 41,626 55,291
--------- --------- ----------
Operating Income (loss).................................................... (620) 2,129 1,276
Interest expense, net of interest income of $28 in 1995, $60 in 1996 and $115
in 1997...................................................................... 654 952 2,455
--------- --------- ----------
Income (loss) before provision (benefit) for corporate income taxes........ (1,274) 1,177 (1,179)
Provision (benefit) for corporate income taxes................................. (541) 628 (243)
--------- --------- ----------
Net income (loss).......................................................... (733) 549 (936)
Accreted dividends on preferred stock.......................................... (258) (400) (1,286)
--------- --------- ----------
Net income (loss) to common stockholders................................... $ (991) $ 149 $ (2,222)
--------- --------- ----------
--------- --------- ----------
Pro forma per common share data (unaudited):
Net (loss) per common share................................................ $ (2.20)
----------
----------
Weighted average number of common shares outstanding....................... 1,010,000
----------
----------
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED AUGUST 31, 1996 AND 1997
ALL FIGURES $'000, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
AUGUST 31,
------------------------
<S> <C> <C>
1996 1997
----------- -----------

<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Club operations...................................................................... $ 11,757 $ 16,528
Management fees...................................................................... 327 366
Rental income........................................................................ 220 239
Share of net income in affiliated companies.......................................... 71 65
----------- -----------
12,375 17,198
----------- -----------
Operating expenses:
Payroll and related.................................................................. 5,220 7,035
Compensation expense incurred in connection with stock options....................... 450 160
Club operating....................................................................... 3,651 5,230
General and administrative........................................................... 1,023 1,064
Depreciation and amortization........................................................ 889 1,589
----------- -----------
11,233 15,078
----------- -----------
Operating Income................................................................... 1,142 2,120
Interest expense, net of interest income of $19 in 1996 and $29 in 1997................ 184 1,144
----------- -----------
Income before provision for corporate income taxes................................. 958 976
Provision for corporate income taxes................................................... 475 450
----------- -----------
Net income............................................................................. 483 526
Accreted dividends on preferred stock.................................................. (100) (538)
----------- -----------
Net income (loss) to common stockholders........................................... $ 383 $ (12)
----------- -----------
----------- -----------
Pro forma per common share data:
Net (loss) per common share........................................................ $ (.01)
-----------
-----------
Weighted average number of common shares outstanding............................... 1,010,000
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ALL FIGURES $'000, EXCEPT SHARE DATA
FOR THE YEARS ENDED MAY 31, 1995, 1996 AND 1997 AND THE THREE MONTHS ENDED
AUGUST 31, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK
-----------------------------------------------------------
SERIES A SERIES
($1.00 PAR) A ($.10 PAR) SERIES B
-------------------- ------------------------ -----------
SHARES AMOUNT SHARES AMOUNT SHARES
--------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at May 31, 1994........................................ 496
Accretion of Series B redeemable convertible preferred stock
dividends ($.79 per share)...................................
Increase in stockholders' equity related to compensation
expense incurred in connection with stock options............
Net loss.......................................................
--------- --------- --- ----------- -----
Balance at May 31, 1995........................................ 496
Issuance of Class A Common Stock...............................
Issuance of Class A and B Common Stock.........................
Accretion of Series B redeemable convertible preferred stock
dividends ($1.22 per share)..................................
Compensation expense incurred in connection with stock
options......................................................
Net income.....................................................
--------- --------- --- ----------- -----
Balance at May 31, 1996........................................ 496
Liquidation of Series A Preferred Stock for $1,000 per share... (496)
Redemption of Series B Preferred and Class A and B Common Stock
for a cash price of $35 per share............................
Issuance of Series A and B Preferred and Common Stock at cash
price of $100, $35 and $1, respectively...................... 152,455 $ 15,245 3,857
Warrant exercise at $.01 per share.............................
Original issue discount in connection with the issuance of
warrants and subordinated debt...............................
Change in equity related to exercise of stock options..........
Compensation expense incurred in connection with stock
options......................................................
Accretion of Series A and Series B preferred stock dividend
($6.59 and $2.32 per share, respectively.)................... 1,005
Net loss.......................................................
--------- --------- --- ----------- -----
Balance at May 31, 1997........................................ 152,455 16,250 3,857
Compensation expense incurred in connection with stock options
(unaudited)..................................................
Accretion of Series A and Series B preferred stock dividend
($3.50 and $1.04 per share, respectively) (unaudited)........ 534
Net income (unaudited).........................................
--------- --------- --- ----------- -----
Balance at August 31, 1997 (unaudited)......................... 152,455 $ 16,784 -- -- 3,857
--------- --------- --- ----------- -----
--------- --------- --- ----------- -----

COMMON STOCK
-------------------------------------------------

CLASS A CLASS A
($.001 PAR) ($.01 PAR)
------------------------- ----------------------
AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ---------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at May 31, 1994........................................ 475,000 $ 5
Accretion of Series B redeemable convertible preferred stock
dividends ($.79 per share)...................................
Increase in stockholders' equity related to compensation
expense incurred in connection with stock options............
Net loss.......................................................
-- --
----- ---------- ---------
Balance at May 31, 1995........................................ 475,000 5
Issuance of Class A Common Stock............................... 87,948 1
Issuance of Class A and B Common Stock......................... 13,358
Accretion of Series B redeemable convertible preferred stock
dividends ($1.22 per share)..................................
Compensation expense incurred in connection with stock
options......................................................
Net income.....................................................
-- --
----- ---------- ---------
Balance at May 31, 1996........................................ 576,306 6
Liquidation of Series A Preferred Stock for $1,000 per share...
Redemption of Series B Preferred and Class A and B Common Stock
for a cash price of $35 per share............................ (576,306) (6)
Issuance of Series A and B Preferred and Common Stock at cash
price of $100, $35 and $1, respectively...................... $ 135 1,000,000 $ 1
Warrant exercise at $.01 per share............................. 10,000
Original issue discount in connection with the issuance of
warrants and subordinated debt...............................
Change in equity related to exercise of stock options..........
Compensation expense incurred in connection with stock
options......................................................
Accretion of Series A and Series B preferred stock dividend
($6.59 and $2.32 per share, respectively.)................... 9
Net loss.......................................................
-- --
----- ---------- ---------
Balance at May 31, 1997........................................ 144 1,010,000 1
Compensation expense incurred in connection with stock options
(unaudited)..................................................
Accretion of Series A and Series B preferred stock dividend
($3.50 and $1.04 per share, respectively) (unaudited)........ 4
Net income (unaudited).........................................
-- --
----- ---------- ---------
Balance at August 31, 1997 (unaudited)......................... $ 148 1,010,000 $ 1 -- --
-- --
-- --
----- ---------- ---------
----- ---------- ---------

CLASS B CONVERTIBLE RETAINED TOTAL

EARNINGS STOCKHOLDERS'

---------------------- PAID-IN (ACCUMULATED EQUITY

SHARES AMOUNT CAPITAL DEFICIT) (DEFICIT)

--------- ----------- --------- ------------ ------------

Balance at May 31, 1994........................................ $ 1,154 $ 1,184 $ 2,343

Accretion of Series B redeemable convertible preferred stock
dividends ($.79 per share)................................... (258) (258)

Increase in stockholders' equity related to compensation
expense incurred in connection with stock options............ 634 634

Net loss....................................................... (733) (733)

--------- --- --------- ------------ ------------

Balance at May 31, 1995........................................ 1,788 193 1,986

Issuance of Class A Common Stock............................... 1,371 1,372

Issuance of Class A and B Common Stock......................... 2,351 144 144

Accretion of Series B redeemable convertible preferred stock
dividends ($1.22 per share).................................. (400) (400)

Compensation expense incurred in connection with stock
options...................................................... 1,823 1,823

Net income..................................................... 549 549

--------- --- --------- ------------ ------------

Balance at May 31, 1996........................................ 2,351 5,126 342 5,474

Liquidation of Series A Preferred Stock for $1,000 per share... (496) (496)

Redemption of Series B Preferred and Class A and B Common Stock
for a cash price of $35 per share............................ (2,351) (6,553) (21,466) (28,025)

Issuance of Series A and B Preferred and Common Stock at cash
price of $100, $35 and $1, respectively...................... (226) 15,155

Warrant exercise at $.01 per share.............................
Original issue discount in connection with the issuance of
warrants and subordinated debt............................... 123 123

Change in equity related to exercise of stock options.......... (4,179) (4,179)

Compensation expense incurred in connection with stock
options...................................................... 5,933 5,933

Accretion of Series A and Series B preferred stock dividend
($6.59 and $2.32 per share, respectively.)................... 272 (1,286)
Net loss....................................................... (936) (936)

--------- --- --------- ------------ ------------

Balance at May 31, 1997........................................ (23,346) (6,951)

Compensation expense incurred in connection with stock options
(unaudited).................................................. 160 160

Accretion of Series A and Series B preferred stock dividend
($3.50 and $1.04 per share, respectively) (unaudited)........ (538)
Net income (unaudited)......................................... 526 526

--------- --- --------- ------------ ------------

Balance at August 31, 1997 (unaudited)......................... -- -- $ 160 $ (23,358) $ (6,265)

--------- --- --------- ------------ ------------

</TABLE>

See notes to consolidated financial statements

F-6
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MAY 31, 1995, 1996 AND 1997
ALL FIGURES $'000, EXCEPT SHARE DATA
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................................... $ (733) $ 549 $ (936)
--------- --------- ----------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization................................................ 2,168 2,929 4,219
Noncash compensation expense................................................. 635 1,967 5,933
Noncash rental expense, net of noncash rental income......................... 1,232 1,277 1,620
Share of net income in affiliated companies.................................. (270) (331) (179)
Amortization of debt issuance costs.......................................... -- -- 156
Change in certain working capital components................................. 1,882 1,454 4,101
Increase in deferred tax asset............................................... (1,496) (1,539) (2,058)
Increase in deferred membership costs........................................ (454) (926) (847)
Other........................................................................ 319 315 --
--------- --------- ----------
Total adjustments.......................................................... 4,016 5,146 12,945
--------- --------- ----------
Net cash provided by operating activities.................................. 3,283 5,695 12,009
--------- --------- ----------
Cash flows from investing activities:
Capital expenditures, net of effect of acquired businesses................... (7,670) (5,380) (11,110)
Acquisition of businesses.................................................... (3) (35) (1,888)
Intangible and other assets.................................................. -- (72) (280)
--------- --------- ----------
Net cash used in investing activities...................................... (7,673) (5,487) (13,278)
--------- --------- ----------
Cash flows from financing activities:
Issuance of stock, net of expenses........................................... 4,835 2,000 15,155
Redemption and liquidation of stock, including expenses...................... -- -- (38,820)
Proceeds from borrowings..................................................... 5,938 5,365 42,092
Repayments of borrowings..................................................... (7,029) (7,221) (13,607)
Landlord payment for tenant improvements..................................... 500 -- --
Debt issuance costs.......................................................... -- -- (2,011)
--------- --------- ----------
Net cash provided by financing activities.................................. 4,244 144 2,809
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents....................... (146) 352 1,540
Cash and cash equivalents at beginning of period................................. 722 576 928
--------- --------- ----------
Cash and cash equivalents at end of period....................................... $ 576 $ 928 $ 2,468
--------- --------- ----------
--------- --------- ----------
Summary of the change in certain working capital components, net of effects of
acquired businesses:
Decrease in accounts receivable.............................................. $ 307 $ 23 $ 257
Increase in inventory........................................................ (31) (135) (39)
Decrease (increase) in prepaid expenses...................................... (142) (188) 433
Decrease in amounts due from affiliated companies............................ 61 346 519
Increase in accounts payable and accrued expenses............................ 109 805 1,658
(Decrease) increase in prepaid corporate income taxes........................ 503 (913) 156
Increase in deferred revenue................................................. 1,075 1,516 1,117
--------- --------- ----------
Net change working capital................................................. $ 1,882 $ 1,454 $ 4,101
--------- --------- ----------
--------- --------- ----------
</TABLE>

See notes to consolidated financial statements.

F-7
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED AUGUST 31, 1996 AND 1997
ALL FIGURES $'000, EXCEPT SHARE DATA INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS

<TABLE>
<CAPTION>
AUGUST 31,
------------------------
<S> <C> <C>
1996 1997
(UNAUDITED) (UNAUDITED)
----------- -----------
Cash flows from operating activities:
Net income....................................................................... $ 483 $ 526
----------- -----------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 889 1,589
Noncash compensation expense....................................................... 450 160
Noncash rental expense, net of noncash rental income............................... 275 486
Share of net income in affiliated companies........................................ (71) (65)
Amortization of debt issuance costs................................................ -- 78
Change in certain working capital components....................................... (848) (1,387)
Increase in deferred tax asset..................................................... (418) (253)
Increase in deferred membership costs.............................................. (286) (305)
Other.............................................................................. 11 (10)
----------- -----------
Total adjustments................................................................ 2 293
----------- -----------
Net cash provided by operating activities........................................ 485 819
----------- -----------
Cash flows from investing activities:
Capital expenditures, net of effect of acquired businesses......................... (1,187) (1,303)
Acquisition of businesses.......................................................... -- (2,170)
Intangible and other assets........................................................ (14) --
----------- -----------
Net cash used in investing activities............................................ (1,201) (3,473)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings........................................................... 1,412 1,587
Repayments of borrowings........................................................... (1,134) (699)
----------- -----------
Net cash provided by financing activities........................................ 278 888
----------- -----------
Net decrease in cash and cash equivalents........................................ (438) (1,766)
----------- -----------
Cash and cash equivalents at beginning of period....................................... 928 2,468
----------- -----------
Cash and cash equivalents at end of period....................................... $ 490 $ 702
----------- -----------
----------- -----------
Summary of the change in certain working capital components, net of effects of acquired
businesses:
Decrease (increase) in accounts receivable......................................... $ 384 $ (64)
Increase in inventory.............................................................. (23) (76)
Decrease (increase) in prepaid expenses............................................ 38 (267)
(Increase) decrease in amounts due from affiliated companies....................... (33) 298
Decrease in accounts payable and accrued expenses.................................. (2,147) (2,198)
Increase in prepaid corporate income taxes......................................... 513 603
Increase in deferred revenue....................................................... 420 317
----------- -----------
Net change working capital....................................................... $ (848) $ (1,387)
----------- -----------
----------- -----------
</TABLE>

See notes to consolidated financial statements.

F-8
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALL FIGURES $'000, EXCEPT SHARE DATA

1. NATURE OF BUSINESS:

Town Sports International, Inc. and Subsidiaries (the "Company") owns and
operates twenty-seven fitness clubs ("clubs") and a physical therapy facility in
the New York metropolitan market, five clubs in Washington, D.C., one club in
Boston, and two clubs in Switzerland. The Company's geographic concentration in
the New York metropolitan market may expose the Company to adverse developments
related to competition, demographic changes and economic down turns.

On December 10, 1996 the Company completed a restructuring of its ownership
and debt capitalization. The restructuring was accounted for as a leveraged
recapitalization which resulted in a reduction of equity of $32,700 to reflect a
liquidation, and redemption of stock and stock options outstanding immediately
prior to the recapitalization. In addition, 368,333 shares of Series B
Redeemable Preferred Stock were redeemed at a cost of $6,121. New and existing
investors acquired newly constituted preferred and common stock. Closing fees
paid to certain new investors totaled approximately $800. Senior and
subordinated debt facilities were obtained to finance the liquidation,
redemption and repayment of existing bank facilities.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

A. PRINCIPLES OF CONSOLIDATION:

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

B. REVENUE RECOGNITION:

The Company receives a one-time non-refundable initiation fee and monthly
dues from its members. Substantially all of the Company's members join on a
month-to-month basis and can therefore cancel their membership at any time.
Initiation fees and related direct expenses, primarily sales commissions payable
to membership consultants, are deferred and recognized, on a straight-line
basis, in operations over an estimated membership period of two years. Dues that
are received in advance are recognized on a pro-rata basis over the periods in
which services are to be provided.

In connection with advance receipts of fees or dues, the Company is required
to maintain surety bonds totaling $650, pursuant to various state consumer
protection laws.

Management fees earned for services rendered are recognized at the time the
related services are performed.

C. INVENTORY:

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

D. FIXED ASSETS:

Fixed assets are recorded at cost and depreciated on a straight-line basis
over the estimated useful lives of the assets, which are thirty years for
building and improvements, five years for club equipment, furniture, fixtures
and computer equipment, and three years for proprietary computer software.
Leasehold

F-9
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
improvements are amortized over the shorter of their estimated useful lives or
the remaining period of the lease. Expenditures for maintenance and repairs are
charged to operations as incurred. The cost and related accumulated depreciation
or amortization of assets retired or sold are removed from the respective
accounts and any gain or loss is recognized in operations

E. ADVERTISING AND CLUB PREOPENING COSTS

Advertising costs and club preopening costs are charged to operations during
the period in which they are incurred. Total advertising costs incurred by the
Company during the year end May 31, 1995, 1996 and 1997 totaled $1,227, $1,291
and $1,627, respectively.

F. USE OF ESTIMATES

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

The most significant assumptions and estimates relate to the useful lives of
fixed and intangible assets, deferred income tax valuation and compensation
expense incurred in connection with stock options.

G. CORPORATE INCOME TAXES:

The Company provides for corporate income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). SFAS No. 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined on the basis of the difference between
the financial statement and tax bases of assets and liabilities ("temporary
differences") at enacted tax rates in effect for the years in which the
temporary differences are expected to reverse.

F-10
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
H. STATEMENTS OF CASH FLOWS:

Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
MAY 31, AUGUST 31
------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
--------- --------- --------- ------------- -----------

<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid during the year for:
Interest (net of amounts capitalized)................... $ 610 $ 1,118 $ 1,603 $ 184 $ 1,465
Taxes................................................... 352 3,080 1,655 310 99
Noncash investing and financing activities:
Acquisition of fixed assets included in accounts
payable............................................... 171 293 850 972 536
Acquisition of equipment financed by suppliers or
lessors............................................... 1,110 1,475 1,411 19 --
See Notes 9 and 10 for additional noncash investing and
financing activities.
</TABLE>

I. CASH AND CASH EQUIVALENTS:

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

J. DEFERRED LEASE LIABILITIES AND NONCASH RENTAL EXPENSE:

The Company recognizes rental expense from leases with scheduled rent
increases on the straight-line basis.

K. FOREIGN CURRENCY:

Transactions denominated in a foreign currency have been translated into
U.S. dollars at the rates of exchange at the transaction dates. Assets and
liabilities have been translated at the respective year-end exchange rates.
During the years ended May 31, 1995 and 1996, the Company recognized foreign
exchange gains of $60 and $20, respectively. During the year ended May 31, 1997,
the Company recognized a foreign exchange loss of $65. These gains and loss
relate to certain management fees earned in Switzerland.

L. INVESTMENTS IN AFFILIATED COMPANIES:

The Company, through various subsidiaries, has made investments in entities
whose operations are similar to, or related to, those of the Company. Ownership
interests are accounted for by the equity method.

M. INTANGIBLE ASSETS:

Intangible assets consist of acquired leasehold rights, membership lists,
debt issuance costs, goodwill and organizational expenses. Such intangibles,
except debt issuance costs, are stated at amortized cost and are being amortized
by the straight-line method over their estimated lives. Debt issuance costs are

F-11
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
amortized using the interest method. The membership lists are being amortized
over a three-year period. Goodwill and acquired leasehold rights are being
amortized over the remaining lives of the respective leases, five to fifteen
years, and debt issuance costs are being amortized over the term of the
respective borrowings, six to nine years. Organizational expenses are being
amortized over a five-year period. The Company evaluates intangible assets,
including goodwill, for impairment at least annually. In completing this
evaluation the Company compares its best estimate of undiscounted future cash
flows with the carrying value of the respective asset.

N. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS:

In the current fiscal year the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", ("SFAS No. 121"). SFAS No. 121
prescribes the accounting for the impairment of long-lived assets, such as
property, plant and equipment and intangible assets, as well as the accounting
for long-lived assets that are held for disposal. The statement requires that
such assets be reviewed when events or circumstances indicate that an impairment
might exist. The adoption of SFAS No. 121 in this fiscal year did not have an
effect on the results of operations or financial position of the Company.

O. CONCENTRATIONS OF CREDIT RISK:

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

P. STOCK-BASED EMPLOYEE COMPENSATION:

The accompanying financial position and results of operations of the Company
have been prepared in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees ("APB No. 25"). Under APB No. 25, no compensation expense is
recognized in the accompanying financial statements in connection with the
awarding of stock option grants to employees provided that, as of the grant
date, all terms associated with the award are fixed and the fair value of the
Company's stock, as of the grant date, is not greater than the amount an
employee must pay to acquire the stock as defined; however, to the extent that
stock options are granted to employees with variable terms or if the fair value
of the Company's stock as of the measurement date is greater than the amount an
employee must pay to acquire the stock, then the Company will recognize
compensation expense. In addition, the fair value of warrants granted to
nonemployees for goods or services are included in operating results as an
expense.

Disclosures required by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"), including pro forma
operating results had the Company prepared its financial statements in
accordance with the fair value based method of accounting for stock-based
compensation, have been included in Note 9.

Q. RECENTLY ISSUED ACCOUNTING STANDARD:

During February 1997, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128").
SFAS No. 128 will require the Company to

F-12
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
replace the current presentation of the per share data with "basic" and
"diluted" per share. SFAS No. 128 will be adopted by the Company for periods
ending after May 31, 1998, and for all periods presented the Company will
provide "basic" and "diluted" per share data. Based on management's current
estimates, the future adoption of SFAS 128 is not expected to have a material
impact on per share data.

R. PRO FORMA PER COMMON SHARE DATA (UNAUDITED):

The pro forma per common share data included in the statements of operation
has been prepared assuming the leveraged recapitalization discussed in Note 1 to
the financial statements had occurred on June 1, 1996. Accordingly, the pro
forma per common share amounts were computed by dividing the net (loss), after
deduction of the preferred stock dividend, by the issued and outstanding shares
of Class A Voting Common Stock. Such computation also includes, where dilutive,
the weighted average number of shares issuable upon the exercise of outstanding
options and warrants. Since the recapitalization noted above occurred during the
year ended May 31, 1997, per share data prepared in accordance with Accounting
Principles Board Opinion No. 15 Earnings Per Share and SFAS No. 123 has been
omitted as such information is not considered meaningful.

3. FIXED ASSETS:

Fixed assets as of May 31, 1996 and 1997 are shown at cost, less accumulated
depreciation and amortization, and are summarized below:

<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Leasehold improvements.................................................. $ 17,551 $ 26,309
Club equipment.......................................................... 5,895 8,581
Furniture, fixtures and computer equipment.............................. 3,237 5,171
Building and improvements............................................... 4,975 4,995
Land.................................................................... 986 986
Construction in progress................................................ 444 1,284
--------- ---------
33,088 47,326
Less, Accumulated depreciation and amortization......................... 9,454 13,112
--------- ---------
$ 23,634 $ 34,214
--------- ---------
--------- ---------
</TABLE>

Depreciation and leasehold amortization expense for the years ended May 31,
1995, 1996 and 1997 was approximately $2,042, $2,813 and $3,824, respectively.

F-13
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

4. INTANGIBLE ASSETS:

Intangible assets as of May 31, 1996 and 1997 are shown at cost, less
accumulated amortization, and are summarized below:

<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Goodwill arising on acquisition of businesses................................ $ 31 $ 2,223
Debt issuance costs.......................................................... 164 2,150
Acquired leasehold rights.................................................... 328 549
Organizational expenses...................................................... 159 184
Membership lists............................................................. 16 176
--------- ---------
698 5,282
Less, Accumulated amortization............................................... 326 857
--------- ---------
$ 372 $ 4,425
--------- ---------
--------- ---------
</TABLE>

Amortization expense for the years ended May 31, 1995, 1996 and 1997 was
approximately $126, $116 and $551, respectively.

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

<TABLE>
<CAPTION>
MAY 31,
-------------------- AUGUST 31,
1996 1997 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Accounts payable............................................. $ 1,062 $ 1,698 $ 1,142
Accrued payroll.............................................. 794 1,882 995
Accrued interest............................................. 29 839 367
Accrued other................................................ 1,322 1,296 1,951
--------- --------- -----------
$ 3,207 $ 5,715 $ 4,455
--------- --------- -----------
--------- --------- -----------
</TABLE>

F-14
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:

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

<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Term loan--Bank, payable in installments of $300 in 1998 and 1999, $4,400 in 2000, $5,000 in
2001 and 2002 and $15,000 in 2003......................................................... $ -- $ 30,000
Subordinated note payable--face value of $7,500, payable in installments of $2,500 in 2004,
2005 and 2006 subordinated to term loan--bank. Note shown net of original issue discount
arising out of issuance of warrants to buy common stock................................... -- 7,384
First mortgage note payable, due December 22, 1999, interest payable quarterly, at a rate of
London Interbank Offered Rate ("LIBOR") plus 1.5% as defined, principal payable in monthly
installments of $15, repaid in year ended May 31, 1997.................................... 5,135 --
Notes payable under the line of credit due various dates within fiscal year-end May 31,
1998, interest payable quarterly, interest accrues at a rate of LIBOR plus 1%, repaid in
year ended May 31, 1997................................................................... 2,750 --
Capital lease obligations................................................................... 2,153 2,317
Notes payable--face value of $1,200, discounted at a rate of 7%, payable in annual
installments of principal and interest of $225 for 1998 and 1999, and $250 for 2000, 2001
and 2002.................................................................................. -- 980
Note payable--face value of $325, discounted at a rate of 6.2% payable in annual
installments of principal and interest of $175 in 1998 and $150 in 1999................... -- 298
Note payable--face value of $205 discounted at a rate of 6.2%, payable in installments of
principal and interest of $70 in 1996 and 1997 and $30 in 1998............................ 157 92
Installment loan--due December 1, 1996, principal payable in monthly installments, plus
interest at a rate of 5.8%................................................................ 175 --
Notes payable--face value at May 31, 1996 of $19, discounted at a rate of 5.7%, repaid in
year ended May 31, 1997................................................................... 19 --
Note payable--interest-bearing at 6.8%, payable in annual installments of principal and
interest of $25 repaid in year ended May 31, 1997......................................... 24 --
Note payable--interest payable monthly at a rate of prime plus 1%, principal payable in
quarterly installments of $10, repaid in year ended May 31, 1997.......................... 40 --
--------- ---------
10,453 41,071
Less, Current portion due within one year............................................... 1,318 1,924
--------- ---------
Long-term portion..................................................................... $ 9,135 $ 39,147
--------- ---------
--------- ---------
</TABLE>

F-15
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (CONTINUED)
The aggregate long-term debt and capital lease obligations maturing during
the next five years is as follows:

<TABLE>
<CAPTION>
YEAR ENDING MAY 31, AMOUNT DUE
- -------------------------------------------------------------------------------- ------------
<S> <C>
1998............................................................................ $ 1,924
1999............................................................................ 1,458
2000............................................................................ 4,797
2001............................................................................ 5,262
2002............................................................................ 5,246
Thereafter...................................................................... 22,384
------------
$ 41,071
------------
------------
</TABLE>

As of May 31, 1997, the Company has a line of credit with its principal bank
for direct borrowings and letters of credit of up to $15,000. The line of credit
carries interest at the Company's option based upon the Eurodollar borrowing
rate plus 3.00% or the bank's prime rate plus 2.25%, as defined and the Company
is required to pay a commitment commission of 0.5% per annum based upon the
daily unutilized amount. There were no outstanding borrowings against this line
of credit as of May 31, 1997. The utilization of this facility is governed by
the leverage ratio as defined. The unutilized portion of the line of credit as
of May 31, 1997, was $13,891, of which $10,186 would have been available for
direct borrowings. This line of credit matures May 31, 2002.

The term loan, line of credit and subordinated note payable contain various
covenants including interest and fixed charge coverage, a leverage ratio and
annual limitations on capital expenditures as well as restrictions on the
payment of dividends.

The term loan and line of credit are collateralized by a mortgage on land,
building and equipment, which, as of May 31, 1997, had an aggregate book value
of approximately $3,759, and by all other assets of the Company.

The term loan carries interest based upon Eurodollar borrowing rate plus
3.25%, or the base prime rate plus 2.00%, payable as defined, and was
approximately 9.00% at May 31, 1997.

The subordinated note payable carries interest of 11.5% payable
semi-annually.

As a result of the variable interest charged on the Company's long-term
debt, the carrying value of long-term debt approximates fair market value as of
May 31, 1996 and 1997.

The Company's interest expense and capitalized interest related to club
facilities under construction are as follows:

<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Interest costs expensed............................................ $ 682 $ 1,012 $ 2,570
Interest costs capitalized......................................... 71 46 28
--------- --------- ---------
$ 753 $ 1,058 $ 2,598
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-16
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (CONTINUED)
The Company leases equipment under noncancelable capital leases. Lease terms
range from three to five years, after which the Company is required to purchase
the equipment at amounts defined by the agreements.

As of May 31, 1997, minimum rental payments, under all capital leases,
including payments to acquire leased equipment, are as follows:

<TABLE>
<CAPTION>
MINIMUM
YEAR ENDING MAY 31, ANNUAL RENTAL
- ------------------------------------------------------------------------------- -------------
<S> <C>
1998........................................................................... $ 1,391
1999........................................................................... 875
2000........................................................................... 206
2001........................................................................... 49
2002........................................................................... 13
------
2,534
Less, Amounts representing interest.......................................... (217)
------
Present value of minimum capital lease payments.............................. $ 2,317
------
------
</TABLE>

The cost of leased equipment included in club equipment was approximately
$2,779 and $4,190 at May 31, 1996 and 1997, respectively; related accumulated
depreciation was $559 and $1,283, respectively.

F-17
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

7. INVESTMENTS IN, AND AMOUNTS DUE FROM, AFFILIATED COMPANIES:

Investments in, and amounts due from, affiliated companies as of May 31,
1996 and 1997 consist of the following:

<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C> <C>
Investments:
Capitol Hill Squash Club Associates ("CHSCA")............................................. $ 35 $ 39
Kalorama Sports Management Associates ("KSMA")............................................ 14 (31)
--------- ---
49 8
Receivables, payables and advances:
American Fitness Franchise Corp. and its affiliate........................................ -- 150
Great Neck Fitness Club, Ltd. and its affiliate ("GNFC").................................. (a) 319 212
Town Squash AG ("TSAG")--management fees receivable, denominated in Swiss francs.......... (b) 296 84
Mid-Atlantic Fitness Network with interest at 7.5%........................................ 110 76
Kalorama Sports Management Associates, with interest at prime plus 1.5% (10% at May 31,
1997)................................................................................... 40 128
Note due from stockholder, interest at prime plus 2%...................................... 74 --
Capitol Hill Squash Club Associates and its affiliate..................................... 1 (5)
Bruckmann, Rosser, Sherrill & Co., Inc. ("BRS")........................................... (c) -- (104)
--------- ---
889 549
Less, Current portion due within one year................................................. 539 129
--------- ---
$ 350 $ 420
--------- ---
--------- ---
</TABLE>

Summarized selected data of the investees is as follows:

<TABLE>
<CAPTION>
COMPANY'S SHARE
INVESTEE DATA AS OF AND FOR THE YEAR ENDED MAY 31, 1997 OF NET INCOME IN
- ------------------------------------------------------------------------------------------------------------ AFFILIATED
THE COMPANY'S COMPANIES
OWNERSHIP TOTAL ----------------
INVESTEE SEE NOTE PERCENTAGE ASSETS TOTAL LIABILITIES EQUITY NET INCOME 1995 1996 1997
- -------------------------------- -------- ------------- ------ ----------------- ------ ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CHSCA........................... (d),(e) 20% $ 508 $ 68 $440 $426 $ 56 $ 71 $ 86
KSMA............................ (d) 42% 1,624 1,313 311 288 214 260 93
---- ---- ----
$270 $331 $179
---- ---- ----
---- ---- ----
</TABLE>

- ------------------------

(a) The Company entered into a management agreement with GNFC. The Company
together with the shareholders of GNFC, is liable to fund shortfalls in
operating cash flows, as defined.

The terms of the agreement provide for the Company to fund a maximum amount
of $250, which is non-interest-bearing and will be repaid out of future
operating cash flows, as defined.

Management fees earned during the year ended May 31, 1996 amounted to
approximately $75. No management fees were recognized as income during the
year ended May 31, 1995 and 1997.

(b) The Company entered into a management agreement with TSAG. The Company,
together with the shareholders of TSAG, is contingently liable to fund
shortfalls in operating cash flow, as defined.

F-18
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

7. INVESTMENTS IN, AND AMOUNTS DUE FROM, AFFILIATED COMPANIES: (CONTINUED)
The terms of the agreement provide for the Company to fund a maximum amount
of operating cash flow of approximately $140 ("Advances"). As of May 31,
1996 and 1997, the Company had no outstanding Advances to TSAG. Amounts due
the Company at May 31, 1996 and 1997 represented earned management fees
payable after year-end.

Management fees earned during the years ended May 31, 1995, 1996 and 1997
amounted to approximately $482, $695 and $223, respectively.

(c) The Company entered into a professional service agreement with BRS, for
strategic and financial advisory services on December 10, 1996. Fees for
such services are $250 per annum, and are payable while BRS owns 20% or more
of the outstanding common stock of the Company.

(d) Income and loss allocations to the Company are based on terms defined within
the partnership agreements and may not equal ownership percentages.

(e) Investee earnings exclude management fees earned during each of the years
ended May 31, 1995, 1996 and 1997, which amounted to approximately $67, $67
and $66, respectively.

8. LEASES:

The Company leases office, warehouse and multi-recreational facilities and
certain equipment under noncancelable operating leases. In addition to base
rent, the facility leases generally provide for additional rent based on
increases in real estate taxes and other costs. Certain leases provide for
additional rent based upon defined formulas of revenue, cash flow or operating
results of the respective facilities. Under the provisions of certain of these
leases, the Company is required to maintain irrevocable letters of credit, which
total $1,109.

The leases expire at various times through May 31, 2019, and some may be
extended at the Company's option.

Future minimum rental payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31, MINIMUM ANNUAL RENTAL
- --------------------------------------------------------------------- -----------------------
<S> <C>
1998................................................................. $ 8,142
1999................................................................. 9,083
2000................................................................. 9,340
2001................................................................. 9,416
2002................................................................. 9,460
Aggregate thereafter................................................. 79,004

Rent expense, including deferred lease liabilities, for the years ended May
31, 1995, 1996 and 1997 was approximately $7,108, $8,653 and $10,169,
respectively. Such amounts include additional rent of $1,726, $1,863 and $2,136,
respectively.

The Company, as landlord, leases space under noncancelable operating leases.
In addition to base rent, certain leases provide for additional rent based on
increases in real estate taxes, indexation, utilities

F-19
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

8. LEASES: (CONTINUED)
and defined amounts based on the operating results of the lessee. The leases
expire at various times through May 31, 2005. Future minimum rentals receivable
under noncancelable leases are as follows:

<TABLE>
<CAPTION>
YEAR ENDING MAY 31, MINIMUM ANNUAL RENTAL
- --------------------------------------------------------------------- -----------------------
<S> <C>
1998................................................................. $ 527
1999................................................................. 466
2000................................................................. 375
2001................................................................. 375
2002................................................................. 338
Aggregate thereafter................................................. 650
------
$ 2,731
------
------
</TABLE>

Rental income, including noncash rental income, for the years ended May 31,
1995, 1996 and 1997, was approximately $831, $882 and $936, respectively. Such
amounts included additional rental charges above the base rent of $499, $570 and
$620, respectively.

9. STOCKHOLDERS' EQUITY:

A. CAPITALIZATION:

The Company's certificate of incorporation, as amended on December 10, 1996,
provides for the issuance of up to 2,050,000 shares of capital stock, consisting
of 1,150,000 shares of Class A Voting Common Stock ("Class A"), par value $0.001
per share; 500,000 shares of Class B Non-voting Common Stock ("Class B"), par
value of $0.01 per share, (Class A and Class B are collectively referred to
herein as "Common Stock") and 200,000 shares of Series A Preferred Stock,
("Series A") par value $1.00 per share, and 200,000 shares of Series B Preferred
Stock ("Series B") par value $1.00 per share.

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

PREFERRED STOCK

The Preferred Stock has liquidation preferences over Common Stock. The
Company's Series A and Series B stock have no conversion features or voting
rights except as required by law, and rank PARI PASSU.

Series A stock has a liquidation value of $100 per share plus cumulative
unpaid dividends of $1,005 as of May 31, 1997. Series A stockholders are
entitled to a cumulative 14% annual dividend based upon the per share price of
$100.

Series B stock has a liquidation value of $35 per share plus cumulative
unpaid dividends of $9 as of May 31, 1997. Series B stockholders are entitled to
a cumulative 14% annual dividend based upon the per share price of $35.

Accrued dividends on all Series of Preferred Stock are payable upon certain
defined events which include: the dissolution, liquidation or winding up of the
Company; the redemption of such shares; or the sale of substantially all of the
assets of the Company.

F-20
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

9. STOCKHOLDERS' EQUITY: (CONTINUED)
COMMON STOCK

Class A stock and Class B stock each have identical terms with the exception
that Class A stock is entitled to one vote per share, while Class B stock has no
voting rights, except as required by law. In addition, Class B stock is
convertible into an equal number of Class A shares, at the option of the holder
of the majority of the Class B stockholders.

B. STOCK OPTIONS AND WARRANTS:

The following table summarizes the stock option activity for the years ended
May 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
CLASS A COMMON SERIES B
($0.01 PAR CLASS A COMMON CLASS B REDEEMABLE SERIES B
STOCK OPTIONS VALUE) ($.001 PAR VALUE) COMMON PREFERRED PREFERRED
- --------------------------------------- ---------------- ----------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Number of shares under option:
Outstanding at June 1, 1994.......... 150,000 121,000
Options granted...................... 150,000 -- 21,251
Options exercised....................
Options cancelled.................... (150,000) -- --

<CAPTION>
---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at May 31, 1995.......... 150,000 121,000 21,251
Options exercised.................... (13,358) (2,351) --
Options cancelled.................... (6,642) (349) --
<CAPTION>
---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at May 31, 1996.......... 130,000 118,300 21,251
Options granted...................... -- 57,142(a) 20,000(b) -- 164,783(b)
Options exercised.................... (130,000) -- (138,300) (21,251) --
<CAPTION>
---------------- ----------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at May 31, 1997.......... -- 57,142 -- -- 164,783
<CAPTION>
---------------- ----------------- ---------- ----------- -----------
---------------- ----------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Weighted average exercise price:
Outstanding at June 1, 1994.......... $ 3.00 $ 10.00
Options granted...................... 3.40 -- $ 3.00
Options cancelled.................... 3.00 -- --
<CAPTION>
---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at May 31, 1995.......... 3.40 10.00 3.00
Options exercised.................... 2.40 9.89 --
Options cancelled.................... 2.40 9.89 --
<CAPTION>
---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at May 31, 1996.......... 3.55 10.06 3.00
Options granted...................... -- $ 1.00 6.00 -- $ 10.00
Options exercised.................... 3.55 -- 9.47 3.00 --
<CAPTION>
---------------- ----------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at May 31, 1997.......... -- $ 1.00 -- -- $ 10.00
<CAPTION>
---------------- ----------------- ---------- ----------- -----------
---------------- ----------------- ---------- ----------- -----------
</TABLE>

- ------------------------

(a) Option exercise price equal to market price on the grant date.

(b) Option exercise price less than market price on the grant date.

F-21
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

9. STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes stock option information as of May 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE WEIGHTED- ------------------------------
EXERCISE NUMBER REMAINING AVERAGE NUMBER WEIGHTED- AVERAGE
PRICE OUTSTANDING CONTRACTUAL LIFE EXCERCISE PRICE EXERCISABLE EXERCISE PRICE
------------- ----------- ---------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Class A Common ($.001 par
value).................. $ 1.00 57,142 114 months $ 1.00 11,428 $ 1.00
Series B Preferred........ $ 10.00 164,783 294 months $ 10.00 164,783 $ 10.00
</TABLE>

CLASS A COMMON STOCK ($.001 PAR VALUE) OPTIONS:

Options vest based upon achievement of annual equity value attributable to
Common stockholders over five years, as defined. There are no option shares
reserved for future issuance.

SERIES B PREFERRED STOCK OPTIONS:

During the period between the grant date, December 10, 1996, and the
exercise date, the option agreements contain provisions whereby the options
exercise price will be reduced or in certain cases, the optionholder will
receive cash in accordance with a formula as defined. There are no option shares
reserved for future issuance.

During the years ended May 31, 1995, 1996 and 1997, in connection with the
granting of Series B Preferred Stock Options and Class A and Class B Common
Stock Options, the Company recognized a noncash compensation charge of
approximately $635, $1,967 and $5,933, respectively. The Company applied APB
Opinion No. 25 in accounting for its plans. Such charges represented the
difference between the exercise price of the respective options and the fair
market value as determined by the Board of Directors of the underlying
securities.

The following table summarizes the pro forma operating results of the
Company had compensation costs for the outstanding options been determined in
accordance with the fair value based method of accounting for stock-based
compensation as prescribed in SFAS No. 123. There were no options granted during
the year ended May 31, 1996 and since option grants awarded during the year
ended May 31, 1997 vest over several years, the pro forma results noted below
are not likely to be representative of the effects on future years of the
application of the fair value based method.

<TABLE>
<CAPTION>
1997
---------
<S> <C>
Pro forma net (loss) to common stockholders prepared in accordance with SFAS No. 123.................... $ (1,826)
---------
---------
</TABLE>

For the purposes of the above pro forma information, the fair value of each
option granted was estimated on the date of grant using the Black-Scholes option
pricing model. The weighted-average fair value of the options was $26.80. The
following weighted-average assumptions were used in computing the fair value of
options grants: expected volatility of 60%; risk-free interest rate of
approximately 6.5%; expected lives of five years; and a zero dividend yield.

F-22
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

9. STOCKHOLDERS' EQUITY: (CONTINUED)
WARRANTS TO BUY COMMON STOCK:

In connection with the issuance of the Subordinated note payable on December
10, 1996 warrants to buy 124,022 Class A Common Shares were issued at an
exercise price of $0.01 per share. Original issue discount arising upon this
issue, totaled approximately $123 and 10,000 warrants were exercised on December
10, 1996 with the remaining warrants outstanding and fully exercisable until
expiration on December 10, 2006.

10. ASSET ACQUISITIONS:

During the year ended May 31, 1997, the Company acquired the assets of three
separate fitness clubs. The purchase prices totaled $4,138 which included $1,888
payable at closing and the issuance, or assumption of notes payable totaling
$2,250.

During the year ended May 31, 1996, the Company acquired the assets of a
fitness club. The purchase price totaled $304, which included $35 payable at
closing and the issuance, or assumption of notes payable totaling $269.

During the year ended May 31, 1995, the Company acquired the stock of a
fitness club which had been managed by the Company. The purchase price totaled
$311, which included $95 payable at closing and the issuance of notes payable
totaling $216. In addition, the Company also acquired all of the assets and
liabilities of a health and fitness club for nominal consideration, canceled the
pre-existing management agreement, entered into a noncancelable operating lease
for the space previously occupied by former owner and assumed operation of the
club. The fair value of the net assets acquired, which included cash of $67,
exceeded the total consideration paid by approximately $80. Such difference has
been accounted for as a lease incentive and is included in other liabilities.

For financial reporting purposes, these acquisitions have been accounted for
under the purchase method and, accordingly, the purchase price has been assigned
to the assets acquired on the basis of their respective fair values on the dates
of acquisition. The results of operations of the clubs have been included in the
Company's consolidated financial statements from the respective dates of
acquisition and the impact of these acquisitions on the respective consolidated
financial statements of the Company was not material.

F-23
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

11. CORPORATE INCOME TAXES:

The (benefit) provision for income taxes for the years ended May 31, 1995,
1996 and 1997 consists of the following:

<TABLE>
<CAPTION>
1995
-----------------------------------------
FEDERAL STATE AND LOCAL TOTAL
----------- ----------------- ---------
<S> <C> <C> <C>
Current.................................................. $ 442 $ 364 $ 806
Deferred................................................. (818) (529) (1,347)
----- ----- ---------
$ (376) $ (165) $ (541)
----- ----- ---------
----- ----- ---------
</TABLE>

<TABLE>
<CAPTION>
1996
-------------------------------------
FEDERAL STATE AND LOCAL TOTAL
--------- --------------- ---------
<S> <C> <C> <C>
Current................................................. $ 1,256 $ 911 $ 2,167
Deferred................................................ (964) (575) (1,539)
--------- ----- ---------
$ 292 $ 336 $ 628
--------- ----- ---------
--------- ----- ---------
</TABLE>

<TABLE>
<CAPTION>
1997
-------------------------------------
FEDERAL STATE AND LOCAL TOTAL
--------- --------------- ---------
<S> <C> <C> <C>
Current................................................. $ 1,053 $ 762 $ 1,815
Deferred................................................ (1,226) (832) (2,058)
--------- ----- ---------
$ (173) $ (70) $ (243)
--------- ----- ---------
--------- ----- ---------
</TABLE>

F-24
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

11. CORPORATE INCOME TAXES: (CONTINUED)
The components of the net deferred tax asset as of May 31, 1996 and 1997 are
summarized below:

<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Deferred lease liabilities............................................. $ 2,226 $ 2,966
Stock compensation..................................................... 1,060 1,846
Fixed assets........................................................... 781 1,153
State net operating loss carry-forwards................................ 123 100
Investment in affiliated companies..................................... -- 33
Deferred income........................................................ 1,431 1,835
--------- ---------
5,621 7,933
--------- ---------
--------- ---------
Deferred tax liabilities:
Accruals............................................................... (152) (153)
Investment in affiliated companies..................................... (37) --
Deferred charges....................................................... (1,234) (1,624)
--------- ---------
(1,423) (1,777)
--------- ---------
Net deferred tax asset, prior to valuation allowance................... 4,198 6,156
Valuation allowance...................................................... (284) (184)
--------- ---------
Net deferred tax asset................................................. $ 3,914 $ 5,972
--------- ---------
--------- ---------
</TABLE>

As of May 31, 1997, the Company has state net operating loss carry-forwards
of approximately $1,178. Such amounts expire between May 31, 2006 and May 31,
2009.

The following table accounts for the differences between the actual
provision and the amounts obtained by applying the statutory U.S. Federal income
tax rate of 34% to the income (loss) before provision (benefit) for corporate
income taxes:

<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate............................................. (34)% 34% (34)%
State and local income taxes, net of federal tax benefit............... (9) 19 (6)
Reduction in valuation allowance....................................... -- -- (8)
Adjustment of prior year's tax refund.................................. -- -- 25
Other.................................................................. 1 -- 2
-- -- --
(42)% 53% (21)%
-- -- --
-- -- --
</TABLE>

12. CONTINGENCIES:

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

F-25
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALL FIGURES $'000, EXCEPT SHARE DATA

13. EMPLOYEE BENEFIT PLAN:

During April 1996, the Company implemented a 401(k) salary deferral plan
(the "Plan") which is available to eligible employees, as defined. The Plan
provides for the Company to make discretionary contributions, however, the
Company elected not to make contributions for the years ended May 31, 1996 and
1997.

14. SUBSEQUENT EVENTS:

During June 1997, the Company acquired the assets of three fitness clubs.
The purchase prices totaled $4,116 which included $1,590 payable at closing, the
issuance, or assumption of notes payable totaling $1,946 and the utilization of
amounts paid under a purchase option agreement of $580. In addition, the Company
has entered into noncancelable operating leases which expire at various times
through May 31, 2013. Future minimum rental payments required under these leases
total approximately $11,600.

15. NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)

A. BASIS OF PRESENTATION:

The consolidated financial statements as of August 31, 1997 and for the
three months ended August 31, 1996 and 1997 are unaudited. In the opinion of
management, these unaudited consolidated financial statements reflect all
adjustments necessary (which are of a normal recurring nature) to present fairly
the financial position and results of operations and cash flows for the interim
periods, but are not necessarily indicative of the results of operations for a
full fiscal year.

B. ACQUISITION:

During September 1997, the Company acquired the assets of a fitness club.
The purchase price totaled $2,184 which included $1,900 payable at closing and
the issuance of a note payable totaling $284. In addition, the Company has
entered into a noncancelable operating lease which expires May 31, 2003. Future
minimum rental payments required under this lease totals approximately $2,900.

F-26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
REGISTRATION STATEMENT IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASERS. NEITHER THE DELIVERY
OF THIS REGISTRATION STATEMENT NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS
REGISTRATION STATEMENT. THIS REGISTRATION STATEMENT DOES NOT CONSTITUTE AN OFFER
OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary......................................... 3
Risk Factors.................................... 15
Use of Proceeds................................. 19
Capitalization.................................. 20
Selected Historical Consolidated Financial
Data.......................................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 23
Business........................................ 27
Management...................................... 36
Security Ownership.............................. 41
Certain Relationships and Related
Transactions.................................. 43
Description of New Credit Facility.............. 44
Description of Notes............................ 45
The Exchange Offer.............................. 69
Certain Federal Income Tax Considerations....... 75
Plan of Distribution............................ 77
Legal Matters................................... 77
Experts......................................... 77
Available Information........................... 77
Index to Consolidated Financial Statements...... F-1
</TABLE>

$85,000,000

TOWN SPORTS
INTERNATIONAL, INC.

SERIES B
9 3/4% SENIOR NOTES
DUE 2004

REGISTRATION STATEMENT

DATED , 1997

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Reference is made to Sections 721 to 725 of the New York Business
Corporation Law ("NYBCL") which provide for indemnification of directors and
officers. Pursuant to Section 721 of the NYBCL, no indemnification shall be made
to or on behalf of a director or officer if a judgment or other final
adjudication adverse to the director or officer establishes that his or her acts
were committed in bad faith or were the results of active and deliberate
dishonesty and were material to the cause of action so adjudicated, or that he
or she personally gained in fact a financial profit or other advantage to which
he or she was not legally entitled. Section 402(b) of the NYBCL permits a
certificate of incorporation to set forth a provision limiting or eliminating
the personal liability of directors to a corporation or its shareholders for
damages for any breach of duty in such capacity, provided that no such provision
shall eliminate or limit the liability of a director (i) if a judgment or other
final adjudication adverse to him or her establishes that his or her acts were
in bad faith or involved intentional misconduct or a knowing violation of law or
(ii) that he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled, or (iii) in certain other
cases specified in Section 719 of the NYBCL.

Article Eighth of Registrant's Restated Certificate of Incorporation
provides that, except to the extent limitation of liability or indemnification
is not permitted by applicable law: (i) a director or officer of the Registrant
shall not be liable to the Registrant or any of its shareholders for damages for
any breach of duty in such capacity, and (ii) the Registrant shall fully
indemnify any person made, or threatened to be made a party to an action or
proceeding, whether civil or criminal, including an investigative,
administrative or legislative proceeding, and including an action by or in the
right of the Registrant or any other enterprise, by reason of the fact that the
person is or was a director or officer of the Registrant, or is or was serving
at the request of the Registrant any other enterprise as a director, officer or
in any other capacity, against any and all damages incurred as a result of or in
connection with such action or proceeding or any appeal thereof.

II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) EXHIBITS.

<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger dated as of November 8, 1996 by and among Town Sports
International, Inc., various Sellers and Option Holders and TSI Merger Sub, Inc.

2.2 Amendment to Agreement and Plan of Merger dated as of December 10, 1996 among TSI
Merger Sub, Inc., Town Sports International, Inc. and various sellers and Option
Holders of the Company.

3.1 Certificate of Incorporation of Town Sports International, Inc.*

3.2 By-Laws of Town Sports International, Inc.

4.1 Indenture dated as of October 16, 1997 between Town Sports International, Inc. and
United States Trust Company of New York.

4.2 Purchase Agreement dated as of October 9, 1997 among Town Sports International,
Inc. and BT Alex. Brown, Inc.

4.3 Registration Rights Agreement dated as of October 16, 1997 among Town Sports
International, Inc., and BT Alex. Brown, Inc.

5.1 Opinion and consent of Kirkland & Ellis.

10.1 Amended and Restated Credit Agreement among Town Sports International, Inc.,
Various Lending Institutions, and Bankers Trust Company, as Administrative Agent
dated as of October 16, 1997.

10.2 Registration Rights Agreement dated as of December 10, 1996 by and among Town
Sports International, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and various
investors, Farallon Capital Partners, L.P., Farallon Capital Institutional
Partners, L.P., RR Capital Partners, L.P., Farallon Capital Institutional Partners
II, L.P., Canterbury Mezzanine Capital, L.P., and certain TSI shareholders.

10.3 Shareholders Agreement dated as of December 10, 1996 by and among Town Sports
International, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and various investors,
Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P., RR
Capital Partners, L.P., Farallon Capital Institutional Partners II, L.P.,
Canterbury Mezzanine Capital, L.P., and certain TSI shareholders.

11.1 Statement of Computation of Per Share Data

12.1 Statement of Computation of Ratios of Earnings to Fixed Charges.

21.1 Subsidiaries of Town Sports International, Inc.

23.1 Consent of Coopers & Lybrand L.L.P., independent accountants.

23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).

24.1 Powers of Attorney (included in signature page).

25.1 Statement of Eligibility of Trustee on Form T-1.

27.1 Financial Data Schedule.

99.1 Form of Letter of Transmittal.

99.2 Form of Notice of Guaranteed Delivery.

99.3 Form of Tender Instructions.
</TABLE>

- ------------------------

* To be filed by amendment.

II-2
<PAGE>
(b) Financial Statement Schedules

Schedule II--Valuation and Qualifications Accounts

ITEM 22. UNDERTAKINGS.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement.

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;

(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the Securities offered therein, and the
offering of such Securities at the time shall be deemed to be the initial BONA
FIDE offering thereof;

(3) To remove from registration by means of a post-effective amendment any
of the Securities being registered which remain unsold at the termination of the
offering; and

(4) That for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(5) That for the purpose of determining liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.

(6) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.

(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.

In so far as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described under
Item 20 or otherwise, the registrant has been advised that in the opinion of the
Securities and exchange Commission such indemnification is against public policy
as expressed in the Securities At and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or

II-3
<PAGE>
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of New York, state of New
York, on November 24, 1997.

<TABLE>
<S> <C> <C>
TOWN SPORTS INTERNATIONAL, INC.

By /s/ MARK A. SMITH
-----------------------------------------
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
</TABLE>

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Mark Smith, Richard Pyle and Alexander
Alimanestianu, his/her true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities (including his capacity as a director and/or
officer of Town Sports International, Inc.) to sign any and all amendments
(including post-effective amendments) to this registration statement and any
subsequent registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement anad power of attorney have been signed by the following
persons on November 24, 1997 in the capacities indicated:

<TABLE>
<S> <C> <C>
By /s/ MARK A. SMITH
-----------------------------------------
Mark A. Smith
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD (PRINCIPAL EXECUTIVE OFFICER)

By /s/ RICHARD PYLE
-----------------------------------------
Richard Pyle
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)

By /s/ KEITH ALESSI
-----------------------------------------
Keith Alessi
DIRECTOR

By /s/ PAUL ARNOLD
-----------------------------------------
Paul Arnold
DIRECTOR

By /s/ BRUCE BRUCKMANN
-----------------------------------------
Bruce Bruckmann
DIRECTOR
</TABLE>

II-5
<PAGE>
<TABLE>
<S> <C> <C>
By /s/ STEPHEN EDWARDS
-----------------------------------------
Stephen Edwards
DIRECTOR

By /s/ JASON FISH
-----------------------------------------
Jason Fish
DIRECTOR
</TABLE>

II-6
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of independent accountants.......................................................................... S-2
Schedule II, valuation and qualifying accounts............................................................. S-3
</TABLE>

S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Town Sports International, Inc.

Our report on the consolidated financial statements of Town Sports
International, Inc. and Subsidiaries is included on page F-2 of the Form S-4. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page S-1 of this
Form S-4.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.

Coopers & Lybrand, L.L.P.

New York, New York
July 24, 1997

S-2
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE YEARS ENDED MAY 31, 1995, 1996 AND 1997

<TABLE>
<CAPTION>
COL. C
ADDITIONS
COL. B ------------------------------ COL. E
------------- (1) (2) -------------
COL A. BALANCE AT CHARGED TO CHARGED TO COL. D BALANCE AT
- -------------------------------------------------- BEGINNING COSTS AND OTHER ------------- END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- -------------------------------------------------- ------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Deferred tax valuation
allowance:
1995.............................................. $ 284 $ 284
1996.............................................. 284 284
1997.............................................. 284 (1) $ (100) 184
</TABLE>

- ------------------------

(1) Reduction of valuation allowance from the utilization of state net operating
loss carryforward which were no longer required.

S-3
<PAGE>
EXHIBIT INDEX

<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger dated as of November 8, 1996 by and among Town Sports
International, Inc., various Sellers and Option Holders and TSI Merger Sub, Inc.
2.2 Amendment to Agreement and Plan of Merger dated as of December 10, 1996 among TSI
Merger Sub, Inc., Town Sports International, Inc. and Various Sellers and Option
Holders of the Company.
3.1 Certificate of Incorporation of Town Sports International, Inc.*
3.2 By-Laws of Town Sports International, Inc.
4.1 Indenture dated as of October 16, 1997 between Town Sports International, Inc. and
United States Trust Company of New York.
4.2 Purchase Agreement dated as of October 9, 1997 among Town Sports International, Inc.
and BT Alex. Brown, Incorporated.
4.3 Registration Rights Agreement dated as of October 16, 1997 among Town Sports
International, Inc., and BT Alex. Brown, Incorporated.
5.1 Opinion and consent of Kirkland & Ellis.
10.1 Amended and Restated Credit Agreement among Town Sports International, Inc., Various
Lending Institutions, and Bankers Trust Company, as Administrative Agent dated as of
October 16, 1997.
10.2 Registration Rights Agreement dated as of December 10, 1996 by and among Town Sports
International, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and various investors,
Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P., RR
Capital Partners, L.P., Farallon Capital Institutional Partners II, L.P., Canterbury
Mezzanine Capital, L.P., and certain TSI shareholders.
10.3 Shareholders Agreement dated as of December 10, 1996 by and among Town Sports
International, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and various investors,
Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P., RR
Capital Partners, L.P., Farallon Capital Institutional Partners II, L.P., Canterbury
Mezzanine Capital, L.P., and certain TSI shareholders.
11.1 Statement of Computation of Per Share Data.
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges.
21.1 Subsidiaries of Town Sports International, Inc.
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page).
25.1 Statement of Eligibility of Trustee on Form T-1
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Tender Instructions.
</TABLE>

- ------------------------

* To be filed by amendment.

<PAGE>
Exhibit 2.1

EXECUTION COPY

AGREEMENT AND PLAN OF MERGER

DATED AS OF

NOVEMBER 8, 1996

BY AND AMONG

TOWN SPORTS INTERNATIONAL, INC.,

THE SELLERS AND OPTION HOLDERS

NAMED ON THE SIGNATURE PAGES HERETO

AND

TSI MERGER SUB, INC.

<PAGE>

TABLE OF CONTENTS
-----------------

ARTICLE I--CERTAIN DEFINITIONS

SECTION 1.1. CERTAIN DEFINITIONS.............................................1
SECTION 1.2. INTERPRETATION..................................................7

ARTICLE II--THE MERGER

SECTION 2.1. THE MERGER......................................................7
SECTION 2.2. OUTSTANDING SHARES..............................................7
SECTION 2.3. CERTIFICATE OF MERGER...........................................7
SECTION 2.4. CERTIFICATE OF INCORPORATION....................................8
SECTION 2.5. BY-LAWS.........................................................8
SECTION 2.6. OFFICERS........................................................8
SECTION 2.7. DIRECTORS.......................................................8
SECTION 2.8. CONVERSION OF SHARES............................................8
SECTION 2.9. DISSENTING SHARES...............................................9
SECTION 2.10. OPTIONS.........................................................9
SECTION 2.11. EXCHANGE OF CERTIFICATES.......................................10
SECTION 2.12. CLOSING........................................................11
SECTION 2.13. SERIES A PREFERRED; SERIES B PREFERRED.........................11

ARTICLE III--REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SELLERS

SECTION 3.1. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES...................11
SECTION 3.2. AUTHORIZATION..................................................12
SECTION 3.3. NON-CONTRAVENTION..............................................12
SECTION 3.4. NO CONSENTS....................................................12
SECTION 3.5. CAPITALIZATION OF THE COMPANY AND THE SUBSIDIARIES.............12
SECTION 3.6. FINANCIAL STATEMENTS...........................................13
SECTION 3.7. ABSENCE OF CERTAIN DEVELOPMENTS................................14
SECTION 3.8. GOVERNMENTAL AUTHORIZATIONS; LICENSES; ETC.....................15
SECTION 3.9. LITIGATION.....................................................16
SECTION 3.10. UNDISCLOSED LIABILITIES........................................16
SECTION 3.11. TAXES..........................................................16
SECTION 3.12. ENVIRONMENTAL MATTERS..........................................18
SECTION 3.13. EMPLOYEE MATTERS...............................................19
SECTION 3.14. EMPLOYEE BENEFIT PLANS.........................................19
SECTION 3.15. PROPRIETARY RIGHTS.............................................21
SECTION 3.16. CONTRACTS......................................................22
SECTION 3.17. BOOKS AND RECORDS..............................................23
SECTION 3.18. INSURANCE......................................................23
SECTION 3.19. REAL PROPERTY..................................................24
SECTION 3.20. TRANSACTION WITH AFFILIATES....................................24
SECTION 3.21. ACCOUNTS RECEIVABLE............................................25
SECTION 3.22. SUFFICIENCY OF ASSETS..........................................25

-i-
<PAGE>

SECTION 3.23. BROKERS........................................................25
SECTION 3.24. ACCURACY OF REPRESENTATIONS....................................25
SECTION 3.25. BOARD RECOMMENDATION...........................................25
SECTION 3.26. CLOSING DATE...................................................25
SECTION 3.27. KNOWLEDGE......................................................26

ARTICLE IV--REPRESENTATIONS AND WARRANTIES OF NEWCO

SECTION 4.1. ORGANIZATION...................................................26
SECTION 4.2. AUTHORIZATION..................................................26
SECTION 4.3. NON-CONTRAVENTION..............................................26
SECTION 4.4. NO CONSENTS....................................................26
SECTION 4.5. BROKERS........................................................27
SECTION 4.6. ACCURACY OF REPRESENTATIONS....................................27
SECTION 4.7. FINANCING......................................................27
SECTION 4.8. HSR............................................................27
SECTION 4.9. NEWCO BOARD....................................................27
SECTION 4.10. CLOSING DATE...................................................27

ARTICLE V--COVENANTS AND AGREEMENTS

SECTION 5.1. STOCKHOLDER MATTERS............................................27
SECTION 5.2. ACCESS AND INFORMATION.........................................28
SECTION 5.3. CONDUCT OF BUSINESS BY THE COMPANY.............................28
SECTION 5.4. CLOSING DOCUMENTS..............................................30
SECTION 5.5. BEST EFFORTS; FURTHER ASSURANCES...............................30
SECTION 5.6. PUBLIC ANNOUNCEMENTS...........................................31
SECTION 5.7. THIRD PARTY PROPOSALS..........................................31

ARTICLE VI--CONDITIONS TO CLOSING

SECTION 6.1. MUTUAL CONDITIONS..............................................32
SECTION 6.2. CONDITIONS TO THE OBLIGATIONS OF NEWCO.........................32
SECTION 6.3. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE SELLERS...35

ARTICLE VII--TERMINATION AMENDMENT AND WAIVER

SECTION 7.1. TERMINATION....................................................36
SECTION 7.2. EFFECT OF TERMINATION..........................................37
SECTION 7.3. AMENDMENTS.....................................................37

ARTICLE VIII-MISCELLANEOUS

SECTION 8.1. SELLER REPRESENTATIVE..........................................37
SECTION 8.2. REPRESENTATIONS AND WARRANTIES OF SELLERS......................38
SECTION 8.3. NOTICES........................................................38
SECTION 8.4. SURVIVAL; LIMITATION OF LIABILITY..............................40

-ii-
<PAGE>

SECTION 8.5. EXHIBITS AND SCHEDULES.........................................40
SECTION 8.6. TIME OF THE ESSENCE; COMPUTATION OF TIME.......................40
SECTION 8.7. TRANSFER TAXES; EXPENSES.......................................40
SECTION 8.8. GOVERNING LAW; CONSENT TO JURISDICTION.........................41
SECTION 8.9. ASSIGNMENT; SUCCESSORS AND ASSIGNS; NO THIRD PARTY RIGHTS......41
SECTION 8.10. COUNTERPARTS...................................................41
SECTION 8.11. TITLES AND HEADINGS............................................41
SECTION 8.12. ENTIRE AGREEMENT...............................................41
SECTION 8.13. SEVERABILITY...................................................41
SECTION 8.14. NO STRICT CONSTRUCTION.........................................42
SECTION 8.15. SPECIFIC PERFORMANCE...........................................42
SECTION 8.16. WAIVER OF JURY TRIAL...........................................42

-iii-
<PAGE>

EXHIBITS & SCHEDULES
--------------------

EXHIBIT A CERTIFICATE OF MERGER
EXHIBIT B FINANCING LETTER
EXHIBIT C TAX AFFIDAVIT
EXHIBIT D COMPANY BOARD APPROVAL
EXHIBIT E NEWCO SHAREHOLDER APPROVAL

SCHEDULE A LIST OF OPTION AGREEMENTS
SCHEDULE 2.10(A) OPTIONS CONVERTED INTO NEW OPTIONS
SCHEDULE 2.10(B) OPTIONS CONVERTED INTO NEW COMMON STOCK
SCHEDULE 3.1 JURISDICTIONS OF INCORPORATION
SCHEDULE 3.3 NONCONTRAVENTION
SCHEDULE 3.4 CONSENTS
SCHEDULE 3.5 CAPITALIZATION; SUBSIDIARIES
SCHEDULE 3.6 COMPANY FINANCIAL STATEMENTS
SCHEDULE 3.7 INTERIM CHANGES
SCHEDULE 3.8 GOVERNMENTAL AUTHORIZATIONS
SCHEDULE 3.9 LITIGATION
SCHEDULE 3.10 UNDISCLOSED LIABILITIES
SCHEDULE 3.11 TAX MATTERS
SCHEDULE 3.12 ENVIRONMENTAL MATTERS
SCHEDULE 3.13 EMPLOYEE MATTERS
SCHEDULE 3.14 EMPLOYEE BENEFIT PLANS
SCHEDULE 3.15 PROPRIETARY RIGHTS
SCHEDULE 3.16 CONTRACTS
SCHEDULE 3.18 INSURANCE
SCHEDULE 3.19 REAL PROPERTY
SCHEDULE 3.20 AFFILIATE TRANSACTIONS
SCHEDULE 3.21 ACCOUNTS RECEIVABLE
SCHEDULE 3.22 LIENS
SCHEDULE 4.4 NEWCO CONSENTS
SCHEDULE 5.3(N) CONDUCT OF BUSINESS
SCHEDULE 6.2(M) OPTIONS TO BE EXERCISED

-iv-
<PAGE>

AGREEMENT AND PLAN OF MERGER
----------------------------

AGREEMENT AND PLAN OF MERGER, dated November 8, 1996, by and among TSI
Merger Sub, Inc., a New York corporation ("Newco"), Town Sports International,
Inc. (formerly known as Saint John Squash Racquets, Inc.), a New York
corporation (the "Company"), the shareholders of the Company listed on the
signature pages hereto (each, a "SELLER" and collectively, the "SELLERS") and
certain holders of the Options (as defined below) listed on the signature pages
hereto (each, an "OPTION HOLDER" and collectively, the "OPTION HOLDERS").

W I T N E S S E T H
- - - - - - - - - -

WHEREAS, the respective Boards of Directors of Newco, the Company and the
Sellers have approved the merger of Newco with and into the Company on the terms
and subject to the conditions set forth herein; and

WHEREAS, pursuant to the Merger (as defined below), shares of Common Stock
(as defined below) will be converted into the Merger Consideration (as defined
below) in the manner set forth herein;

NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and intending to be legally bound, the parties hereto agree as follows:

ARTICLE I--CERTAIN DEFINITIONS

SECTION 1.1 CERTAIN DEFINITIONS. As used in this Agreement, the
following terms have the respective meanings set forth below.

"ACQUISITION PROPOSAL" has the meaning set forth in Section 5.7.

"AFFILIATE" means, with respect to any Person, any other Person who
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such Person; and with respect to
any Seller also includes any Relative thereof. The term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise, and the terms
"controlled" and "controlling" have meanings correlative thereto.

"AGREEMENT" means this Agreement and Plan of Merger.

"BCL" has the meaning set forth in Section 2.1.

"BUSINESS DAY" means a day, other than a Saturday or Sunday, on which
commercial banks in New York City are open for the general transaction of
business.

"CERCLA" means the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. Section 19601, ET. SEQ., and the regulations
promulgated thereunder, as amended, or any successor thereto.

<PAGE>

"CERTIFICATES" means the outstanding certificates which immediately prior
to the Effective Time represent shares of Common Stock.

"CERTIFICATE OF MERGER" has the meaning set forth in Section 2.3.

"CG SELLERS" means, collectively, Coranda S. A. and Gerarda de
Orleans-Borbon, as holders of certain shares of the Common Stock, or any of
their respective permitted transferees or assigns.

"CLASS A COMMON" means the Class A Voting Common Stock, par value $.01 per
share, of the Company.

"CLASS B COMMON" means the Class B Convertible Non-Voting Common Stock, par
value $.01 per share, of the Company.

"CLOSING" has the meaning set forth in Section 2.12.

"CLOSING DATE" has the meaning set forth in Section 2.12.

"CODE" means the Internal Revenue Code of 1986, as amended.

"COMMON STOCK" means collectively, the Class A Common and the Class B
Common.

"COMMON STOCK OPTIONS" means (i) the options to purchase up to 118,300
shares of Class B Common granted to certain current and former employees of the
Company pursuant to the Option Plan and certain of the Option Agreements, (ii)
the options to purchase up to 20,000 shares of Class B Common granted to certain
current employees of the Company pursuant to the 1996 Option Plan and certain of
the Option Agreements and (iii) the options to purchase up to 130,000 shares of
Class A Common granted to Messrs. Marc Tascher and Robert Giardina pursuant to
the Tascher Option Agreement and the Giardina Option Agreement, respectively.

"CONFIDENTIALITY AGREEMENT" has the meaning set forth in Section 5.2(b).

"CONTRACTS" has the meaning set forth in Section 3.16.

"DISSENTING SHARES" has the meaning set forth in Section 2.9.

"EFFECTIVE TIME" has the meaning set forth in Section 2.3.

"EMPLOYEE BENEFIT PLAN" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or
arrangement (including any Multiemployer Plan), (d) Employee Welfare Benefit
Plan or (e) material fringe benefit plan or program.

"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in ERISA Section
3(2).

"EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in ERISA Section
3(1).

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"ENVIRONMENTAL CLAIM" means any claim, complaint, citation, report or other
written or oral notice regarding any liabilities or potential liabilities,
including any investigatory, remedial or corrective obligations, arising under
Environmental and Safety Requirements.

"ENVIRONMENTAL AND SAFETY REQUIREMENTS" shall mean all federal, state,
local and foreign statutes, regulations, ordinances and similar provisions
having the force or effect of law, all judicial or administrative orders and
determinations, all contractual obligations and all common law concerning public
health and safety, worker health and safety, and pollution or protection of the
environment, including without limitation all those relating to the presence,
use, production, generation, handling, transport, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, release, threatened
release, control, or cleanup of any hazardous or otherwise regulated materials,
substances or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation.

"ENVIRONMENTAL LIEN" shall mean a Lien, either recorded or unrecorded, in
favor of any governmental entity, relating to any liability of the Company or
any Subsidiary arising under Environmental and Safety Requirements.

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

"EXISTING SHAREHOLDERS AGREEMENTS" means, collectively, (i) the Amended and
Restated Shareholders Agreement, dated as of March 7, 1995, by and among the
Company and its stockholders and (ii) Tascher/Giardina Shareholders Agreement,
dated as of September 16, 1994, by and among the Company, the CG Sellers and
Messrs. Robert Giardina and Marc Tascher, as each may be amended, restated or
modified from time to time.

"GAAP" means generally accepted accounting principles as in effect in the
United States on the date of this Agreement, applied on a consistent basis.

"GIARDINA OPTION AGREEMENT" means the Amended and Restated Stock Option
Agreement dated as of September 16, 1994 by and between the Company and Robert
Giardina, as amended, restated or modified from time to time.

"GIARDINA OPTIONS" means the options to purchase Class A Common granted by
the Company to Robert Giardina pursuant to the Giardina Option Agreement.

"GOVERNMENTAL AUTHORITY" means any national, federal, state, provincial,
county, municipal or local government, foreign or domestic, or the government of
any political subdivision of any of the foregoing, or any entity, authority,
agency, ministry or other similar body exercising executive, legislative,
judicial, regulatory or administrative authority or functions of or pertaining
to government, including any authority or other quasi-governmental entity
established to perform any of such functions.

"HAZARDOUS SUBSTANCE" means any substance that is a "hazardous substance"
under CERCLA, any substance that is a "solid waste" or "hazardous waste" under
RCRA, any pesticide, pollutant, contaminant, toxic chemical, petroleum product
or byproduct, asbestos, polychlorinated biphenyl, noise, odor, or radiation.

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"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.

"KNOWLEDGE" means (i) with respect to the Sellers, the actual knowledge of
the Sellers (including its directors and officers), without investigation and
(ii) with respect to the Company, the actual knowledge of the Company (including
its officers).

"LENDER" means Bankers Trust Company, as the agent for the lenders under
the senior credit facility that may be used in connection with the financing of
the Merger, or any other agent for any other such credit facility.

"LIEN" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind.

"MATERIAL ADVERSE EFFECT" means a material adverse effect upon (i) the
condition (financial or otherwise), business, assets, results of operations or
prospects of the Company or any of its Subsidiaries, taken as a whole or (ii)
the ability of the Company, any Seller or any Option Holder to consummate the
transactions contemplated hereby and to perform their respective obligations
hereunder.

"MERGER" has the meaning set forth in Section 2.1.

"MERGER CONSIDERATION" has the meaning set forth in Section 2.8.

"MERGER DOCUMENTS" means, collectively, this Agreement, the Certificate of
Merger, and all other agreements and documents entered into in connection with
the Merger and the other transactions contemplated hereby.

"MULTIEMPLOYER PLAN" has the meaning set forth in ERISA Section 3(37).

"1996 OPTION PLAN" means, collectively, each of the Company's Nonqualified
Stock Option Agreements dated as of September 26, 1996 by and between the
Company and the employees of the Company party thereto.

"OPTION AGREEMENTS" means, collectively, the Tascher Option Agreement, the
Giardina Option Agreement, and the option agreements entered into by and between
the Company and certain members of management of the Company as set forth and
described in SCHEDULE A attached hereto, each as may be amended, restated or
modified from time to time.

"OPTION HOLDERS" has the meaning set forth in the recitals herein.

"OPTION PLAN" means the Company's Nonqualified Stock Option Plan adopted as
of January 22, 1993 and as amended from time to time, as in effect on the date
hereof.

"OPTIONS" means, collectively, the Common Stock Options, the Series B
Options, and any stock options issued in exchange therefor (other than pursuant
to Section 2.10).

"PERMITTED ENCUMBRANCES" has the meaning set forth in Section 3.19.

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"PERSON" means an individual, partnership, corporation, limited liability
company, joint stock company, unincorporated organization or association, trust,
joint venture, association or other organization, whether or not a legal entity,
or a Governmental Authority.

"PREFERRED STOCK" means collectively, the Series A Preferred and the Series
B Preferred.

"PROPRIETARY RIGHTS" has the meaning set forth in Section 3.15.

"PRO RATA PORTION" means a fraction, the numerator of which is one (1), and
the denominator of which is the total number of shares of Common Stock
outstanding on a fully diluted basis immediately prior to the Effective Time
(assuming (i) full exercise of all outstanding Options, (ii) the conversion of
all outstanding shares of Series B Preferred into Class A Common (after giving
effect to the exercise of all Series B Options) and (iii) the exercise of all
other securities of the Company which are convertible into, or exchangeable for,
shares of Common Stock).

"RCRA" means the Resource Conservation and Recovery Act of 1976, 42 U.S.C.
Section 16901 ET. SEQ., and the regulations promulgated thereunder, as amended,
or any successor thereto.

"RELATIVE" means an individual who is the spouse, ancestor, descendant or
sibling of the individual specified.

"SELLER REPRESENTATIVE" has the meaning set forth in Section 8.1.

"SELLERS" has the meaning set forth in the recitals herein.

"SERIES A PREFERRED" means the Series A Preferred Stock, par value $.10 per
share, of the Company and any other securities of the Company issued in
exchange, substitution or replacement therefor.

"SERIES B PREFERRED" means the Series B Redeemable Convertible Preferred
Stock, par value $.01 per share, of the Company and any other securities of the
Company issued in exchange, substitution or replacement therefor.

"SERIES B OPTIONS" means the options to purchase up to 21,251 shares of
Series B Preferred granted to certain current and former employees of the
Company pursuant to certain of the Option Agreements.

"SHARES" means collectively all of the issued and outstanding shares of
Common Stock and Preferred Stock.

"SUBSIDIARY" means, with respect to any Person, any corporation,
partnership, association or other business entity of which (i) if a corporation,
a majority of the total voting power of shares of stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person or a combination thereof, or (ii) if a partnership, association or other
business entity, a majority of the partnership or other similar ownership
interests thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person

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or Persons shall be deemed to have a majority ownership interest in a
partnership, association or other business entity if such Person or Persons
shall be allocated a majority of partnership, association or other business
entity gains or losses or shall be or control the managing director, managing
member, general partner or other managing Person of such partnership,
association or other business entity. Unless the context requires otherwise,
each reference to a Subsidiary shall be deemed to be a reference to a Subsidiary
of the Company.

"SURVIVING CLASS A COMMON" means the Surviving Corporation's Class A Common
Stock, par value $.01 per share, the terms of which are set forth in the
Certificate of Merger.

"SURVIVING COMMON STOCK" means, collectively, the Surviving Class A Common,
and the Surviving Corporation's Class B Common Stock, par value $.01 per share,
the terms of which are set forth in the Certificate of Merger.

"SURVIVING CORPORATION" has the meaning set forth in Section 2.1.

"SURVIVING OPTION PLAN" means the Surviving Corporation's Preferred Stock
Option Plan, in form and substance acceptable to Newco.

"SURVIVING OPTIONS" means the options to purchase the Surviving
Corporation's Series B Preferred Stock, par value $.01 per share, granted
pursuant to the Surviving Option Plan.

"TASCHER OPTION AGREEMENT" means the Amended and Restated Stock Option
Agreement dated as of September 16, 1994 by and between the Company and Marc
Tascher, as may be amended, restated or modified from time to time.

"TASCHER OPTIONS" means the options to purchase shares of Series B
Preferred, Class A Common and Class B Common granted by the Company to Marc
Tascher pursuant to the Tascher Option Agreement and the other Option Agreements
executed by Marc Tascher and the Company.

"TAX" means any federal, state, local or foreign income, gross receipts,
franchise, estimated, alternative minimum, add-on minimum, sales, use, transfer,
real property gains, registration, value added, excise, natural resources,
severance, stamp, occupation, windfall profits, environmental (under Section 59A
of the Code), customs, duties, real property, personal property, capital stock,
social security (or similar), unemployment, disability, payroll, license,
employee or other withholding, or other tax, of any kind whatsoever, including
any interest, penalties or additions to tax or similar items in respect of the
foregoing (whether disputed or not).

"TAX RETURN" means any return, report, declaration, claim for refund,
information return or other document (including any related or supporting
schedule, statement or information) filed or required to be filed in connection
with the determination, assessment or collection of any Tax of any party or the
administration of any laws, regulations or administrative requirements relating
to any Tax (including any amendment thereof).

"TRANSFER TAXES" has the meaning set forth in Section 8.7(a).

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"UBS INDEMNITY" means the Union Bank of Switzerland Letter of Credit and
Indemnity No. 301-46148, dated August 8, 1988, issued at the request of Coranda
S.A. in favor of Bank Julius Baer & Co. Ltd., as amended from time to time.

SECTION 1.2 INTERPRETATION. Unless otherwise indicated to the contrary
herein by the context or use thereof: (i) the words, "herein," "hereto,"
"hereof" and words of similar import refer to this Agreement as a whole and not
to any particular Section or paragraph hereof; (ii) the word "including" means
"including, but not limited to"; (iii) masculine gender shall also include the
feminine and neutral genders, and vice versa; and (iv) words importing the
singular shall also include the plural, and vice versa.

ARTICLE II--THE MERGER

SECTION 2.1 THE MERGER. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time, Newco shall pursuant to the provisions of
the Business Corporation Law of the State of New York (as amended from time to
time, the "BCL"), be merged with and into the Company (the "MERGER") and the
separate corporate existence of Newco shall thereupon cease in accordance with
the provisions of the BCL. The Company shall be the surviving corporation in
the Merger and shall continue to exist as said surviving corporation under its
present name pursuant to the provisions of the BCL. The separate corporate
existence of the Company with all its rights, privileges, powers and franchises
shall continue unaffected by the Merger. The Merger shall have the effects
specified in the BCL. From and after the Effective Time, the Company is
sometimes referred to herein as the "SURVIVING CORPORATION."

SECTION 2.2 OUTSTANDING SHARES. (a) As of the date hereof, the number
of outstanding shares of capital stock of Newco is three shares of common stock.
The number of outstanding shares of Newco's capital stock is subject to change
prior to the Effective Time by reason of the subsequent issuance of Newco's
capital stock.

(b) The number of outstanding shares of capital stock of the Company, on a
fully diluted basis (without giving effect to the conversion of the Series B
Preferred into the Class A Common), is as follows:

(1) 706,306 shares of Class A Common, all of which are entitled to
one (1) vote per share;

(2) 140,651 shares of Class B Common, none of which are entitled to
vote;

(3) 496 shares of Series A Preferred, none of which are entitled to
vote; and

(4) 389,584 shares of Series B Preferred, all of which are entitled
to one (1) vote per share and are entitled to vote as a class on
certain matters.

SECTION 2.3 CERTIFICATE OF MERGER. On the Closing Date (as defined in
Section 2.12), the parties hereto shall cause a certificate of merger
substantially in the form attached hereto as EXHIBIT A (the "CERTIFICATE OF
MERGER"), meeting the requirements of Section 904 of the BCL, to be properly
executed and filed in accordance with the BCL. The Merger shall be effective at
the time

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and on the date of the filing of the Certificate of Merger in accordance with
the BCL, which filing shall occur on the Closing Date (the "EFFECTIVE TIME").

SECTION 2.4 CERTIFICATE OF INCORPORATION. The Certificate of
Incorporation of the Company in effect at the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation, except that Article
FOURTH thereof shall be amended immediately following the Effective Time in
connection with the filing of the Certificate of Merger on the terms set forth
therein. Such amended Certificate of Incorporation of the Surviving Corporation
shall continue in full force and effect until further amended in the manner
prescribed by the provisions of the BCL.

SECTION 2.5 BY-LAWS. The by-laws of Newco, substantially in the form
previously provided to the Company and the Sellers (but otherwise in form and
substance satisfactory to Newco) in effect immediately prior to the Effective
Time shall be the by-laws of the Surviving Corporation until amended in
accordance with applicable law.

SECTION 2.6 OFFICERS. The officers of the Company (who are not
requested to resign pursuant to Section 6.2(f)) immediately prior to the
Effective Time shall be the officers of the Surviving Corporation and will hold
office until their successors are duly elected or appointed and qualify in the
manner provided in the certificate of incorporation or by-laws of the Surviving
Corporation or as otherwise provided by law, or until their earlier death,
resignation or removal.

SECTION 2.7 DIRECTORS. The directors of Newco immediately prior to the
Effective Time shall be the directors of the Surviving Corporation and will
serve until their successors are duly elected or appointed and qualify in the
manner provided in the certificate of incorporation or by-laws of the Surviving
Corporation or as otherwise provided by law, or until their earlier death,
resignation or removal.

SECTION 2.8 CONVERSION OF SHARES. (a) As of the Effective Time, by
virtue of the Merger and without any action on the part of any holder thereof or
any party hereto, each share of Common Stock issued and outstanding immediately
prior to the Effective Time (other than (i) shares held in the Company's
treasury or by any of the Subsidiaries, and (ii) Dissenting Shares (as defined
in Section 2.9)) shall be canceled and converted into the right to receive (such
amount, the "MERGER CONSIDERATION") $35.00 per such share (determined by
dividing $43,278,935 by 1, 236,541 (which represents the number of shares of
Common Stock outstanding on a fully diluted basis as set forth on SCHEDULE 3.5)
and provided that in the event SCHEDULE 3.5 with respect to such number of
shares is inaccurate, the Merger Consideration shall be adjusted accordingly)
exchanged pursuant to Section 2.11, LESS an amount equal to the Pro Rata Portion
MULTIPLIED BY the amount by which the aggregate amount of (i) the expenses
incurred or to be incurred by the Company and/or the Sellers and (ii) the
estimated amount of Transfer Taxes, pursuant to Sections 8.7(a) and 8.7(b),
exceeds $1,000,000 (provided that if the actual amount of Transfer Taxes is less
than such estimated amount such that the aggregate amount of such expenses and
the actual amount of Transfer Taxes is less than $1,000,000, the Merger
Consideration shall be adjusted accordingly), payable in cash to the holder
thereof, without interest thereon, upon surrender of the Certificate formerly
representing such share, all in accordance with Section 2.11; PROVIDED, that the
aggregate amount payable to any holder of a Certificate representing Common
Stock shall be reduced dollar-for-dollar by the amount, if any, such holder owes
the Company. Any adjustment to the Merger Consideration set forth in this
Section 2.8 shall survive the Closing.

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<PAGE>

(b) Each share of Common Stock held in the treasury of the Company or by
any Subsidiary immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holders thereof, be canceled,
retired and cease to exist as of the Effective Time and no payment shall be made
with respect thereto.

(c) Each share of capital stock of Newco issued and outstanding
immediately prior to the Effective Time shall, at the time of the Merger and
without any action on the part of Newco, be converted on a one-for-one basis
into shares of the corresponding class and/or series of capital stock of the
Surviving Corporation, except that shares of Newco's Class C Convertible Common
Stock, par value $.01 per share, shall be converted on a one for one basis into
shares of Surviving Class A Common.

(d) From and after the Effective Time, the holders of Certificates (except
for Certificates representing Dissenting Shares) shall cease to have any rights
with respect to such Certificates, except the right to receive the Merger
Consideration with respect to each of the shares represented thereby.

SECTION 2.9 DISSENTING SHARES. Each share of Common Stock issued and
outstanding immediately prior to the Effective Time held by shareholders who
shall have properly exercised their appraisal rights with respect thereto under
Section 623 of the BCL ("DISSENTING SHARES") shall not be converted into the
right to receive the Merger Consideration pursuant to the Merger, but shall be
entitled to receive payment of the appraised value of such shares in accordance
with the provisions of Section 623 of the BCL, except that each Dissenting Share
held by a shareholder who shall thereafter withdraw his or her demand for
appraisal or shall fail to perfect his or her right to such payment as provided
in such Section 623 shall be deemed to be converted, as of the Effective Time,
into the right to receive the Merger Consideration in the form such holder
otherwise would have been entitled to receive as a result of the Merger. The
Company shall give Newco prompt notice of any demands for appraisal, withdrawals
of demands for appraisal and any other instruments served pursuant to Section
623 of the BCL and received by the Company in connection with the Merger, and
Newco shall have the opportunity to direct and settle all negotiations and
proceedings with respect to such demands. The Company will not, except with the
prior written consent of Newco, make any payment with respect to, settle or
offer to settle, any such demands.

SECTION 2.10 OPTIONS. The Company and each Option Holder, with respect
to such Option Holder's Options, shall take such action as may be necessary or
appropriate in order that, at the Effective Time, (a) all Options set forth on
SCHEDULE 2.10(A) shall be converted into the Surviving Options on the terms and
conditions set forth in the Surviving Option Plan, (b) all Options set forth in
SCHEDULE 2.10(B) shall be converted into shares of Surviving Class A Common, on
terms and conditions satisfactory to Newco, and (c) all Tascher Options that are
unexercised and Giardina Options for 29,411 shares of Class A Common shall each
be converted into the right to receive, for each share of Common Stock or Series
B Preferred subject to such Tascher Option or such Giardina Option, as the case
may be, an amount in cash equal to the excess, if any, of the Merger
Consideration over the per share exercise price of such Tascher Options or such
Giardina Options, as the case may be, in the manner set forth in Section 2.11 in
the form of cash by check or wire transfer of immediately available funds (if
sufficient wire transfer instructions are submitted by the holder of the Tascher
Options or such Giardina Options), to which the holder of such Tascher Options
or such Giardina Options is entitled, without interest, less any required
withholding of Taxes. The conversion of an Option as set forth in this Section
2.10 shall be deemed a release of

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any and all rights the holder had or may have had with respect to its Options.
Except as otherwise agreed to by the parties or set forth herein, (i) the Option
Agreements shall terminate as of the Effective Time and the provisions in any
other plan, program or arrangement providing for the issuance or grant of any
other interest in respect of the capital stock of the Company or any Subsidiary
(other than the Surviving Option Plan) shall be terminated as of the Effective
Time, and (ii) the Company shall take all action necessary to ensure that
following the Effective Time no participant in or beneficiary of the Options,
the Option Agreements, the Option Plan or other plans, programs or arrangements
shall have any right thereunder to retain or acquire, or participate in changes
in value of, equity securities of the Company, the Surviving Corporation, Newco
or any of their respective Subsidiaries and to terminate all such plans
effective as of the Effective Time.

SECTION 2.11 EXCHANGE OF CERTIFICATES. (a) Upon surrender of any
Certificates, together with duly executed stock powers, (i) on or prior to the
Closing Date to Newco or the Surviving Corporation in accordance with Section
6.2(n), the holder of each Certificate shall receive from the Surviving
Corporation on the Closing Date in exchange therefor, and (ii) following the
Closing Date to the Surviving Corporation, the holder of each such Certificate
shall receive from the Surviving Corporation immediately thereafter in exchange
therefor, the portion of the Merger Consideration, in the form of cash by
certified check drawn on a bank located in New York City or wire transfer of
immediately available funds (if sufficient wire transfer instructions are
submitted by such holder), to which such holder is entitled pursuant to Section
2.8, without interest, less any required withholding of U.S. federal, state or
local income Taxes; PROVIDED, that no withholding pursuant to Code Sections 897
and 1445 will be made by Newco, the Company and the Surviving Corporation to the
extent that the Company shall have provided the tax affidavit to Newco described
in Section 6.2(t). Each such Certificate so surrendered shall be canceled. If
payment or delivery is to be made to a Person other than the Person in whose
name a Certificate so surrendered is registered, it shall be a condition of
payment that the Certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer, that the signatures on the certificate or
any related stock power shall be properly guaranteed and that the Person
requesting such payment either pay any transfer or other Taxes required by
reason of the payment to a Person other than the registered holder of the
Certificate so surrendered or establish to the satisfaction of the Surviving
Corporation that such Tax has been paid or is not applicable. Until surrendered
in accordance with the provisions of this Section 2.11, each Certificate (other
than Certificates canceled pursuant to Section 2.8(b) and Dissenting Shares)
shall represent for all purposes only the right to receive the Merger
Consideration in the form provided for by this Agreement, without interest. All
cash paid upon surrender of the Certificates in accordance with this Section
2.11 shall be deemed to have been paid in full satisfaction of all rights
pertaining to the shares of Common Stock represented thereby.

(b) In the event that any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the registered holder
of such lost, stolen or destroyed Certificate in form and substance acceptable
to Newco (if such affidavit is accepted before the Effective Time) or the
Surviving Corporation (if such affidavit is accepted after the Effective Time)
and accompanied by a bond in an amount satisfactory to Newco (if such affidavit
is accepted before the Effective Time) or the Surviving Corporation (if such
affidavit is accepted after the Effective Time), the Surviving Corporation will
issue in exchange for such lost, stolen or destroyed Certificate the Merger
Consideration in respect thereof in the manner set forth in Sections 2.8 and
2.11.

(c) If Certificates are not surrendered prior to the date that is one year
after the Effective Time, unclaimed amounts (including interest thereon) of
Merger Consideration shall, to

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<PAGE>

the extent permitted by applicable law, become the property of the Surviving
Corporation and may be commingled with the general funds of the Surviving
Corporation, free and clear of all claims or interest. Notwithstanding the
foregoing, any shareholders of the Company who have not theretofore complied
with the provisions of this Section 2.11 shall thereafter look only to the
Surviving Corporation and only as general creditors thereof for payment for
their claims in the form and amounts to which such shareholders are entitled.

(d) After the Effective Time, there shall be no transfers on the stock
transfer books of the Surviving Corporation of the shares of Common Stock that
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation, they
shall be canceled and exchanged for the Merger Consideration as provided for,
and in accordance with, the provisions of this Section 2.11.

SECTION 2.12 CLOSING. The closing of the transactions contemplated
hereby (the "CLOSING") shall take place at the offices of counsel to Newco, at
10:00 A.M. on the earlier of (i) the fifth Business Day following the
satisfaction or waiver of the conditions set forth in Article VI, or (ii)
December 6, 1996, or on such date and time as the Company and Newco shall
mutually agree. The time and date of the Closing is herein called the "CLOSING
DATE".

SECTION 2.13 SERIES A PREFERRED; SERIES B PREFERRED. (a) The holders of
the Series A Preferred acknowledge and agree that, notwithstanding anything
contained in paragraph FOURTH of the Company's Restated Certificate of
Incorporation, simultaneously with the Closing, the Company shall redeem all of
the issued and outstanding Series A Preferred shares from the holders thereof at
a price of $1,000.00 per share upon the surrender of the Certificates
representing such shares.

(b) The Company, the Sellers and the Option Holders hereby
acknowledge and agree that (i) no dividends pursuant to paragraph FOURTH.B.5(a)
of the Company's Restated Certificate of Incorporation will be paid or are
payable on any shares of the Series B Preferred in connection with the
conversion of such shares in accordance with Section 6.2(l), and (ii) that each
share of Series B Preferred is convertible, and at the Closing will be
converted, into one share of Class A Common.

ARTICLE III--REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SELLERS

Each of the Sellers on a several and not joint basis, and the Company, each
hereby represents and warrants to Newco as of the date hereof and as of the
Closing Date as follows:

SECTION 3.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each of the
Company and its Subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation
specified on SCHEDULE 3.1 and has the corporate power and authority and all
licenses, permits and authorizations necessary to own or lease its property and
assets and to carry on its business as presently conducted, and as presently
proposed to be conducted, and is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction wherein the nature of
its business or the ownership of its assets makes such qualification necessary,
except where the failure to be so qualified and in good standing would not have
a Material Adverse Effect. The Company has previously provided to Newco true
and complete copies of (i) its certificate of incorporation and all amendments
thereto or restatements thereof,

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(ii) its by-laws as currently in effect and (iii) true and complete copies of
the certificate or articles of incorporation and by-laws, as currently in
effect, of each of its Subsidiaries.

SECTION 3.2 AUTHORIZATION. The Company has the corporate power and
authority to execute and deliver this Agreement and each other Merger Document
to be executed in connection herewith and to perform its obligations hereunder
and thereunder, all of which have been duly authorized by all requisite
corporate action, other than the meeting of the shareholders of the Company
described in Section 5.1. This Agreement and each other Merger Document to be
executed in connection herewith has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms.

SECTION 3.3 NON-CONTRAVENTION. Neither the execution and delivery of
this Agreement or any other Merger Document, the consummation of the Merger and
the other transactions contemplated hereby nor the fulfillment of and the
performance by the Company of its obligations hereunder will (i) contravene any
provision contained in the Company's Restated Certificate of Incorporation
(except as contemplated by Section 2.13) or by-laws, (ii) conflict with, violate
or result in a breach (with or without the lapse of time, the giving of notice
or both) of, or constitute a default (with or without the lapse of time, the
giving of notice or both) under (A) except as set forth in SCHEDULE 3.3, any
contract, agreement, commitment, indenture, mortgage, lease, pledge, note, bond,
license, permit or other instrument or obligation or (B) any judgment, order,
decree, statute, law, rule or regulation or other restriction of any
Governmental Authority, in each case to which the Company or any of the
Subsidiaries is a party or by which any of them is bound or to which any of
their respective assets or properties are subject, (iii) except as contemplated
herein or with respect to Liens granted to the Lender at the Closing in
connection with the financing described in EXHIBIT B hereto, result in the
creation or imposition of any Lien on any of the assets or properties of the
Company or the Subsidiaries, including, without limitation, the Proprietary
Rights, or (iv) result in the acceleration of, or permit any Person to
terminate, modify, cancel, accelerate or declare due and payable prior to its
stated maturity, any obligation of the Company or any Subsidiaries, which in the
case of any of clauses (ii) through (iv) above, could have a Material Adverse
Effect.

SECTION 3.4 NO CONSENTS. Except for (i) filing and recordation of
appropriate merger documents as required by the BCL, and (ii) filings and
approvals set forth in SCHEDULE 3.4, no notice to, filing with, or
authorization, registration, consent or approval of any Governmental Authority
or other Person is, to the Sellers' Knowledge, necessary for the execution,
delivery or performance of this Agreement or the consummation of the
transactions contemplated hereby or thereby by the Company, the Sellers or the
Option Holders; notwithstanding the foregoing, the Sellers make no
representation as to the requirement of a filing under the HSR Act.

SECTION 3.5 CAPITALIZATION OF THE COMPANY AND THE SUBSIDIARIES. (a) The
Company's authorized capital stock consists solely of 3,500,000 authorized
shares of Class A Common, of which, 576,306 shares are presently issued and
outstanding; 1,250,000 shares of Class B Common, of which, 2,351 shares are
presently issued and outstanding; 500 shares of Series A Preferred Stock, of
which, 496 shares are presently issued and outstanding; and 1,000,000 shares of
Series B Preferred of which, 368,333 shares are presently issued and
outstanding, in each case, which shares are held beneficially and of record by
the Persons set forth on SCHEDULE 3.5(A) in the amounts set forth opposite such
Person's name. No shares of the Company's capital stock are held as treasury

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shares. As of the date hereof, (i) 138,300 shares of Class B Common are
reserved for issuance upon the exercise of all outstanding Common Stock Options
for Class B Common, (ii) 130,000 shares of Class A Common are reserved for
issuance upon exercise of all outstanding Common Stock Options for Class A
Common, (iii) 140,651 shares of Class A Common are reserved for issuance upon
the conversion of Class B Common, (iv) 21,251 shares of Series B Preferred are
reserved for issuance upon exercise of the Series B Options, and (v) 389,584
shares of Class A Common are reserved for issuance upon the conversion of shares
of Series B Preferred. Except as set forth in this Section 3.5(a) or in SCHEDULE
3.5(A), the Company does not have (i) any shares of Common Stock or Preferred
Stock reserved for issuance, or (ii) any outstanding or authorized option,
warrant, right, call or commitment relating to its capital stock or any
outstanding securities or obligations convertible into or exchangeable for, or
giving any Person any right to subscribe for or acquire from it, any shares of
its capital stock. Except as set forth in this Section 3.5(a) or in SCHEDULE
3.5(A), there are no (i) outstanding obligations of the Company or any of the
Subsidiaries to repurchase, redeem or otherwise acquire any capital stock of the
Company, (ii) authorized or outstanding stock appreciation, phantom stock,
profit participation or similar rights with respect to the Company or any of the
Subsidiaries or (iii) voting trusts, proxies or other agreements among the
Company's shareholders with respect to the voting or transfer of the Company's
capital stock except as otherwise set forth in this Agreement. Except as set
forth in SCHEDULE 3.5(A), there are no preemptive or other subscription rights
with respect to any shares of the Company's capital stock, and all of the issued
and outstanding shares of capital stock of the Company have been duly
authorized, validly issued, are fully paid and are nonassessable.

(b) All Subsidiaries are listed on SCHEDULE 3.5(B). Except with respect
to the Subsidiaries and except as otherwise disclosed in SCHEDULE 3.5(B),
neither the Company nor any Subsidiary owns any shares of stock or any equity
interest in any Person, and neither the Company nor any of the Subsidiaries
controls any other Person by means of ownership, management contract or
otherwise. All of the outstanding capital stock of, or other ownership
interests in, each Subsidiary of the Company is owned beneficially and of record
by the Company, directly or indirectly, is validly issued, fully paid and
nonassessable and free and clear of any preemptive rights (other than such
rights as may be held by the Company), restrictions on transfer, Taxes or Liens
or any other limitation or restriction. Except as set forth in Section 3.5(b),
there are no (i) authorized or outstanding securities of the Company or any of
the Subsidiaries convertible into or exchangeable for, no options, warrants, or
other rights to acquire from the Company or any of the Subsidiaries, and no
other contract, understanding or arrangement (whether or not contingent)
granting to any Person the right to subscribe for, or providing for the issuance
or sale of, any capital stock or other ownership interest in, or any other
securities of, any Subsidiary, (ii) voting trusts, proxies or other agreements
among the Subsidiaries' shareholders with respect to the voting or transfer of
the Subsidiaries' capital stock, or (iii) outstanding obligations of the Company
or any of the Subsidiaries to repurchase, redeem or otherwise acquire any
outstanding shares of capital stock or other ownership interests in any
Subsidiary. All of the issued and outstanding shares of capital stock of each
of the Company's Subsidiaries have been duly authorized and validly issued, and
are fully paid and nonassessable.

SECTION 3.6 FINANCIAL STATEMENTS. Attached hereto as SCHEDULE 3.6 are
(i) the audited consolidated balance sheets, and the audited consolidated
statements of earnings, shareholders' equity and cash flows of the Company and
its Subsidiaries for the years ended May 31, 1994, May 31, 1995, and May 31,
1996 including the notes thereto, together with the relevant auditors' report
with respect thereto and (ii) the unaudited consolidated balance sheet of the
Company and its

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<PAGE>

Subsidiaries as of September 30, 1996 (the "MOST RECENT BALANCE SHEET"). All of
the foregoing financial statements are hereinafter collectively referred to as
the "COMPANY FINANCIAL STATEMENTS". Except as set forth in SCHEDULE 3.6, the
Company Financial Statements have been prepared from, and are in accordance
with, the books and records of the Company and its Subsidiaries, are correct and
complete, and fairly present the transactions, assets and liabilities of the
Company and its Subsidiaries and the consolidated financial position and
consolidated results of operations of the Company and its Subsidiaries as of the
dates and for the periods indicated, in each case in accordance with GAAP,
subject to, in the case of the Most Recent Balance Sheet, the lack of footnote
disclosure and normally recurring year-end audit adjustments.

SECTION 3.7 ABSENCE OF CERTAIN DEVELOPMENTS. Except as set forth in
SCHEDULE 3.7, since the date of the Most Recent Balance Sheet, there has not
been any Material Adverse Effect and each of the Company and the Subsidiaries
has conducted their respective businesses in the ordinary and usual course
consistent with past practices. Without limiting the generality of the
foregoing, except as set forth on SCHEDULE 3.7 or as expressly contemplated by
this Agreement, since the date of the Most Recent Balance Sheet none of the
Company nor any of its Subsidiaries has:

(a) experienced any material changes in any relationship with its
suppliers, customers, distributors, brokers, lessors or others, other than
changes in the ordinary course of business, consistent with past custom and
practice;

(b) sold, leased, transferred, or assigned any of its material assets,
tangible or intangible (including, without limitation, the Proprietary Rights)
other than for fair consideration in the ordinary course of business, consistent
with past custom and practice;

(c) entered into any agreement, contract, lease, or license (or series of
related agreements, contracts, leases or licenses) involving more than $100,000
individually to which it is a party or by which it is bound nor modified the
terms of any such existing contract or agreement, other than in the ordinary
course of business consistent with past custom and practice;

(d) engaged in any activity which has resulted in any acceleration or
delay of the collection of its accounts or notes receivable or any delay in the
payment of its accounts payable, in each case other than in the ordinary course
of business consistent with past custom and practice;

(e) (nor has any other party) accelerated, terminated, modified or
canceled any permit or agreement, contract, lease or license involving more than
$100,000 individually to which it is a party or by which it is bound;

(f) suffered any material damage, destruction or loss, whether or not
covered by insurance, affecting any material property or assets owned or used by
it;

(g) adopted, modified, amended or terminated, in any material respect, any
bonus, profit-sharing, incentive, severance, or other similar plan (including
any Employee Benefit Plan), contract, or commitment for the benefit of any of
its directors, officers, or employees, or otherwise made any material change in
the employment terms (including any increase in the base compensation) for any
of its officers and employees described in clause (i) of Section 3.13(a);

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<PAGE>

(h) made any capital expenditure or any other investment (or series of
related investments) in excess of $100,000 other than in the ordinary course of
business consistent with past custom and practices;

(i) issued any note, bond, or other debt security or created, incurred,
assumed, or guaranteed any indebtedness involving more than $100,000
individually or in the aggregate;

(j) canceled, compromised, waived, or released any right or claim (or
series of related rights and claims) either involving more than $100,000
individually or in the aggregate or outside the ordinary course of business,
consistent with past custom and practice;

(k) made or authorized any change in its charter or by-laws;

(l) issued, sold, or otherwise disposed of any of its capital stock, or
granted, modified or amended any options, warrants, stock appreciation rights,
or other rights to purchase or obtain (including upon conversion, exchange, or
exercise) any of its capital stock or participate in any change in the value
thereof;

(m) made or been subject to change in its accounting practices, procedures
or methods or in its cash management practices;

(n) entered into or become party to any agreement, arrangement or
transaction with any of its Affiliates or any of their respective directors,
officers, employees (other than in the ordinary course of business, consistent
with past custom and practice), shareholders or Relatives, including, without
limitation, any (i) loan or advance of funds, or made any other payments, to any
of its directors, officers, employees, shareholders or Affiliates, (ii) creation
or discharge of any intercompany account, other than in the ordinary course of
business consistent with past practice, or (iii) any payment or declaration of
any dividend, redemption or other distribution with respect to their respective
capital stock;

(o) granted any license or sublicense of any rights under, allowed to
lapse, disposed of, or otherwise experienced any adverse changes with respect to
the Proprietary Rights;

(p) experienced any material changes in the amount or scope of coverage of
insurance now carried by them; or

(q) committed to do any of the foregoing.

SECTION 3.8 GOVERNMENTAL AUTHORIZATIONS; LICENSES; ETC. Except as set
forth in SCHEDULE 3.8, the business of each of the Company and its Subsidiaries
has been operated in compliance, in all material respects, with all applicable
laws, rules, regulations, codes, ordinances, orders, policies and guidelines of
all Governmental Authorities and, without limiting the generality of the
foregoing, none of the Company and the Subsidiaries or any of their respective
officers, directors, employees or agents or other Persons acting on behalf of
any of them have used any corporate or other funds for unlawful contributions,
payments, gifts or entertainment, or made any unlawful expenditures relating to
political activity to government officials or others. Except as set forth in
SCHEDULE 3.8, each of the Company and the Subsidiaries has, and after giving
effect to the Merger and the other transactions contemplated by the Merger
Documents, will continue to have, all permits, licenses,

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<PAGE>

approvals, certificates and other authorizations, and has made all
notifications, registrations, certifications and filings with all Governmental
Authorities, necessary or advisable for the operation of its business as
currently conducted. Except as set forth in SCHEDULE 3.8, there is no action,
case or proceeding pending or, to the Company's Knowledge and the Sellers'
Knowledge, threatened by any Governmental Authority with respect to (i) any
alleged violation by the Company or its Affiliates of any statute, law, rule,
regulation, code, ordinance, order, policy or guideline of any Governmental
Authority, or (ii) any alleged failure by the Company or its Affiliates to have
any permit, license, approval, certification or other authorization required in
connection with the operation of the business of each of the Company and the
Subsidiaries.

SECTION 3.9 LITIGATION. Except as set forth in SCHEDULE 3.9, as of the
date hereof, there are no judgments, decrees, lawsuits, actions, proceedings,
claims, complaints, injunctions, orders or investigations by or before any
Governmental Authority pending or, to the Company's Knowledge and the Sellers'
Knowledge, threatened against the Company or its Subsidiaries (i) relating to
the Company, any Subsidiary, their respective businesses or properties, the
Proprietary Rights, or (ii) seeking to enjoin the transactions contemplated
hereby. To the Company's Knowledge and the Sellers' Knowledge, there are no
existing facts or circumstances which give any reason to believe that any such
action, suit, proceeding, hearing or investigation may be brought or threatened
against the Company or any of the Subsidiaries. None of the litigation listed
on SCHEDULE 3.9 could reasonably be expected to have a Material Adverse Effect.

SECTION 3.10 UNDISCLOSED LIABILITIES. Other than those specifically
reflected on the face of (as opposed to in the notes thereto) the Company
Financial Statements or disclosed in SCHEDULE 3.10, there are no material
liabilities of the Company or its Subsidiaries of any kind or nature whatsoever,
whether known or unknown, absolute, accrued, contingent or otherwise, or whether
due or to become due, other than liabilities incurred in the ordinary course of
business consistent with past practices since the date of the Most Recent
Balance Sheet (none of which are liabilities for breach of contract, breach of
warranty, tort, infringement, violation of law, or an environmental liability).

SECTION 3.11 TAXES. (a) Except as set forth on SCHEDULE 3.11, each of
the Company and its Subsidiaries has duly and timely filed all Tax Returns
required to be filed by it, all such Tax Returns have been prepared in material
compliance with all applicable laws and regulations and are true, correct and
complete in all material respects. Except as set forth in SCHEDULE 3.11, all
Taxes owed by each of the Company and the Subsidiaries, whether or not shown on
any Tax Return, have been timely paid. The Company and the Subsidiaries have
maintained adequate provision for, and adequate funds to pay, Taxes payable by
the Company and the Subsidiaries as of September 30, 1996, and such provision
and funds (as adjusted for the passage of time through the Closing Date in
accordance with the past custom and practices of each of the Company and the
Subsidiaries in filing its Tax Returns) will be adequate for Taxes payable by
the Company and the Subsidiaries as of the Closing Date. There are no Liens on
any of the assets of the Company or any Subsidiary that arose in connection with
any failure (or alleged failure) to pay any Tax. The Company has made available
to Newco correct and complete copies of (i) its federal income Tax returns for
the last five (5) taxable years and the corresponding balance sheets of the
Company as of the end of such years and (ii) other Tax Returns as requested by
Newco.

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<PAGE>

(b) Except as set forth on SCHEDULE 3.11:

(i) neither the Company nor any Subsidiary is currently the subject
of a Tax audit or examination;

(ii) neither the Company nor any Subsidiary has consented to extend
the time, or is the beneficiary of any extension of time, in which any Tax
may be assessed or collected by any taxing authority;

(iii) neither the Company nor any Subsidiary has received, or expects
to receive, from any taxing authority any written notice of proposed
adjustment, deficiency, underpayment of Taxes or any other such notice
which has not been satisfied by payment or been withdrawn, and no claims
have been asserted relating to such Taxes against the Company or any
Subsidiary;

(iv) the Company and each of the Subsidiaries has withheld and paid
all required Taxes in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder, or other similar
third party;

(v) neither the Company nor any Subsidiary has filed a consent to
the application of Section 341(f) of the Code;

(vi) neither the Company nor any of the Subsidiaries will be
required, as a result of (A) a change in accounting method for a Tax period
beginning on or before the Closing Date, to include any adjustment under
Section 481(c) of the Code (or any corresponding provision of state, local
or foreign Tax law) in taxable income for any Tax period beginning on or
after the Closing Date, or (B) any "closing agreement," as described in
Section 7121 of the Code (or any corresponding provision of state, local or
foreign Tax law), to include any item or income in or exclude any item of
deduction from any Tax period beginning on or after the Closing Date;

(vii) each of the Company and the Subsidiaries has disclosed on its
income Tax Returns all positions taken therein that could give rise to an
accuracy-related penalty under Section 6662 of the Code (or any
corresponding provision of Tax law);

(viii) neither the Company nor any Subsidiary has made any payments,
is obligated to make any payments, or is a party to any agreement that
under certain circumstances could obligate it to make any payments that
will not be deductible under Section 280G or Section 162(m) of the Code;

(ix) no claim has ever been made by a taxing authority in a
jurisdiction where any of the Company and the Subsidiaries does not pay
Taxes or file Tax Returns that such entity is or may be subject to Taxes
assessed by such jurisdiction;

(x) upon Sellers' information and belief and to the Company's
Knowledge, the Company has not been a United States real property holding
corporation within the meaning of Code Section 897(c)(2) during the
applicable period specified in Code Section 897(c)(1)(A)(ii);

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<PAGE>

(xi) neither the Company nor any Subsidiary is a party to any Tax
allocation or sharing agreement; and

(xii) neither the Company nor any Subsidiary (A) has been a member of
an affiliated group filing a consolidated federal income Tax Return (other
than a group the common parent of which was the Company) or (B) has any
liability for the Taxes of any Person (other than the Company and the
Subsidiaries) under Treas. Reg. Section 1.1502-6 (or any similar provision
of state, local, or foreign law), as a transferee or successor, by
contract, or otherwise.

SECTION 3.12 ENVIRONMENTAL MATTERS. Except as set forth on SCHEDULE 3.12
hereto:

(a) The Company and its Subsidiaries have complied in all material
respects and are in compliance in all material respects with all Environmental
and Safety Requirements.

(b) Without limiting the generality of the foregoing, the Company and its
Subsidiaries have obtained and complied in all material respects with and are in
compliance in all material respects with, all permits, licenses and other
authorizations that may be required pursuant to Environmental and Safety
Requirements for the occupation of their respective facilities and the operation
of their respective businesses and such permits, licenses and other
authorizations may be relied upon for continued lawful operation of the
businesses of the Company and the Subsidiaries on and after the Closing Date,
without transfer, reissuance, or other governmental approval or action.

(d) Neither the Company nor any of its Subsidiaries has treated, stored,
disposed of, arranged for or permitted the disposal of, transported, handled, or
released any substance, including without limitation any Hazardous Substance, or
owned or operated any property or facility (and, to the Company's Knowledge and
the Sellers' Knowledge, no such property or facility is contaminated by any such
substance) in a manner that has given or would give rise to material
liabilities, including any liability for response costs, corrective action
costs, personal injury, property damage, natural resources damages or attorney
fees, or any investigative, corrective or remedial obligations, pursuant to
Environmental and Safety Requirements (including CERCLA and RCRA).

(e) None of the following exists at any Owned Property or Leased Property:
(i) underground storage tanks; (ii) asbestos-containing material in any form or
condition; (iii) materials or equipment containing polychlorinated biphenyls; or
(iv) landfills, surface impoundments or disposal areas, except (x) in the case
of clauses (i), (iii) or (iv), for such items that are in compliance in all
material respects with all applicable Environmental and Safety Requirements and
(y) in the case of clause (ii), for such items for which no remedial actions are
necessary to prevent any present or future material liability.

(f) No facts, events or conditions relating to the past or present
facilities, properties or operations of the Company or any of its Subsidiaries
will prevent, hinder or limit continued compliance with Environmental and Safety
Requirements, give rise to any investigatory, remedial or corrective obligations
pursuant to Environmental and Safety Requirements, or give rise to any other
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise)
pursuant to

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Environmental and Safety Requirements, including without limitation any relating
to onsite or offsite releases or threatened releases of Hazardous Substances,
personal injury, property damage or natural resources damage.

(g) Neither this Agreement nor the consummation of the transactions
contemplated hereby will result in any obligations for site investigation or
cleanup, or notification to or consent of government agencies or third parties,
pursuant to any so-called "transaction-triggered" or "responsible transfer"
Environmental and Safety Requirement.

(h) Neither the Company nor any of its Subsidiaries has, either expressly
or by operation of law, assumed or undertaken any material liability, including
without limitation any obligation for corrective or remedial action, of any
other Person relating to Environmental and Safety Requirements.

SECTION 3.13 EMPLOYEE MATTERS. (a) SCHEDULE 3.13 contains a true and
complete list as of September 30, 1996 of (i) the employees currently employed
by the Company and its Subsidiaries having an annual base salary in calendar
year 1995 of $100,000 or more, indicating the title of and a description of any
agreements with such employees , (ii) the rate of all current compensation
payable by the Company or its Subsidiaries to each employee, including, without
limitation, any bonus, contingent or deferred compensation, and (iii) the
directors of each of the Company and the Subsidiaries.

(b) Except as set forth on SCHEDULE 3.13, (i) neither the Company nor any
Subsidiary has entered into any collective bargaining agreements with respect to
the employees, (ii) there are no written personnel policies applicable to the
employees generally, other than employee manuals, true and complete copies of
which have previously been provided to Newco, (iii) there is no labor strike,
labor dispute, work slowdown or work stoppage or lockout pending or, to the
Company's Knowledge and the Seller's Knowledge, threatened against or affecting
the Company or any Subsidiary and during the past two years there has been no
such action, (iv) to the Company's Knowledge and the Sellers' Knowledge, no
union organization campaign is in progress with respect to any of the employees,
and no question concerning representation exists respecting such employees, (v)
there is no unfair labor practice, charge or complaint pending or, to the
Company's Knowledge and the Sellers' Knowledge, threatened against the Company
or any Subsidiary, and (vi) the Company has not entered into any agreement or
arrangement restricting its ability to terminate the employment of any or all of
its employees at any time, for any lawful or no reason, without penalty or
liability. Neither the Company nor any Subsidiary has engaged in any plant
closing or employee layoff activities within the last two (2) years that would
violate or in any way implicate the Worker Adjustment Retraining and
Notification Act of 1988, as amended, or any similar state or local plant
closing or mass layoff statute, rule or regulation.

SECTION 3.14 EMPLOYEE BENEFIT PLANS. (a) SCHEDULE 3.14 lists all Employee
Benefit Plans maintained or contributed to for the benefit of any current or
former employee of the Company or its Subsidiaries. No Employee Benefit Plan is
or was collectively bargained for. No Employee Benefit Plan is a Multiemployer
Plan or a plan which is subject to Title IV of ERISA, and no Employee Benefit
Plan provides health or other welfare benefits to former employees other than in
compliance with Section 4980B of the Code or similar State law ("COBRA").

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<PAGE>

(b) Except as set forth on SCHEDULE 3.14, each Employee Benefit Plan (and
each related trust or insurance contract) is maintained and administered in
compliance in all material respects with the applicable requirements of ERISA,
the Code and any other laws (including compliance with all reporting and
disclosure obligations) and, if intended to be tax qualified, Sections 401(a)
and 501(a) of the Code. Other than the Company's 401(k) Pension Plan listed on
SCHEDULE 3.14, as to which the Company intends to apply for a favorable
determination letter, each Employee Benefit Plan which is intended to be
qualified under Section 401(a) of the Code has received a favorable
determination letter that it is so qualified (which favorable determination
letter covers changes mandated by the Tax Reform Act of 1986 and subsequent
related regulations) and none of the Company or the Subsidiaries is aware of any
facts of circumstances which could adversely affect any of such favorable
determination letters.

(c) No material liability under Subtitle C or D of Title IV of ERISA has
been or, to the Company's knowledge, is expected to be incurred by the Company
or any Subsidiary with respect to any ongoing, frozen or terminated
"single-employer plan", within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained or contributed to by any of them. The fair
market value of the assets of each single-employer plan equals or exceeds the
accrued benefit liabilities thereunder. With respect to each Employee Benefit
Plan which is an employee pension benefit plan (as defined in Section 3(2) of
ERISA), all required contributions which are due for all periods ending prior to
or as of the Closing Date have been made, all such contributions which are not
due as of the Closing Date have been properly accrued, and none of the Company
or any Subsidiary has incurred any funding deficiency (as defined in ERISA).
With respect to each other Employee Benefit Plan, all contributions, premiums or
other payments which are due have been made or, if not due as of the Closing
Date, have been properly accrued. With respect to each Employee Benefit Plan
which is a Section 401(k) plan, the Company and each Subsidiary contribute all
employee pre-tax contributions to the appropriate trust in accordance with all
applicable laws.

(d) The Company and each of the Subsidiaries have complied, in all
material respects, with the requirements of COBRA.

(e) None of the Company, any Subsidiary or to the Company's Knowledge and
the Sellers' Knowledge, any other Person has engaged in any transaction with
respect to any Employee Benefit Plan which could subject the Company or any
Subsidiary to any material Tax or penalty (civil or otherwise) imposed by ERISA,
the Code or other applicable law. No actions, suits, investigations or claims
with respect to the Employee Benefit Plans (other than routine claims for
benefits) are pending or to the Company's Knowledge and the Sellers' Knowledge,
threatened and none of the Company or any of the Subsidiaries has any knowledge
of any facts which could give rise to or be reasonably expected to give rise to
any such actions, suits or claims.

(f) No liability to the Pension Benefit Guaranty Corporation ("PBGC")
(except for routine payment of premiums) has been or is expected to be incurred
with respect to any Employee Benefit Plan that is subject to Title IV of ERISA,
no reportable event within the meaning of Section 4043 of ERISA has occurred
with respect to any such Employee Benefit Plan and the PBGC has not commenced or
threatened the termination of any Employee Benefit Plan. None of the assets of
the Company or any Subsidiary is the subject of any Lien arising under Section
302(f) of ERISA of Section 412(n) of the Code, neither the Company nor any
Subsidiary has been required to post any security under Section 307 of ERISA of
Section 401(a)(29) of the Code, and none of the Company

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nor any Subsidiary has any knowledge of any facts which could reasonably be
expected to give rise to such Encumbrance or such posting of security.

(g) Except as disclosed above, none of the Company or any of the
Subsidiaries has any actual or potential material liability with respect to any
Employee Pension Benefit Plan or Employee Welfare Benefit Plan which is
maintained or sponsored by a member of the controlled group of companies (within
the meaning of Section 414 of the Code) that includes the Company or any of the
Subsidiaries.

(h) With respect to each Employee Benefit Plan, the Company has provided
to Newco true, complete and correct copies, to the extent applicable, of (i) all
documents pursuant to which such Plans are maintained, funded and administered,
(ii) the most recent annual report (Form 5500 series) filed with the IRS report,
(iv) the most recent financial statement, (v) all governmental rulings,
determinations and opinions (and any pending requests).

SECTION 3.15 PROPRIETARY RIGHTS. Except as set forth in SCHEDULE 3.15,
the Company and the Subsidiaries own and possess all right, title and interest
in, free and clear of all Liens or have a valid, enforceable and effective
written license to use, all patents, patent disclosures, patent applications,
trademarks, service marks, trademark and service mark registrations and
applications therefor, and all goodwill associated therewith, copyrights,
copyright registrations and applications, mask works, trade names, corporate
names, trade dress, technology, inventions, computer software, data and
documentation (including electronic media), specifications, product drawings,
training materials (including films, brochures and printed materials), catalogs
and other advertising and promotional materials, trade secrets, know-how,
confidential information, financial business and marketing plans, customer and
supplier lists, and all other intellectual property and proprietary information
or rights used in or necessary for the operation of the business of the Company
and the Subsidiaries as presently conducted and presently proposed to be
conducted (collectively, the "PROPRIETARY RIGHTS"). SCHEDULE 3.15 contains a
complete and accurate list of (i) all patented and registered Proprietary
Rights; (ii) all pending patent applications and applications for the
registration of other Proprietary Rights; (iii) all material unregistered
trademarks and copyrights included among the Proprietary Rights; (iv) all trade
and corporate names owned or used by the Company or any Subsidiary; (v) all
computer software (other than mass-marketed software having a license fee of
less than $1,000.00) owned or used by the Company or any Subsidiary and (vi) all
licenses or other agreements to or from third parties regarding any of the
Proprietary Rights. Except as set forth in SCHEDULE 3.15, there is not pending
or, to the Company's Knowledge and the Sellers' Knowledge, threatened against
the Company or any Subsidiary any claim by any third party contesting the
validity, enforceability, use or ownership of any Proprietary Right, and, to the
Company's Knowledge and the Seller's Knowledge, there are no grounds for any
such claim. Except as set forth in SCHEDULE 3.15, neither the Company nor any
Subsidiary has received any notice of, nor is aware of any facts which indicate
a likelihood of, any infringement or misappropriation by, or conflict with, any
third party with respect to any of the Proprietary Rights. Except as set forth
on SCHEDULE 3.15, the Company and Subsidiaries have not infringed,
misappropriated or otherwise conflicted with any proprietary rights of any
Person, nor are they aware of any infringement, misappropriation or conflict
which will occur as a result of continued operation of the business of the
Company and the Subsidiaries as currently conducted. Other than the name "New
York Sports Club", there is no individual Proprietary Right the loss or
expiration of which would have a Material Adverse Effect. All Proprietary Rights
owned or used by the Company and the Subsidiaries prior to the Closing Date will
be owned or available for use on identical terms and conditions immediately
after the Closing

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Date. The Company and the Subsidiaries have no knowledge of any proprietary
rights that any competitor or other Person has developed which reasonably could
be expected to supersede or make obsolete any product or process used by, or
otherwise result in any Material Adverse Effect.

SECTION 3.16 CONTRACTS. (a) SCHEDULE 3.16 describes all contracts
(except for usual and ordinary purchase orders and membership contracts executed
in the normal course of business, copies of the forms of which, in the case of
membership contracts, have previously been provided or made available to Newco),
agreements, leases, commitments, instruments, plans, permits or licenses,
whether written or oral, to which, as of the date hereof, the Company or any
Subsidiary is a party or is otherwise bound, of the type described below (the
"CONTRACTS"):

(i) all agreements or commitments for the purchase by the Company of
machinery, equipment or other personal property other than those that are
for amounts not to exceed $100,000;

(ii) all capitalized leases, pledges, conditional sale or title
retention agreements involving the payment of more than $100,000;

(iii) all employment agreements and commitments, all consulting or
severance agreements or arrangements and all other agreements between the
Company or a Subsidiary of the Company and any Affiliate of the Company or
such Subsidiary or any officer, director or employee of the Company or a
Subsidiary;

(iv) all agreements relating to the consignment or lease of personal
property (whether the Company or a Subsidiary is lessee, sublessee, lessor
or sublessor), other than such agreements that provide for annual payments
of less than $100,000;

(v) all license, royalty or other agreements relating to the
Proprietary Rights;

(vi) all agreements containing commitments of suretyship, guarantee
or indemnification (except for guarantees, warranties and indemnities
provided by the Company or any Subsidiary in the ordinary course of
business and those having a contract value, in the aggregate of $100,000 or
less);

(vii) all agreements prohibiting the Company or any Subsidiary from
freely engaging in any business;

(viii) all mortgages, indentures, notes, bonds or other agreements
relating to indebtedness incurred or provided by the Company or any of the
Subsidiaries;

(ix) all agreements involving a Governmental Body;

(x) all partnership agreements and joint venture agreements relating
to the Company and the Subsidiaries;

(xi) any agreement other than those covered by clauses (i) through
(x) above involving payment or receipt of more than $100,000 in the
aggregate in any calendar year;

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(xii) any agreement other than those covered by clauses (i) through
(xi) involving non-competition agreements or nondisclosure covenants
intended to protect the Proprietary Rights of the Company and its
Subsidiaries or any third party; and

(xiii) any commitment to do any of the foregoing described in clauses
(i) through (xii).

(b) None of the other parties to any such Contracts has given written
notice to the Company or a Subsidiary that it intends to terminate or materially
alter the provisions of such Contracts either as a result of transactions
contemplated hereby or otherwise, and neither the Company nor any of the
Subsidiaries have given notice to any other party to any such Contract that it
intends to terminate or materially alter the provisions of any such Contract.

(c) Neither the Company nor any Subsidiary is in material default, nor has
either the Company or any Subsidiary given notice of, any default or claimed,
purported or alleged default, and neither the Company nor any Subsidiary is
aware of any facts that, with notice or lapse of time, or both, would constitute
a default (or give rise to a termination right) on the part of any party in the
performance of any obligation to be performed under any of the Contracts.

(d) True and complete copies of all written Contracts, including any
amendments thereto, have been delivered or made available to Newco and such
documents constitute the legal, valid and binding obligation of the Company or
the Subsidiary party thereto and, to the Company's Knowledge and the Sellers'
Knowledge, each other party purportedly obligated thereunder.

(e) Except as specifically set forth in SCHEDULE 3.16, neither the Company
nor any of the Subsidiaries is a party to any contract, agreement or
understanding which contains a "change in control," "potential change in
control" or similar provision, which would be triggered by the transactions
contemplated hereby.

SECTION 3.17 BOOKS AND RECORDS. The stock records of the Company and the
Subsidiaries fairly and accurately reflect in all material respects the record
ownership of all of the outstanding shares of the Company's and the
Subsidiaries' capital stock. The other books and records of the Company and its
Subsidiaries, including financial records, minute books and books of account,
are complete and accurate in all material respects and have been maintained in
accordance with sound business practices.

SECTION 3.18 INSURANCE. SCHEDULE 3.18 contains an accurate and complete
description of all policies of fire, liability, workmen's compensation,
property, casualty and other forms of insurance owned or held by the Company and
the Subsidiaries. Such policies are in adequate amounts and cover risks
customarily insured against by businesses of the type operated by the Company
and the Subsidiaries. All such policies are in full force and effect, all
premiums with respect thereto covering all periods up to and including the
Effective Time will have been paid, and no notice of cancellation or termination
has been received with respect to any such policy. Such policies will remain in
full force and effect through the respective dates set forth in SCHEDULE 3.18
without the payment of additional premiums; and will not be materially affected
by, or terminate or lapse by reason of, the transactions contemplated by this
Agreement. All of such policies have been issued by reputable insurance
companies actively engaged in the insurance business. All known claims, if any,
made against the Company or any of the Subsidiaries that are covered by
insurance

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<PAGE>

have been disclosed to and accepted by the appropriate insurance companies and
are being defended by such appropriate insurance companies and are described in
SCHEDULE 3.18 and, except as disclosed in SCHEDULE 3.18, no claims have been
denied coverage during the last three years.

SECTION 3.19 REAL PROPERTY. (a) SCHEDULE 3.19 sets forth a legal
description of each parcel of real property owned, in whole or in part, by the
Company or any Subsidiary (the "OWNED PROPERTY"). SCHEDULE 3.19 also sets forth
a complete and correct list of all leases or other agreements for occupancy,
including all amendments, extensions and other modifications (the "LEASES") for
real property or premises utilized by the Company or any Subsidiary (the "LEASED
PROPERTY"; the "Owned Property" and the "Leased Property" collectively the "REAL
PROPERTY") to which the Company or any Subsidiary is a party. Complete and
correct copies of all mortgages, deeds of trust, leases, subleases, guaranties
of leases, guaranties of subleases and other documents concerning such Real
Property and the interests of the Company and the Subsidiaries therein have been
delivered or made available to Newco.

(b) The Company or a Subsidiary, as applicable, has good and marketable
fee simple title to each Owned Property and a good and valid leasehold interest
in each Leased Property, in each case, free and clear of all Liens except as is
set forth on SCHEDULE 3.19 and except for installments of special assessments of
real estate Taxes not yet delinquent and recorded easements, covenants and other
restrictions and utility easements, building restrictions, zoning restrictions
and other easements and restrictions existing generally with respect to
properties of a similar character which do not affect materially and adversely
the current use, occupancy or value of, or marketability of title to, the Real
Property ("PERMITTED ENCUMBRANCES"). The Company has delivered or made
available to Newco true and complete copies of all Permitted Encumbrances listed
on SCHEDULE 3.19.

(c) Each Lease is in full force and effect and is, to the Company's
Knowledge and the Sellers' Knowledge, enforceable against the landlord which is
a party thereto in accordance with its terms. Neither the Company nor any
Subsidiary has received any notice of default or event of default or, to the
Company's Knowledge and the Sellers' Knowledge, there exists no event which,
with the giving of notice, the passage of time or both could result in a default
or event of default under any Lease. The Company has delivered to Newco true
and complete copies of all Leases.

(d) The Real Property constitutes all of the real property owned, leased,
occupied or otherwise utilized in connection with the business of the Company
and its Subsidiaries. To the Seller's Knowledge, other than the Company and the
Subsidiaries, there are no parties in possession or parties having any current
or future right to occupy any of the Real Property. The Real Property is in
good condition and repair and is sufficient and appropriate for the conduct of
the Company's business. To the Company's Knowledge and the Sellers' Knowledge,
there exists no violation of any covenant, condition, restriction, easement,
agreement or order materially and adversely affecting any portion of the Real
Property. There is no pending or, to the Company's Knowledge and the Sellers'
Knowledge, any threatened condemnation proceeding materially and adversely
affecting the current use, occupancy or value of any Leased Property or any
Owned Property.

SECTION 3.20 TRANSACTION WITH AFFILIATES. Except as set forth on
SCHEDULE 3.20, none of the Company's shareholders, directors, officers or
employees nor any of their respective Relatives or Affiliates is involved in any
business arrangement or relationship with the Company or the Subsidiaries
(whether written or oral), and none of the Company's shareholders, directors,
officers

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<PAGE>

or employees nor any of their respective Relatives or Affiliates owns any
property or right, tangible or intangible, which is used by the Company or the
Subsidiaries.

SECTION 3.21 ACCOUNTS RECEIVABLE. Except as listed on SCHEDULE 3.21
hereto, all accounts and notes receivable of the Company and the Subsidiaries
reflected on the Company Financial Statements, and all accounts and notes
receivable arising subsequent to the date of the Company Financial Statements,
in each case, have arisen in the ordinary course of business, consistent with
past custom and practice, and the reserves for doubtful accounts set forth on
the Company Financial Statements have been established in accordance with past
custom and practice and are substantially adequate in light of the previous
collectibility experience with respect to accounts receivables generated by the
Company and the Subsidiaries.

SECTION 3.22 SUFFICIENCY OF ASSETS. The assets (whether tangible or
intangible) currently owned by the Company or any Subsidiary, or leased or
licensed by the Company or any Subsidiary pursuant to any lease or license
agreement entered into in the ordinary course of business or otherwise disclosed
to Newco, constitute all of the material assets necessary to conduct the
businesses of the Company and the Subsidiaries in accordance with past
practices, as of September 30, 1996 and as of the date hereof. The Company and
the Subsidiaries hold all such assets free and clear of all Liens except for
Permitted Encumbrances or as otherwise set forth on SCHEDULE 3.22.

SECTION 3.23 BROKERS. With the exception of Dresdner Kleinwort Benson, no
Person is or will be entitled to a broker's, finder's, investment banker's,
financial adviser's or similar fee from the Company or its Subsidiaries in
connection with this Agreement or any of the transactions contemplated hereby.
The fees and expenses of Dresdner Kleinwort Benson are the sole responsibility
of, and shall be paid by, the Company upon the Closing, and such fees and
expenses shall be treated in accordance with Section 8.7.

SECTION 3.24 ACCURACY OF REPRESENTATIONS. No representation or warranty
made by the Company in this Agreement or any document delivered, or to be
delivered, by or on behalf of the Company pursuant hereto contains or, as of the
Closing Date, will contain any untrue statement of a material fact or omits or,
as of the Closing Date, will omit to state a material fact necessary to make the
statements contained herein or therein not misleading. Except as expressly set
forth in this Article 3 or Section 8.2, Sellers make no representation or
warranty express or implied, with respect to the transactions contemplated
hereby.

SECTION 3.25 BOARD RECOMMENDATION. The board of directors of the
Company, by unanimous written consent dated as of October 31, 1996, a copy of
which is attached hereto as EXHIBIT D, has by unanimous vote of the directors
signing such consent (who constituted 100% of the directors then in office) (a)
determined that this Agreement and the transactions contemplated hereby,
including the Merger, taken together, are fair to and in the best interests of
the shareholders of the Company, (b) adopted resolutions to recommend that the
holders of the shares of Common Stock approve this Agreement and the
transactions contemplated, herein, including the Merger, and (c) adopted
resolutions providing that, subject to approval of the holders of the Options,
the Options shall be treated, in accordance with the terms of this Agreement.

SECTION 3.26 CLOSING DATE. All of the representations and warranties
contained in this Article III and elsewhere in this Agreement and all
information delivered in any schedule or exhibit hereto or in any writing
delivered to Newco will be true and correct in all material respects on the

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<PAGE>

Closing Date, except to the extent that the Company has disclosed to Newco
otherwise in a written certificate specifically addressed to Newco prior to the
Closing; PROVIDED, that no such disclosure shall be effective to limit the
rights of Newco under Section 6.2.

SECTION 3.27 KNOWLEDGE. All qualifications of any representations and
warranties contained herein with respect to Sellers' Knowledge are deemed only
to apply to the representations and warranties made by Sellers, and not to those
made by the Company unless expressly specified otherwise.

ARTICLE IV--REPRESENTATIONS AND WARRANTIES OF NEWCO

Newco represents and warrants to the Company and the Sellers as follows:

SECTION 4.1 ORGANIZATION. Newco is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority to own or lease its
property and assets and to carry on its business as presently conducted. Newco
has no Subsidiaries.

SECTION 4.2 AUTHORIZATION. Newco has the corporate power and authority
to execute and deliver this Agreement and each other agreement or instrument to
be executed in connection herewith and to perform its obligations hereunder and
thereunder, all of which have been duly authorized by all requisite corporate
action. This Agreement and each other agreement or instrument to be executed in
connection herewith has been duly authorized, executed and delivered by Newco
and constitutes a valid and binding agreement of Newco, enforceable against
Newco in accordance with its terms.

SECTION 4.3 NON-CONTRAVENTION. The execution, delivery and performance
by Newco of this Agreement and the Certificate of Merger, the consummation of
the Merger and each of the other transactions contemplated hereby will not (i)
contravene any provision contained in its Certificate of Incorporation or
by-laws, (ii) conflict with, violate or result in a material breach (with or
without the lapse of time, the giving of notice or both) of or constitute a
material default (with or without the lapse of time, the giving of notice or
both) under (A) any contract, agreement, commitment, indenture, mortgage, lease,
pledge, note, bond, license, permit or other instrument or obligation or (B) any
judgment, order, decree, statute, law, rule or regulation or other restriction
of any Governmental Authority, in each case to which Newco is a party or by
which it is bound or to which any of its assets or properties are subject.
Newco has previously delivered to the Company true and complete copies of its
certificate of incorporation (and all amendments thereto) and by-laws (as
currently in effect) or (iii) result in the acceleration of, or permit any
Person to terminate, modify, cancel, accelerate or declare due and payable prior
to its stated maturity any material obligation of Newco.

SECTION 4.4 NO CONSENTS. Except for (i) filing and recordation of
appropriate merger documents as required by the BCL and (ii) filings and
approvals set forth in SCHEDULE 4.4, no notice to, filing with, or
authorization, registration, consent or approval of any Governmental Authority
or other Person is necessary for the execution, delivery or performance of this
Agreement or the consummation of the transactions contemplated hereby by Newco.

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<PAGE>

SECTION 4.5 BROKERS. With the exception of Bruckmann, Rosser, Sherrill
& Co., Inc. (and its Affiliates) and Affiliates of Farallon Capital Management,
L.L.C. (collectively, the "Investors"), no Person is or will be entitled to a
broker's, finder's, investment banker's, financial adviser's or similar fee from
Newco or any of its subsidiaries in connection with this Agreement or any of the
transactions contemplated hereby. The fees and expenses of the Investors, if
any, are the sole responsibility of, and shall be paid by, the Surviving
Corporation following the Closing.

SECTION 4.6 ACCURACY OF REPRESENTATIONS. No representation or warranty
made by Newco in this Agreement or any document delivered, or to be delivered,
by or on behalf of Newco pursuant hereto contains or, as of the Closing Date,
will contain any untrue statement of a material fact or omits or, as of the
Closing Date, will omit to state a material fact necessary to make the
statements contained herein or therein not misleading.

SECTION 4.7 FINANCING. Newco has heretofore received a letter of
commitment with respect to a senior loan facility from Bankers Trust Company to
be provided to the Surviving Corporation in connection with the Merger, a copy
of which is attached hereto as EXHIBIT B.

SECTION 4.8 HSR. Newco is its own "ultimate parent entity" as such term
is defined by the HSR Act. Newco does not have a regularly prepared balance
sheet and does not have annual net sales or total assets of $25,000,000 or more
as defined by Section 801.11(e) of the rules and regulations promulgated under
the HSR Act. Newco does not have voting securities with a value in excess of
$15,000,000 as determined under the HSR Act.

SECTION 4.9 NEWCO BOARD. The board of directors of Newco, by unanimous
written consent, has approved the execution by Newco of this Agreement.

SECTION 4.10 CLOSING DATE. All representations and warranties contained
in this Article IV and elsewhere in this Agreement and all information delivered
in any schedule or exhibit hereto or in any writing delivered to the Company and
Seller Representative will be true and correct in all material respects on the
Closing Date, except to the extent that Newco has disclosed to the Company and
Seller Representative otherwise in a written certificate specifically addressed
to the Company and the Seller Representative; PROVIDED, that no such disclosure
shall be effective to limit the rights of the Company and Sellers under Section
6.3.

ARTICLE V--COVENANTS AND AGREEMENTS

SECTION 5.1 STOCKHOLDER MATTERS.

(a) The Company will cause a special meeting of its shareholders to
be duly called and held as soon as practicable (but in any event within fifteen
(15) days) after the date hereof for the purpose of approving the Merger, this
Agreement and the transactions contemplated hereby which require the approval of
the shareholders of the Company. The Company will, through its Board of
Directors, recommend to its shareholders approval of the transactions
contemplated by this Agreement.

(b) Each Seller acknowledges that as a condition to its willingness
to enter into this Agreement, Newco has requested that each Seller agree, and in
order to induce Newco to enter into this Agreement:

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<PAGE>

(i) each Seller agrees to vote all Shares in favor of the
transactions contemplated by this Agreement, and

(ii) each CG Seller agrees to grant, upon the execution and
delivery of this Agreement, a proxy to Jon H. I. Grouf to vote such CG
Seller's Shares as indicated in Section 5.1(b)(i) above. Each CG Seller
intends such proxy to be irrevocable and coupled with an interest and will
take such further action or execute such other instruments as may be
necessary to effectuate the intent of this proxy and hereby revokes any
proxy previously granted by him, her or it with respect to such CG Seller's
Shares; PROVIDED, that such proxy shall terminate and be deemed revoked
upon the termination of this Agreement pursuant to Section 7 hereof.

(c) Each shareholder of Newco has voted in favor of the transactions
contemplated by this Agreement by unanimous written consent in lieu of special
meeting of shareholders, a copy of which is attached hereto as EXHIBIT E.

SECTION 5.2 ACCESS AND INFORMATION. (a) From the date hereof, Newco
shall be entitled to make or cause to be made such reasonable investigation of
the Company and its Subsidiaries, and the financial and legal condition thereof,
as Newco deems reasonably necessary or advisable, and the Company shall
cooperate with any such investigation. In furtherance of the foregoing, but not
in limitation thereof, the Company will, and will cause each of its Subsidiaries
to provide Newco and its financing sources and their respective agents and
representatives or cause them to be provided with full access to any and all of
its management personnel, representatives, premises, properties, contracts,
commitments, books, records and other information of the Company and the
Subsidiaries upon reasonable notice during regular business hours and shall
furnish such financial and operating data, projections, forecasts, business
plans, strategic plans and other data relating to the Company, the Subsidiaries
and their respective businesses as Newco, its financing sources and their
respective agents and representatives shall reasonably request from time to
time, including all information necessary to satisfy closing conditions for
obtaining financing for the transactions contemplated hereby. No investigation
by Newco heretofore or hereafter made shall modify or otherwise affect any
representations and warranties of the Company and the Sellers, which shall
survive any such investigation, or the conditions to the obligation of Newco to
consummate the transactions contemplated hereby. Newco agrees to conduct any
such inquiries with reasonable discretion and sensitivity to the Company's
relationships with its employees, customers and suppliers.

(b) All information disclosed in writing, whether before or after the
date hereof, pursuant to this Agreement or in connection with the transactions
contemplated by, or the discussions and negotiations preceding, this Agreement
to any other party (or its representatives) shall be kept confidential by such
other party and its representatives in accordance with the confidentiality
agreement dated September 5, 1996 by and between the Company and Affiliates of
Newco (the "CONFIDENTIALITY AGREEMENT") and shall not be used by any Person,
other than in connection with the transactions contemplated by this Agreement.

SECTION 5.3 CONDUCT OF BUSINESS BY THE COMPANY. From the date hereof to
the Effective Time, the Sellers shall use their reasonable best efforts to cause
the Company to, and the Company will and will cause each of its Subsidiaries to,
except as otherwise expressly provided herein, or consented to in writing by
Newco:

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<PAGE>

(a) conduct its business only in the ordinary and regular course in
substantially the same manner heretofore conducted;

(b) use its reasonable best efforts to take all such actions as Newco may
reasonably request in connection with satisfying the conditions necessary for
Newco to obtain the financing necessary to consummate the transaction
contemplated hereby;

(c) use its reasonable best efforts to keep in full force and effect its
corporate existence and all material rights, franchises, Proprietary Rights and
goodwill relating or obtaining to its business;

(d) cause each of the Company and its Subsidiaries to be duly qualified
and in good standing as a foreign corporation in each jurisdiction in which the
nature of its business or the ownership of its property makes such qualification
necessary;

(e) use its reasonable best efforts, consistent with past custom and
practice, to retain its employees and preserve its present relationships with
customers, suppliers, contractors, distributors and such employees, and continue
to compensate such employees consistent with past practices;

(f) maintain the Proprietary Rights so as not to affect adversely any
registration or application for registration thereof or the validity or
enforcement thereof, maintain its other assets in customary repair, order and
condition and maintain insurance reasonably comparable to that in effect on the
date of this Agreement; and in the event of any casualty, loss or damage to any
of such assets repair or replace such assets with assets of comparable quality
and value;

(g) use its reasonable best efforts to obtain all authorizations,
consents, waivers, approvals or other actions (it being understood and agreed
that the Company and the Sellers are not seeking approval under the HSR Act
based on Newco's representation set forth in Section 4.7) necessary or desirable
to consummate the transactions contemplated hereby (including, without
limitation, paying any expenses in connection therewith) and to cause the other
conditions to Newco's obligation to close to be satisfied;

(h) perform in all material respects all of its obligations under all
notes, bonds, mortgages, indentures, licenses, contracts, agreements or other
instrument or obligation to which the Company or any Subsidiary is a party or by
which any of them or any of their respective properties or assets may be bound
and not enter into, assume or amend any such contract or commitment other than
in the ordinary course of business in accordance with past custom and practice;

(i) prepare and file all Tax Returns and other Tax reports, filings and
amendments thereto required to be filed by it, on a timely basis; PROVIDED, that
the Company will not file or amend any income Tax returns without the prior
written consent of Newco, which shall not be unreasonably withheld or delayed;

(j) promptly inform Newco in writing of any material breach of or change
in the representations and warranties contained in Article III hereof;

(k) not enter into any contract, agreement or commitment or take any other
action (other than in the ordinary course of business) which, if entered into or
taken prior to the date of this

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<PAGE>

Agreement, would cause any representation or warranty of the Company to be
untrue in any material respect or be required to be disclosed on one or more
Schedules referred to in Article III (including, without limitation, with
respect to Section 3.7);

(l) not incur, create or suffer to exist any Lien on (i) the shares of
Common Stock (other than any Lien in favor of the Company in connection with a
pledge of Shares by Marc Tascher) or (ii) any assets of the Company and the
Subsidiaries (other than Permitted Encumbrances and the Liens set forth on
SCHEDULE 3.22).

(m) not enter into or become party to any agreement, arrangement or
transaction with any of its Affiliates or any of their respective directors,
officers, employees (other than in the ordinary course of business, consistent
with past custom and practice), shareholders or Relatives, including, without
limitation, any (i) loan or advance of funds, or make any other payments, to any
of its directors, officers, employees, shareholders or Affiliates, except any
loan to Marc Tascher pursuant to his rights to exercise any Tascher Options,
which loan shall be secured by a pledge of Shares in accordance with the terms
of the Option Agreements executed by March Tascher and the Company, (ii)
creation or discharge of any intercompany account, other than in the ordinary
course of business consistent with past practice, or (iii) any payment or
declaration of any dividend, redemption or other distribution with respect to
their respective capital stock;

(n) except as set forth on SCHEDULE 5.3(n), not incur any material amount
of indebtedness, (for purposes of this section, $100,000 shall constitute a
material amount); and

(o) not take or omit to be taken any action, or permit its Affiliates to
take or to omit to take any action, which would result in a Material Adverse
Effect.

SECTION 5.4 CLOSING DOCUMENTS. The Sellers shall cause the Company to,
and the Company shall, prior to or on the Closing Date, execute and deliver, or
cause to be executed and delivered to Newco, the documents or instruments
described in Section 6.2. Newco shall, prior to or on the Closing Date, execute
and deliver, or cause to be executed and delivered, to the Company, the
documents or instruments described in Section 6.3.

SECTION 5.5 BEST EFFORTS; FURTHER ASSURANCES. (a) Subject to the terms
and conditions herein provided, each of the parties hereto shall use its
reasonable best efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things reasonably necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement (it being understood and agreed that
the Company and the Sellers are not seeking any approval under the HSR Act based
on Newco's representations set forth in Section 4.7). Each of the Sellers, the
Option Holders, the Company and Newco will use their respective reasonable best
efforts to obtain consents of all Governmental Authorities and third parties
necessary to the consummation of the transactions contemplated by this
Agreement. All costs incurred in connection with obtaining such consents shall
be borne by the Company and treated in accordance with Section 8.7.

(b) In the event any claim, action, suit, investigation or other
proceeding by any Governmental Authority or other Person is commenced which
questions the validity or legality of the Merger or any of the other
transactions contemplated hereby or seeks damages in connection therewith, the
parties agree to cooperate and use reasonable best efforts to defend against
such claim,

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action, suit, investigation or other proceeding and, if an injunction or other
order is issued in any such action, suit or other proceeding, to use reasonable
best efforts to have such injunction or other order lifted, and to cooperate
reasonably regarding any other impediment to the consummation of the
transactions contemplated hereby.

(c) Each party shall give prompt written notice to the other of (i) the
occurrence, or failure to occur, of any event which occurrence or failure would
cause any representation or warranty of the Sellers, the Company or Newco as the
case may be, contained in the Merger Documents to be untrue or inaccurate in any
material respect at any time from the date hereof to the Effective Time or that
will result in the failure to satisfy any of the conditions specified in Article
VI (provided that such written notice (i) shall specify the representation or
warranty so breached and (ii) will not be deemed to amend the Schedules attached
hereto unless so accepted as such by Newco in writing prior to the Effective
Time, such written acceptance shall be deemed to cure the breach of any such
representation or warranty and amend and/or supplement the schedule related to
such representation or warranty) and (ii) any failure of the Company, the
Sellers, the Option Holders or Newco, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it under the Merger Documents. The Company shall give prompt written notice to
Newco of any development which could reasonably be expected to have a Material
Adverse Effect.

SECTION 5.6 PUBLIC ANNOUNCEMENTS. The timing and content of all
announcements regarding any aspect of this Agreement or the Merger to the
financial community, government agencies, employees or the general public shall
be mutually agreed upon in advance by Coranda, S.A. and Newco; PROVIDED, that
each party hereto may make any such announcement which it in good faith
believes, based on advice of counsel, is necessary or advisable in connection
with any requirement of law or regulation, it being understood and agreed that
each party shall promptly provide the other parties hereto with copies of any
such announcement.

SECTION 5.7 THIRD PARTY PROPOSALS. From the date hereof until the
earlier of (a) the termination of this Agreement pursuant to Article VII or (b)
the Effective Time, neither the Sellers, the Company, nor any Subsidiary shall,
and the Sellers and the Company shall cause their respective officers,
directors, shareholders (other than with respect to Marc Tascher as to whom the
Company and Sellers shall use reasonable best efforts to cause to comply with
this Section), employees, agents, representatives or Affiliates of the Sellers,
the Company or any Subsidiary (all such Persons, including the Company, the
"COMPANY GROUP") not to, initiate, solicit, entertain, negotiate, accept or
discuss, directly or indirectly, or encourage inquiries or proposals (each, an
"ACQUISITION PROPOSAL") with respect to, or furnish any information relating to,
or otherwise facilitate or participate in any negotiations or discussions
concerning, or enter into any agreement with respect to, any acquisition or
purchase of all or a substantial portion of the assets of, or of a substantial
equity interest in, the Company or any Subsidiary or any business combination
with the Company or any Subsidiary (a "THIRD PARTY ACQUISITION") other than as
contemplated by this Agreement, or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
transactions contemplated by this Agreement. The Company shall notify Newco
immediately if any Acquisition Proposal is received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated with, any member of the Company Group. The Company and the Sellers
shall, and shall cause each other member of the Company Group to, immediately
cease and cause to be terminated any existing activities, including discussions
or negotiations with any parties, conducted prior to the date hereof with
respect to any Acquisition

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Proposal. Each of the Sellers and the Company represents that neither it nor
any other member of the Company Group is party to or bound by any agreement with
respect to an Acquisition Proposal other than under this Agreement. Each of the
Sellers and the Company shall cause each other member of the Company Group to
comply with the provisions of this Section 5.7.

ARTICLE VI--CONDITIONS TO CLOSING

SECTION 6.1 MUTUAL CONDITIONS. The respective obligations of each party
to consummate the transactions contemplated by this Agreement shall be subject
to the fulfillment at or prior to the Effective Time of each of the following
conditions:

(a) INJUNCTION. At the Effective Time there shall be no effective
injunction, writ or preliminary restraining order or any order of any nature
issued by a court or Governmental Authority of competent jurisdiction to the
effect that the Merger may not be consummated as herein provided, no proceeding
or lawsuit shall have been commenced by any Governmental Authority or other
Person for the purpose of obtaining any such injunction, writ or preliminary
restraining order and no written notice shall have been received from any such
Governmental Authority indicating an intent to restrain, prevent, materially
delay or restructure the transactions contemplated hereby.

(b) FILINGS AND CONSENTS. Except for the filing of the Certificate of
Merger with the Secretary of State of New York, all material consents,
authorizations, orders or approvals of, and filings or registrations with, any
Governmental Authority (other than as required with respect to any Contract)
which are required in connection with the execution and delivery of this
Agreement and the other Merger Documents and the consummation of the
transactions contemplated hereby and thereby shall have been obtained or made
and shall be in full force and effect.

SECTION 6.2 CONDITIONS TO THE OBLIGATIONS OF NEWCO. The obligations of
Newco to consummate the transactions contemplated by this Agreement shall be
subject to the fulfillment prior to or at Closing of each of the following
conditions, any and all of which may be waived, in whole or in part, by Newco to
the extent permitted by applicable law:

(a) REPRESENTATIONS AND WARRANTIES. All representations and warranties
made by the Company and the Sellers in this Agreement and the Schedules hereto
shall be true, correct and complete in all material respects on the date hereof
and as of the Closing Date as though such representations and warranties were
made as of the Closing Date (or on the date when made in the case of any
representation or warranty which specifically relates to an earlier date), and
each of the Company, the Sellers and the Option Holders shall have duly
performed or complied with, in all material respects, all of the covenants,
obligations and conditions to be performed or complied with by it under the
terms of this Agreement on or prior to or at Closing.

(b) NO MATERIAL ADVERSE EFFECT. There shall have been no Material Adverse
Effect since the date of the Most Recent Balance Sheet.

(c) CLOSING DELIVERIES. Prior to or at the Closing, the Company and the
Sellers, as applicable, shall have delivered the following closing documents in
form and substance reasonably acceptable to Newco's counsel:

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(i) a certificate of the President or a Vice President of the Company
and the Seller Representative, dated the Closing Date, to the effect that
(1) the Person signing such certificate is familiar with this Agreement and
(2) the conditions specified in Section 6.2(a) and (b) have been satisfied
(provided that such certificate shall, on its face and by its terms,
terminate at the end of the Closing Date and no liability shall result
thereunder after the Closing Date, except with respect to the
representations and warranties of the Company or the Sellers, as the case
may be, that survive pursuant to Section 8.4.);

(ii) a certificate of the Secretary or Assistant Secretary of the
Company, dated the Closing Date, as to the incumbency of any officer of the
Company executing this Agreement or any document related thereto and
covering such other matters as Newco may reasonably request;

(iii) a certified copy of the resolutions of the Company's Board of
Directors authorizing the execution, delivery and consummation of this
Agreement and the transactions contemplated hereby;

(iv) a certified copy of the resolutions of the shareholders of the
Company adopting and approving this Agreement, the other Merger Documents
and the transactions contemplated hereby and thereby;

(v) copies of, or other proof in a form reasonably acceptable to the
Newco that, all authorizations, registrations, consents and approvals
disclosed in Schedule 3.4 as necessary for the execution, delivery or
performance of this Agreement or the consummation of the transactions
contemplated hereby by Newco;

(vi) good standing certificates with respect to the Company and each
of the Subsidiaries, together with certified charter documents from the
secretary of state of their respective states of incorporation, along with
certified copies of the bylaws of the Company and each of the Subsidiaries;
and

(vii) such other documents or instruments as Newco reasonably
requests to effect the transactions contemplated hereby.

(d) CERTIFICATE OF MERGER. The Certificate of Merger shall have been duly
executed and delivered by the duly authorized officers of the Company.

(e) OPINIONS OF COUNSEL. Newco shall have received an opinion of Whitman
Breed Abbott & Morgan, special counsel to the Sellers, and Golenbock, Eiseman,
Assor & Bell, each dated the Closing Date, in form and substance reasonably
acceptable to counsel for Newco.

(f) RESIGNATION OF DIRECTORS. Newco shall have received the resignation
of all directors and such officers, as Newco may request, of the Company and
each Subsidiary or such directors and officers shall have been removed.

(g) DISSENTING SHARES. There shall be no Dissenting Shares.

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(h) FINANCING. Newco shall have received the cash proceeds of financings
in an amount necessary to consummate the Merger and the other transactions
contemplated hereby and to pay all fees and expenses in connection therewith and
to provide adequate working capital, all on terms and conditions satisfactory to
Newco.

(i) SHAREHOLDERS AGREEMENTS. Each Option Holder receiving the Surviving
Common Stock, or any options or warrants to purchase Surviving Common Stock,
shall have entered into a Shareholders Agreement, dated as of the Closing Date,
by and among the Surviving Corporation, and certain other shareholders of the
Surviving Corporation in form and substance satisfactory to Newco and which
shall be in full force and effect. The Company shall have delivered to Newco
evidence satisfactory to Newco that the Existing Shareholders Agreements shall
have been terminated and no longer in force and effect.

(j) UCC TERMINATION STATEMENTS; PAY-OFF LETTERS. Fully executed UCC-3
Termination Statements and other termination, pay-offs and/or releases, or, at
Newco's option, assignments, necessary to terminate, release or assign, as the
case may be, all Liens on the properties of the Company and the Subsidiaries and
evidence the complete satisfaction in full or assignment, as the case may be, of
all obligations for all indebtedness for borrowed money of the Company and the
Subsidiaries (including, without limitation, all obligations of principal,
interest, fees, premiums, penalties, overdrafts, guarantees, indemnities and
breakage costs).

(k) SERIES A PREFERRED. All outstanding shares of Series A Preferred
shall have been redeemed and the Certificates representing such shares have been
canceled.

(l) SERIES B PREFERRED. The Company shall have delivered to Newco
evidence satisfactory to Newco that all outstanding shares of Series B Preferred
have been surrendered for conversion into Common Stock in accordance with the
terms thereof and the Certificates representing such shares have been canceled.

(m) OPTIONS. The Company shall have delivered to Newco (i) evidence
satisfactory to Newco that all Options shall have been either exercised
(accompanied by payment in cash or in kind of all amounts payable to the Company
by such holders upon the exercise of such Options) or surrendered by the holders
thereof and otherwise terminated or (ii) a certificate of the Chief Executive
Officer of the Company certifying the termination and cancellation of all
unexercised Options and all Option Agreements and any other evidence confirming
such termination and cancellation as Newco may reasonably request.

(n) CERTIFICATES. The Sellers and the Company shall have caused all
Certificates to be delivered to Newco or affidavits of lost Certificates in
accordance with Section 2.11(b).

(o) TITLE INSURANCE. A title insurance company selected by Newco (the
"TITLE COMPANY") shall be willing to insure at standard rates the Company's or
the applicable Subsidiary's marketable title in and to the Owned Property in fee
simple, the Company's leasehold estate in any financable (as determined by the
Lender) Leased Property (a "FINANCABLE LEASEHOLD") and Lender's mortgage lien on
the Owned Property and each Financable Leasehold free and clear of all Liens,
defects, claims, leases, or rights of possession (other than Permitted
Encumbrances) including such endorsements and affirmative coverages as Newco
and Lender shall reasonably require including, without limitation,
non-imputation endorsements. The Company and the Subsidiaries shall provide

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all such affidavits and indemnities as the Title Company reasonably shall
require in order to afford such coverages and shall bear all of the costs of
obtaining such title insurance.

(p) SURVEYS. Newco shall have received a survey of each Owned Property
and each Leased Property to which the Company holds a Financable Leasehold
conforming to the Minimum Standard Detail Requirements jointly established and
approved in 1992 by ALTA and ACSM certified to Newco, Lender and the Title
Company and showing no defects, encroachments or encumbrances other than other
than the matters disclosed in SCHEDULE 3.19. The Company shall bear all of the
cost of obtaining such surveys.

(q) REAL PROPERTY. All Real Property shall be in substantially the same
condition and repair as that on the date of this Agreement, reasonable wear and
tear excepted.

(r) LEASES. Newco shall have received from each landlord under a Lease
described in Schedule 3.3 as requiring consent, a consent to the transactions
contemplated by this Agreement and, to the extent the Company is entitled
thereto under any Lease, from each landlord, mortgagee and ground lessor, as
appropriate, of any Leased Property, an estoppel certificate and a
nondisturbance agreement, in each case in form and substance provided for in
such Lease (or, if not so provided, in form and substance reasonably
satisfactory to Newco).

(s) PROPERTY TAXES. Other than as set forth in Section 8.4, the Company
shall have timely paid any and all real property transfer, transfer gains, stamp
and other similar Taxes, if any, assessed in connection with the transactions
contemplated by this Agreement and shall have delivered evidence satisfactory to
Newco and the Title Company of the payment of such Taxes, which shall be treated
in accordance with Section 8.7.

(t) TAX AFFIDAVIT. Newco shall have received from the Company an
affidavit from the Chief Financial Officer of the Company, in the form of
EXHIBIT C hereto.

SECTION 6.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE
SELLERS. The obligations of the Company and the Sellers to consummate the
transactions contemplated by this Agreement shall be subject to the fulfillment
at or prior to the Closing of each of the following conditions, any and all of
which may be waived in whole or in part by the Company and the Seller
Representative to the extent permitted by applicable law:

(a) REPRESENTATIONS AND WARRANTIES. All representations and warranties
made by Newco in this Agreement shall be true, correct and complete in all
material respects on the date hereof and as of the Closing Date as though such
representations and warranties were made as of the Closing Date (or on the date
when made in the case of any representation or warranty which specifically
relates to an earlier date), and Newco shall have duly performed or complied
with, in all material respects, all of the covenants, obligations and conditions
to be performed or complied with by each of them under the terms of this
Agreement on or prior to or at the Closing.

(b) CLOSING DELIVERIES. Prior to or at the Closing, Newco shall have
delivered to the Company the following closing documents in form and substance
reasonably acceptable to its counsel:

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(i) a certificate of the President or a Vice President of Newco,
dated the Closing Date, to the effect that (1) the Person signing such
certificate is familiar with this Agreement and (2) the conditions
specified in Section 6.3(a) have been satisfied (provided that such
certificate shall, on its face and by its terms, terminate at the end of
the Closing Date and no liability shall result thereunder after the Closing
Date, except with respect to the representations and warranties of Newco
that survive pursuant to Section 8.4.) ;

(ii) certificates of the Secretary or Assistant Secretary of each of
Newco, dated the Closing Date, as to the incumbency of any officer of
Newco, executing this Agreement or any document related thereto and
covering such other matters as the Company may reasonably request;

(iii) certified copies of the resolutions of Newco's Board of
Directors authorizing the execution, delivery and consummation of this
Agreement and the transactions contemplated hereby and thereby; and

(iv) a certified copy of the resolutions of the shareholders of Newco
adopting and approving this Agreement, the Merger and the transactions
contemplated hereby.

(c) UBS INDEMNITY. The CG Sellers shall have received a letter from Bank
Julius Baer & Co., Ltd. reasonably satisfactory to the Seller Representative
that the UBS Indemnity, solely to the extent that it relates to indebtedness of
the Company or any Subsidiary, has been terminated and is of no further force
and effect.

(d) CERTIFICATE OF MERGER. The Certificate of Merger shall have been duly
executed and delivered by the duly authorized officers of Newco.

(e) OPINION OF NEWCO'S COUNSEL. The Company and Sellers shall have
received an opinion of Kirkland & Ellis, special counsel to Newco, dated the
Closing Date, in form and substance reasonably satisfactory to the Seller
Representative's counsel.

(f) OTHER CERTIFICATES. Such certificates as to the solvency of the
Surviving Corporation as the Surviving Corporation delivers to the Lender, if
applicable.

ARTICLE VII--TERMINATION AMENDMENT AND WAIVER

SECTION 7.1 TERMINATION. This Agreement may be terminated and the
Merger may be abandoned at any time, notwithstanding the approval thereof by the
shareholders of the Company at any time prior to Closing:

(a) by mutual consent of the Company and Newco;

(b) by either the Company or Newco, if the Merger shall not have been
consummated on or before December 6, 1996 (the "TERMINATION DATE");

(c) by Newco, in the event that the conditions to its obligations set
forth in Article VI hereof have not been satisfied or waived at or prior to the
Termination Date;

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(d) by the Company, in the event that the conditions to its obligations
set forth in Article VI hereof have not been satisfied or waived at or prior to
the Termination Date;

(e) by Newco, if the shareholders of the Company fail to adopt and approve
this Agreement and the Merger;

(f) by the Company or the Sellers, if the shareholders of Newco fail to
adopt and approve this Agreement and the Merger; or

(g) by either Newco or the Company, if any Governmental Authority shall
have issued an order, decree or ruling or taken any other action restraining,
enjoining or otherwise prohibiting the Merger and such order, decree, ruling or
other action shall have become final and nonappealable.

SECTION 7.2 EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to Section 7.1 hereof, (a) all rights and obligations of the parties
hereunder shall terminate and no party shall have any liability to the other
party, except for obligations of the parties hereto in Sections 5.2, 5.6 and
8.7, which shall survive the termination of this Agreement, and except nothing
herein will relieve any party from liability for any breach of any
representation, warranty, agreement or covenant contained herein prior to such
termination and (b) Newco shall cease any use of the name "TSI Merger Sub, Inc."
or any other name including the name "TSI".

SECTION 7.3 AMENDMENTS. This Agreement may be amended, at any time
prior to the Effective Time, by action taken by the respective Boards of
Directors of the Company and Newco and the Seller Representative; PROVIDED, that
after approval of the Merger by the shareholders of the Company, no amendment,
which under applicable law may not be made without the approval of such
shareholders, may be made without such approval. This Agreement (including the
provisions of this Section 7.3) may not be amended or modified except by an
instrument in writing signed on behalf of all of the parties required pursuant
to the preceding sentence.

ARTICLE VIII-MISCELLANEOUS

SECTION 8.1 SELLER REPRESENTATIVE. (a) The Company and each Seller
hereby irrevocably appoints Dr. Martin Karrer to act as representative and
attorney-in-fact of the Sellers (the "SELLER REPRESENTATIVE") in all matters
provided for herein, and any certificate or instrument by the Seller
Representative in his capacity as such on behalf of the Sellers shall be deemed
to be binding and enforceable against the Sellers. In the event of the death,
incapacity, removal or resignation of Dr. Martin Karrer, a successor Seller
Representative shall be appointed by a vote of the holders of a majority of the
Common Stock owned, as of the Closing Date, by such Sellers individually or as a
result of attribution, at a meeting of such shareholders held for such purpose
or otherwise by written agreement.

(b) The Seller Representative shall be fully authorized to take any action
(or to determine to take no action) with respect to all claims, and all other
notices and communications relating to indemnification in the manner set forth
in this Agreement as the Seller Representative then serving hereunder may deem
appropriate, including, without limitation, the institution or defense of
litigation on behalf of any Seller and the settlement or compromise of any
dispute or controversy. The Seller Representative shall have no duties or
obligations hereunder except those specifically set forth herein and such duties
and obligations shall be determined solely by the express provision of

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this Agreement. In connection with his duties hereunder, the Seller
Representative, in his capacity as such, shall be protected in acting or
refraining from acting upon any written notice, request, consent, certificate,
order, affidavit, letter, telegram or other document furnished to him hereunder
and believed by him to be genuine and to have been signed or sent by the proper
party or parties and the Seller Representative shall not be liable for anything
he may do or refrain from doing in connection with his duties hereunder except
as a result of his own gross negligence, willful misconduct or bad faith. The
Seller Representative may consult counsel and shall be protected in respect of
any action, claim or proceeding brought against the Seller Representative by
another Seller if the Seller Representative took or omitted taking any action in
good faith on the advice of such counsel.

SECTION 8.2 REPRESENTATIONS AND WARRANTIES OF SELLERS. Each Seller
hereby represents and warrants to Newco as follows:

(a) AUTHORITY RELATIVE TO THIS AGREEMENT. Such Seller has all
necessary power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by such Seller and, assuming that this
Agreement has been duly and validly authorized, executed and delivered by Newco,
this Agreement constitutes a valid and binding agreement of such Seller,
enforceable against such Seller in accordance with its terms.

(b) OWNERSHIP OF SHARES. Such Seller beneficially owns all of the
Shares indicated opposite such Seller's name on SCHEDULE 3.5 hereto, which
constitute all the Shares beneficially owned by such Seller, free and clear of
all Liens and restrictions on transfer. Other than as provided in this
Agreement or as set forth on SCHEDULE 3.5(A), there are no restrictions on the
voting rights or rights of disposition pertaining to such Shares.

(c) NO CONFLICTS. Neither the execution and delivery of this
Agreement nor the consummation by such Seller of the transactions contemplated
hereby will conflict with or constitute a violation of or default under any
contract, commitment, agreement, arrangement or restriction of any kind to which
such Seller is a party or by which such Seller is bound.

SECTION 8.3 NOTICES. All notices or other communications required or
permitted hereunder shall be in writing and shall be delivered personally, by
facsimile or sent by certified, registered or express air mail, postage prepaid,
and shall be deemed given when so delivered personally, or by facsimile, or if
mailed, two days after the date of mailing, as follows:

If to Newco:

c/o Bruckmann, Rosser, Sherrill & Co., Inc.
126 East 56th Street
New York, NY 10022
Facsimile: (212) 521-3799
Attention: Stephen F. Edwards

with a copy to:

Kirkland & Ellis

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153 East 53rd Street
New York, NY 10022-4675
Facsimile: (212) 446-4900
Attention: Kirk A. Radke, Esq.

If to the Company:

Town Sports International, Inc.
888 Seventh Avenue, Suite 1801
New York, NY 10106
Facsimile: (212) 246-8422
Attention: Alex Alimanestianu, Esq.

with a copy to:

Golenbock, Eiseman, Assor & Bell
437 Madison Avenue
New York, NY 10022
Facsimile: (212) 754-0330
Attention: Andrew Peskoe, Esq.

If to the Sellers to:

Bar & Karrer
Seefeldstrasse 19
CH-8024 Zurich
Switzerland
Facsimile: (011) 411 251-3025
Attention: Dr. Martin Karrer

with copies to:

Dresdner Kleinwort Benson North America LLC
200 Park Avenue
New York, NY 10166
Facsimile: (212) 351-5988
Attention: James R. Freney

Whitman Breed Abbott & Morgan
200 Park Avenue
New York, NY 10166
Facsimile: (212) 351-3131
Attention: Jon H. I. Grouf, Esq.

or to such other address as any party hereto shall notify the other parties
hereto (as provided above) from time to time.

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SECTION 8.4 SURVIVAL; LIMITATION OF LIABILITY. All representations and
warranties shall survive until the Closing Date; PROVIDED, that the
representations and warranties set forth in Sections 3.5, 3.23, 4.5, 8.2(a) and
8.2(b) shall survive forever. The parties hereto acknowledge and agree that
following the Closing Date, the Sellers and the Option Holders, on the one hand,
and the Company, on the other hand, shall have no right of contribution from
each other with respect to any liabilities resulting from any breaches of any
representation, warranty, undertaking, agreement or covenant set forth herein
(subject to the first sentence of this Section 8.4), and that any such liability
of the Sellers and the Option Holders shall be apportioned among the Sellers and
the Option Holders based on the relative number of shares of Common Stock, on a
fully diluted basis, held by each such Seller and Option Holder.

SECTION 8.5 EXHIBITS AND SCHEDULES. All exhibits and schedules hereto,
or documents expressly incorporated into this Agreement, are hereby incorporated
into this Agreement and are hereby made a part hereof as if set out in full in
this Agreement.

SECTION 8.6 TIME OF THE ESSENCE; COMPUTATION OF TIME. Time is of the
essence for each and every provision of this Agreement. Whenever the last day
for the exercise of any privilege or the discharge or any duty hereunder shall
fall upon a Saturday, Sunday, or any date on which banks in New York City, New
York are authorized to be closed, the party having such privilege or duty may
exercise such privilege or discharge such duty on the next succeeding day which
is a regular business day.

SECTION 8.7 TRANSFER TAXES; EXPENSES. (a) Sellers shall be liable for,
and shall pay when due, any transfer, gains, documentary, sales, use,
registration, value added or other similar Taxes payable by reason of the
transactions contemplated by this Agreement (the "TRANSFER TAXES") up to and
including the amount of such Transfer Taxes estimated in the Tax Return
described in the immediately following sentence (provided that if (i) the actual
amount of Transfer Taxes exceeds such estimated amount, Sellers shall not be
liable for such excess and (ii) the actual amount of Transfer Taxes is less than
such estimated amount, such difference shall be treated in accordance with
Section 2.8), and the Company and the Sellers shall, at their own expense, file
necessary Tax Returns and other documentation with respect to all such Transfer
Taxes. At least ten (10) business days prior to Closing, the Company shall
provide Newco with a draft copy of the Tax Return for such Transfer Taxes in
form and substance reasonably satisfactory to Newco and prepared by Coopers &
Lybrand, the Company's independent tax accountants, which shall set forth the
Company's estimate of such Transfer Taxes, and such estimate shall be used for
purposes of Sections 2.8 and 8.7(b).

(b) Regardless of whether the transactions provided for in this Agreement
are consummated, except as otherwise provided herein, each party hereto shall
pay its own expenses incident to this Agreement and the transactions
contemplated herein. Newco understands and acknowledges that all out-of-pocket
fees and expenses incurred or to be incurred by the Company and the CG Sellers
in connection with the transactions contemplated hereby (including, without
limitation, the fees and expenses described in Section 3.23) will be paid in
full by the Company in cash at or prior to the Closing and to the extent that
the sum of (a) any such expenses PLUS (b) the estimated amount of Transfer Taxes
set forth in the draft Tax Return described in Section 8.7(a), exceeds
$1,000,000, such excess shall reduce the Merger Consideration as set forth in
Section 2.8. No later than 24 hours before the time of the Closing, and no
earlier than 48 hours before the time of the Closing, the Company shall provide
to Newco a certificate of the chief financial officer of the

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<PAGE>

Company and the Seller Representative setting forth in reasonable detail the
true and correct amount of costs and expenses (whether paid or payable) incurred
by the Company and the CG Sellers in connection with the Merger (including,
without limitation, all such costs and expenses relating to the Company and the
CG Sellers obtaining shareholder approval for the Merger and obtaining the
consent of any Governmental Authority or third party as contemplated hereby).

SECTION 8.8 GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement
shall be governed by, and construed in accordance with, the internal laws of the
State of New York, without reference to the choice of law or conflicts of law
principles thereof. Any legal action or proceeding with respect to this
Agreement or any document related hereto may be brought in the courts of the
State of New York or the United States of America for the Southern District of
New York, and, by execution and delivery of this Agreement, Newco, the Company,
each Seller and each Option Holder hereby accepts for itself and in respect of
its property, generally and unconditionally, the jurisdiction of the aforesaid
courts. The parties hereto hereby irrevocably waive any objection, including,
without limitation, any FORUM NON CONVENIENS, which any of them may now or
hereafter have to the bringing of such action or proceeding in such respective
jurisdictions.

SECTION 8.9 ASSIGNMENT; SUCCESSORS AND ASSIGNS; NO THIRD PARTY RIGHTS.
Except as otherwise provided herein, this Agreement may not be assigned by
operation of law or otherwise, and any attempted assignment shall be null and
void; PROVIDED, that Newco may, without such written consent assign, directly or
indirectly, any or all of its rights and obligations hereunder to any of its
Affiliates, to any Person which provides financing to Newco, the Surviving
Corporation or any of their respective Subsidiaries, or to any subsequent
purchaser of the Surviving Corporation or any of its Subsidiaries (whether
through merger, consolidation, sale of stock, sale of assets or otherwise).
Subject to the foregoing, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, successors, permitted
assigns and legal representatives. This Agreement shall be for the sole benefit
of the parties to this Agreement and their respective heirs, successors,
permitted assigns and legal representatives and is not intended, nor shall be
construed, to give any Person, other than the parties hereto and their
respective heirs, successors, assigns and legal representatives, any legal or
equitable right, remedy or claim hereunder.

SECTION 8.10 COUNTERPARTS. This Agreement may be executed in
counterparts, any one of which may be by facsimile followed by the originally
executed document forwarded immediately thereafter to the other parties hereto,
each of which shall be deemed an original agreement, but all of which together
shall constitute one and the same instrument.

SECTION 8.11 TITLES AND HEADINGS. The titles, captions and table of
contents in this Agreement are for reference purposes only, and shall not in any
way define, limit, extend or describe the scope of this Agreement or otherwise
affect the meaning or interpretation of this Agreement.

SECTION 8.12 ENTIRE AGREEMENT. This Agreement, including the Schedules
attached thereto, and the Confidentiality Agreement, constitute the entire
agreement among the parties with respect to the matters covered hereby and
supersedes all previous written, oral or implied understandings among them with
respect to such matters including, without limitation, the letter of intent
dated October 15, 1996.

SECTION 8.13 SEVERABILITY. The invalidity of any portion hereof shall
not affect the validity, force or effect of the remaining portions hereof. If
it is ever held that any restriction hereunder is

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<PAGE>

too broad to permit enforcement of such restriction to its fullest extent, such
restriction shall be enforced to the maximum extent permitted by law.

SECTION 8.14 NO STRICT CONSTRUCTION. Each of the parties hereto
acknowledge that this Agreement has been prepared jointly by the parties hereto,
and shall not be strictly construed against either party.

SECTION 8.15 SPECIFIC PERFORMANCE. Each of the Company, the Sellers, the
Option Holders and Newco acknowledges that the rights of each party to
consummate the transactions contemplated hereby are unique and recognizes and
affirms that in the event of a breach of this Agreement by any party, money
damages may be inadequate and the non-breaching party may have no adequate
remedy at law. Accordingly, the parties agree that such non-breaching party
shall have the right, in addition to any other rights and remedies existing in
their favor at law or in equity, to enforce their rights and the other party's
obligations hereunder not only by an action or actions for damages but also by
an action or actions for specific performance, injunctive and/or other equitable
relief (without posting of bond or other security).

SECTION 8.16 WAIVER OF JURY TRIAL. Each of the parties hereto waives any
right it may have to trial by jury in respect of any litigation based on,
arising out of, under or in connection with this Agreement or any course of
conduct, course of dealing, verbal or written statement or action of any party
hereto.
* * * * *

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<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.

TOWN SPORTS INTERNATIONAL, INC.

By: /s/ Mark Smith
-----------------------------
Name: Mark Smith
Title: CFO

TSI MERGER SUB, INC.

By: /s/ Stephen Edwards
-----------------------------
Name: Stephen Edwards
Title: President

AS SELLERS:

CORANDA S.A.

By: /s/ Karrer, Allarney
-----------------------------
Name: Karrer, Allarney
Title:

/s/ Gerarda de Orleans-Borbon
-----------------------------------
Gerarda de Orleans-Borbon

AS SELLERS' REPRESENTATIVE:

/s/ Karrer, Allarney
-----------------------------------

<PAGE>

OPTION HOLDERS' SIGNATURE PAGE

By: /s/ Carol Cornbill
-----------------------------

Name: Carol Cornbill

<PAGE>

OPTION HOLDERS' SIGNATURE PAGE

By: /s/ Mona Buzman
-----------------------------

Name: Mona Buzman

<PAGE>

OPTION HOLDERS' SIGNATURE PAGE

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

Name: Richard Pyle

<PAGE>

OPTION HOLDERS' SIGNATURE PAGE

By: /s/ Deborah Smith
-----------------------------

Name: Deborah Smith

<PAGE>

OPTION HOLDERS' SIGNATURE PAGE

By: /s/ Bob Colvo
-----------------------------

Name: Bob Colvo

<PAGE>

OPTION HOLDERS' SIGNATURE PAGE

By: /s/ Alex Alimanestiam
-----------------------------

Name: Alex Alimanestiam

<PAGE>

OPTION HOLDERS' SIGNATURE PAGE

By: /s/ Margaret Stevens
-----------------------------

Name: Margaret Stevens

<PAGE>

OPTION HOLDERS' SIGNATURE PAGE

By: /s/ Edward Trainor
-----------------------------

Name: Edward Trainor

<PAGE>

OPTION HOLDERS' SIGNATURE PAGE

By: /s/ Nina Duchaine
-----------------------------

Name: Nina Duchaine

<PAGE>

OPTION HOLDERS' SIGNATURE PAGE

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

Name: Robert Giardina

<PAGE>

OPTION HOLDERS' SIGNATURE PAGE

By: /s/ Mark Smith
-----------------------------

Name: Mark Smith

<PAGE>

OPTION HOLDERS' SIGNATURE PAGE

By: /s/ Leslie Kimerling
-----------------------------

Name: Leslie Kimerling

<PAGE>
Exhibit 2.2

AMENDMENT TO AGREEMENT AND PLAN OF MERGER

AMENDMENT TO AGREEMENT AND PLAN OF MERGER ("Amendment"), dated December
10, 1996, among TSI Merger Sub, Inc., a New York Corporation ("Newco"), Town
Sports International, Inc., a New York Corporation (the "Company"), and the
shareholders of the Company named on the signature page hereof.

WHEREAS, the Company, Newco and certain shareholders and option holders
of the Company have entered into an Agreement and Plan of Merger dated as of
November 8, 1996 (the "Merger Agreement") whereby each of the parties
thereto have approved the merger of Newco with and into the Company upon the
terms and conditions set forth therein; and

WHEREAS, the Company, Newco and the Sellers now desire to amend the
Merger Agreement as provided herein;

NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and intending to be legally bound, the parties hereto agree as
follows:

1. Except as otherwise defined in this Amendment, capitalized terms
shall have the same meanings as set forth in the Merger Agreement.

2. Unless specifically stated in this Amendment that certain words,
phrases or provisions of the Merger Agreement shall be deleted, partially or
in their entirety, the provisions of this Amendment shall be in addition to
the terms and conditions of the Merger Agreement.

3. Section 5.1(a) of the Merger Agreement is hereby amended by adding
the following to the end of the first sentence thereof: "or such approval
shall be obtained by means of the unanimous written consent of the
shareholders".

4. Section 6.2(e) is hereby amended by deleting the words "Whitman Breed
Abbott & Morgan, special counsel to the Sellers," and replacing them with the
words "Sucre, Arias, Castro & Reyes, counsel to Coranda S.A.,"

5. Exhibit D of the Merger Agreement is hereby deleted in its entirety
and is replaced with Exhibit D attached hereto.

6. Except as provided for in this Amendment, all other terms and
conditions of the Merger Agreement shall continue to be in full force and
effect as provided for in the Merger Agreement. The Merger Agreement, as
amended by

<PAGE>

this Amendment, constitutes the entire agreement between the parties with
respect to the subject matter contained herein and therein.

IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.

TOWN SPORTS INTERNATIONAL, INC. TSI MERGER SUB, INC.

By: /s/ R.G. Pyle By: /s/ Stephen Edwards
------------- -------------------
Name: RG Pyle Name: Stephen Edwards
Title: EVP Title: President

SHAREHOLDERS:

CORANDA S.A.

By:
--------------------------
Name: Dr. Martin Karrer
Title: Attorney-in-Fact

/s/ Gerarda de Orleans-Borbon
-----------------------------
Gerarda de Orleans-Borbon

-2-

<PAGE>

this Amendment, constitutes the entire agreement between the parties with
respect to the subject matter contained herein and therein.

IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.

TOWN SPORTS INTERNATIONAL, INC. TSI MERGER SUB, INC.

By: By:
---------------------- -----------------
Name: Name:
Title: Title:

SHAREHOLDERS:

CORANDA S.A.

By: /s/ Dr. Martin Karrer
------------------------------
Name: Dr. Martin Karrer
Title: Attorney-in-Fact

----------------------------------
Gerarda de Orleans-Borbon

-2-

<PAGE>

EXHIBIT D
Town Sports International, Inc.

UNANIMOUS WRITTEN CONSENT

of the

BOARD OF DIRECTORS

TO ACTION IN LIEU OF MEETING

Effective Date: As of October 31, 1996

Pursuant to the provisions of Section 708(b) and 902 of the Business
Corporation Law of the State of New York and consistent with the provisions
of the Certificate of Incorporation and By-Laws of Town Sports
International, Inc., a New York corporation (hereinafter referred to as the
"Corporation"), the undersigned, being all the members of the Board of
Directors of the Corporation, hereby consent to the adoption of the following
preambles and resolutions and to the taking of the actions contemplated
thereby, in each case, with the same force and effect as if presented to and
adopted at a meeting of the Board of Directors of the Corporation
(capitalized terms used in this instrument without definition shall have the
meanings attributed thereto in the Agreement and Plan of Merger (as defined
below)):

WHEREAS, it is advisable and in the best interests of the
Corporation that it merge with TSI Merger Sub, Inc., a New York
corporation (hereinafter referred to as "Newco") and that the Corporation
continue as the surviving entity following such merger, pursuant to the
terms and conditions set forth in the Agreement and Plan of Merger
described below; and

WHEREAS, in furtherance of the foregoing, it is advisable and in the
best interests of the Corporation that it enter into and perform its
obligations under that certain Agreement and Plan of Merger between the
Corporation, its shareholders and option holders named on the signature
page thereto, on the one hand, and Newco, on the other hand (hereinafter
referred to as the "Merger Agreement");

<PAGE>

NOW THEREFORE, IT IS HEREBY

RESOLVED, that the form, terms and conditions of the Merger
Agreement, substantially in the form presented to the Board of Directors,
be and the same hereby is, in all respects authorized and approved;

RESOLVED, that the Chief Executive Officer, the President, any
Executive Vice President, the Treasurer, or the Secretary of the
Corporation, and any other person duly authorized to act in such capacity
be, and each of them hereby is, designated an "Authorized Officer" for
purposes of these resolutions, the Merger Agreement, and any other
documents and instruments necessary, proper or convenient to implement or
accomplish the transactions involved in, contemplated by or related to,
any thereof;

RESOLVED, that an Authorized Officer of the Corporation be, and each
such Authorized Officer hereby is, severally authorized, empowered and
directed, in the name and on behalf of the Corporation, to negotiate, on
behalf of the Corporation and to execute and deliver the Merger Agreement
with such changes, modifications, additions, deletions, amendments and/or
supplements as shall be approved by him, the execution and delivery
thereof to be conclusive evidence of the approval and the authority of
such Authorized Officer;

RESOLVED, that the Authorized Officers of the Corporation, be, and
each of them hereby is, severally authorized, empowered and directed, to
perform or to cause to be performed, in the name and on behalf of the
Corporation or otherwise, such other acts, to pay or to cause to be paid
on behalf of the Corporation such related expenses, and to execute and
deliver or cause to be executed and delivered such other notices,
requests, directions, consents, approvals, orders, applications,
certificates, agreements, undertakings, supplements, amendments, further
assurances or other instruments, documents or communications, under the
corporate seal of the Corporation or otherwise, as they or any of them
may deem to be necessary, advisable or convenient in order to carry into
effect the intent of the foregoing resolutions or to comply with the
requirements of the instruments approved and authorized by the foregoing
resolutions or to effectuate fully the transactions contemplated by the
foregoing resolutions, the execution and delivery thereof to be
conclusive evidence of the approval and the authority of such Authorized
Officer;

-2-

<PAGE>

RESOLVED, that any acts of any Authorized Officer of the Corporation
which acts would have been authorized by the foregoing resolutions except
that such acts were taken prior to the adoption of such resolutions, are
hereby severally ratified, confirmed, approved and adopted as the acts in
the name and on behalf of the Corporation;

RESOLVED, that the Merger Agreement and the merger and transactions
contemplated thereby, taken together, are hereby deemed to be fair to and
in the best interests of the shareholders of the Corporation;

RESOLVED, that the Options shall be treated in accordance with
Section 2.10 of the Merger Agreement subject to the approval of the
holders of the Options;

RESOLVED, that it is hereby recommended to the shareholders of the
Corporation that such shareholders approve and authorize the Merger
Agreement and the merger and transactions contemplated thereby in
accordance with Section 903 of the Business Corporation Law; and

RESOLVED, that the Secretary of the Corporation is hereby directed
to file a copy of this instrument with the minutes of proceedings of the
Corporation, as required by the Business Corporation Law.

This consent may be signed in counterparts, any of which may be by facsimile
provided that the originally executed document is immediately thereafter
forwarded to the secretary of the Corporation.

-3-

<PAGE>

IN WITNESS WHEREOF, the undersigned have executed this instrument as
of date and year first written above.

DIRECTORS:

/s/ Harry Saint
----------------------------------------
Harry Saint

/s/ Alvaro De Orleans-Borbon
----------------------------------------
Alvaro De Orleans-Borbon

/s/ Gerarda De Orleans-Borbon
----------------------------------------
Gerarda De Orleans-Borbon

/s/ Robert Giardina
----------------------------------------
Robert Giardina

/s/ Paolo Mantegazza
----------------------------------------
Paolo Mantegazza

/s/ Dr. Thomas Farini
----------------------------------------
Dr. Thomas Farini

/s/ Mark Smith
----------------------------------------
Mark Smith

-4-

<PAGE>

Exhibit 3.2

BY-LAWS

TOWN SPORTS INTERNATIONAL, INC.

* * * * *

ARTICLE I

Offices

The Corporation may have offices at such places, within or without the
State of New York, as the Board determines from time to time or the business of
the Corporation requires.
ARTICLE II

Meetings of Shareholders

Section 1. Place of Meetings, etc. Except as otherwise provided in these
By-laws, all meetings of the shareholders shall be held at such dates, times and
places, within or without the State of New York, as shall be determined by the
Board or the Chairman and as shall be stated in the notice of the meeting or in
waivers of notice thereof. If the place of any meeting is not so fixed, it
shall be held at the principal office of the Corporation in the State of New
York.

Section 2. Annual Meeting. The annual meeting of shareholders for the
election of directors and the transaction of

<PAGE>

such other business as may be properly brought before the meeting shall be held
on such date after the close of the Corporation's fiscal year, as the Board may
from time to time determine.

Section 3. Special Meetings. Special meetings of the shareholders, for
any purpose or purposes, may be called by the Board or the Chairman and shall be
called by the Chairman upon the written request of the holders of a majority of
the shares of the Corporation issued and outstanding and entitled to vote
thereat. The request shall state the date, time, place and purpose or purposes
of the proposed meeting. The only business which may be transacted at a special
meeting is that relating to the purpose or purposes set forth in the notice or
waivers of notice thereof.

Section 4. Notice of Meetings. Except as otherwise required or permitted
by law, whenever the shareholders are required or permitted to take any action
at a meeting, written notice thereof shall be given, stating the place, date and
time of the meeting and, unless it is the annual meeting, by or at whose
direction it is being issued. Notice of a special meeting also shall state the
purpose or purposes for which the meeting is called. A copy of the notice of
any meeting shall be delivered personally or shall be mailed, not less than ten
(10) nor more than fifty (50) days before the date of the meeting, to each

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<PAGE>

shareholder of record entitled to vote at the meeting. If mailed, the notice
shall be given when deposited in the United States mail, postage prepaid, and
shall be directed to each shareholder at his address as it appears on the record
of shareholders, unless he shall have filed with the Secretary of the
Corporation a written request that notices to him be mailed to some other
address, in which case it shall be directed to him at the other address. Notice
of any meeting of shareholders shall not be required to be given to any
shareholder who shall attend the meeting in person or by proxy and shall not
protest, prior to the conclusion of the meeting, the lack of notice thereof, or
who shall submit, either before or after the meeting, a signed waiver of notice,
in person or by proxy. Unless the Board shall fix a new record date for an
adjourned meeting, notice of an adjourned meeting need not be given if the
place, date and time to which the meeting shall be adjourned is announced at the
meeting at which the adjournment is taken.

Section 5. Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation of the Corporation, at all meetings of shareholders
the holders of a majority of the shares of the Corporation issued and
outstanding and entitled to vote thereat shall be present in person or by proxy
in order to constitute a quorum for the transaction of business. In the

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<PAGE>

absence of a quorum, the shareholders present in person or by proxy and entitled
to vote thereat if a quorum had been present may adjourn the meeting.

Section 6. Voting. Except as otherwise provided by the Certificate of
Incorporation of the Corporation, at any meeting of the shareholders every
shareholder of record having the right to vote thereat shall be entitled to one
vote for every share of stock standing in his name as of the record date and
entitling him to so vote. A shareholder may vote in person or by proxy. Except
as otherwise provided by law or by the Certificate of Incorporation of the
Corporation, any corporate action to be taken by a vote of the shareholders,
other than the election of directors, shall be authorized by a majority of the
votes cast at a meeting by the shareholders present in person or by proxy and
entitled to vote thereon. Directors shall be elected as provided in Section 2
of Article III of these By-laws.

Section 7. Proxies. Every shareholder of record entitled to vote at a
meeting of shareholders or to express consent or dissent without a meeting may
authorize another person or persons to act for him by proxy. Every proxy shall
be signed by the shareholder or by his attorney-in-fact and shall otherwise
conform to the laws of the State of New York.

-4-
<PAGE>

Section 8. List of Shareholders. A list of shareholders as of the record
date, certified by the Secretary or by the transfer agent for the Corporation,
shall be produced at any meeting of the shareholders upon the request of any
shareholder made at or prior to the meeting.

Section 9. Inspectors. (a) The Board, in advance of any meeting of
shareholders, may appoint one or more inspectors to act at the meeting or any
adjournment thereof. If inspectors are not appointed or if any of them shall
fail to appear or act, the Chairman of the meeting may, and on the request of
any shareholder entitled to vote thereat shall, appoint one or more inspectors.
Each inspector, before discharging his duties, shall take and sign an oath
faithfully to execute the duties of inspector at the meeting with strict
impartiality and according to the best of his ability.

(b) The inspectors, if any are appointed as provided above, shall
determine the number of shares outstanding and the voting power of each, the
shares represented at the meeting, the existence of a quorum, the validity
and effect of proxies, and shall receive votes, ballots or consents, hear and
determine all challenges and questions arising in connection with the right
to vote, count and tabulate all votes, ballots or consents, determine the
result, and do such acts as are proper to

-5-

<PAGE>

conduct the election or vote with fairness to all shareholders. On request of
the Chairman of the meeting or any shareholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, question or matter
determined by them and execute a certificate of any fact found by them. Any
report or certificate made by them shall be prima facie evidence of the facts
stated and of the vote as certified by them.

Section 10. Conduct of Meetings. At each meeting of the shareholders, the
Chairman shall act as Chairman of the meeting. The Secretary or any other
person appointed by the Chairman of the meeting shall act as Secretary of the
meeting and shall keep the minutes thereof. The order of business at all
meetings of the shareholders shall be as determined by the Chairman of the
meeting.

Section 11. Consent of Shareholders in Lieu of Meeting. Any action which
may be taken by vote of shareholders may be taken without a meeting on written
consent, setting forth the action so taken, signed, in person or by proxy, by
the holders of all outstanding shares entitled to vote thereon. The foregoing
shall not be construed to alter or modify any provision in the Certificate of
Incorporation of the Corporation, not inconsistent with the laws of the State of
New York, under which

-6-

<PAGE>
the written consent of the holders of less than all outstanding shares is
sufficient for corporate action.

ARTICLE III

Board of Directors

Section 1. Number of Board Members. The Board shall consist of not less
than three (3) nor more than fifteen (15) directors, except that if all of the
shares of the Corporation are owned beneficially and of record by less than
three (3) shareholders, the number of directors constituting the entire Board
may be less than three (3), but not less than the number of shareholders. The
number of directors may be reduced or increased (within the foregoing limits)
from time to time by action of a majority of the entire Board, but no decrease
may shorten the term of an incumbent director. When used in these By-laws, the
phrase "entire Board" means the total number of directors which the Corporation
would have if there were no vacancies.

Section 2. Election and Term. Except as otherwise provided by law or by
these By-laws, the directors shall be elected at the annual meeting of the
shareholders and the persons receiving a plurality of the votes cast shall be so
elected. Subject to his earlier death, resignation or removal as provided

-7-
<PAGE>
in Section 3 of this Article III, each director shall hold office until the next
annual meeting of the shareholders and until his successor shall have been duly
elected and shall have qualified.

Section 3. Removal. Any director may be removed with or without cause by
vote of the shareholders or with cause by the Board.

Section 4. Resignations. Any director may resign at any time by giving
written notice of his resignation to the Corporation. A resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt, and,
unless otherwise specified therein, the acceptance of a resignation shall not be
necessary to make it effective.

Section 5. Vacancies. Any vacancy in the Board, whether arising from
death, resignation, removal (with or without cause), an increase in the number
of directors or any other cause, may be filled by vote of the shareholders only.
Subject to his earlier death, resignation, or removal as provided in Section 3
of this Article III, each director so elected shall hold office until the next
annual meeting of the shareholders and until his successor shall have been duly
elected and shall have qualified.
-8-
<PAGE>

Section 6. Place of Meetings. Except as otherwise provided in these
By-laws, all meetings of the Board shall be held at such places, within or
without the State of New York, as the Board determines from time to time.

Section 7. Annual Meeting. The annual meeting of the Board shall be held
either (a) without notice immediately after the annual meeting of shareholders
and in the same place, or (b) as soon as practicable after the annual meeting of
shareholders on such date and at such time and place as the Board determines.

Section 8. Regular Meetings. Regular meetings of the Board shall be held
on such dates and at such places and times as the Board determines. Notice of
regular meetings need not be given, except as otherwise required by law.

Section 9. Special Meetings. Special meetings of the Board may be called
by the Chairman and shall be called by the Chairman upon the written request of
any two or more directors. The request shall state the date, time, place and
purpose or purposes of the proposed meeting.

Section 10. Notice of Meetings. Notice of each special meeting of the
Board (and of each annual meeting held pursuant to subdivision (b) of Section 7
of this Article III) shall be given, not later than 48 hours before the meeting
is

-9-
<PAGE>

scheduled to commence, by the Chairman and shall state the place, date and time
of the meeting. Notice of each meeting may be given to a director by hand or
orally (whether by telephone or in person), or shall be mailed, delivered by
courier service that guarantees next day delivery or transmitted by telecopier
to each director at his residence or usual place of business. If notice of less
than 72 hours is given, it shall not be mailed or delivered by courier service
(unless much courier service guarantees delivery at least 24 hours prior to the
expiration of such 72 hour period). If mailed, the notice shall be deemed given
when deposited in the United States mail, postage prepaid; if delivered by
courier service, the notice shall be deemed to have been given when deposited
with such courier service; if transmitted by telecopier, the notice shall be
deemed to have been given when the contents of the telecopy are transmitted.
Notice of any meeting need not be given to any director who shall submit, either
before or after the meeting, a signed waiver of notice or who shall attend the
meeting without protesting, prior to or at its commencement, the lack of notice
to him. Notice of any adjourned meeting, including the place, date and time of
the new meeting, shall be given to all directors not present at the time of the
adjournment, as well as to the other directors unless

-10-
<PAGE>
the place, date and time of the new meeting is announced at the adjourned
meeting.

Section 11. Quorum. Except as otherwise provided by law or in these
By-laws, at all meetings of the Board a majority of the entire Board shall
constitute a quorum for the transaction of business, and the vote of a majority
of the directors present at the time of the vote, if a quorum is present, shall
be the act of the Board. A majority of the directors present, whether or not a
quorum is present, may adjourn any meeting to another place, date and time.

Section 12. Conduct of Meetings. At each meeting of the Board, the
Chairman shall act as Chairman of the meeting. The Secretary or any other
person appointed by the Chairman of the meeting shall act as Secretary of the
meeting and keep the minutes thereof. The order of business at all meetings of
the Board shall be as determined by the Chairman of the meeting.

Section 13. Consent of Directors in Lieu of Meeting. Any action required
or permitted to be taken by the Board or any committee thereof may be taken
without a meeting if all of the members of the Board or the committee consent in
writing to the adoption of a resolution authorizing the action. The resolution
and the written consents thereto by the members of the Board or

-11-
<PAGE>
the committee shall be filed with the minutes of the proceedings of the Board or
committee, as the case may be.

Section 14. Other Meetings. Any one or more members of the board or any
committee thereof may participate in a meeting of such board committee by means
of a conference telephone or similar communications equipment allowing all
persons participating in the meeting to hear each other at the same time.
Participation by such means shall constitute presence in person at a meeting.

ARTICLE IV

Committees of the Board

Section 1. General. The Board, by resolution adopted by a majority of the
entire Board, may designate from among its members an executive committee and
other committees, each consisting of three (3) or more persons. The Board may
designate one or more directors as alternate members of any committee to replace
any absent member or members at any meeting of the committee. Each committee
(including the members thereof) shall serve at the pleasure of the Board and
shall keep minutes of its meetings and report the same to the Board.

Section 2. Authority of Committees; Duties of Directors. Except as
limited by law, each committee, to the

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<PAGE>
extent provided in the resolution establishing it, shall have and may exercise
all the authority of the Board with respect to all matters. The designation of
any committee and the delegation of authority thereto shall not alone relieve
any director of his duty to the Corporation.

Section 3. Operation of Committees. At all meetings of a committee a
majority of the entire committee shall constitute a quorum for the transaction
of business, and the vote of a majority of the members of the committee present
at the time of the vote, if a quorum is present, shall be the act of the
committee. Each committee shall adopt whatever other rules of procedure it
determines for the conduct of its activities.

ARTICLE V

Officers

Section 1. Executive Officers, etc. The executive officers of the
Corporation shall be a Chairman, a President, a Secretary and a Treasurer, each
of whom shall be elected by the Board. The Board also may elect or appoint one
or more Vice Presidents (any of whom may be designated as Executive Vice
Presidents or otherwise), and any other officers as it deems necessary or
desirable for the conduct of the business of the Corporation, each of whom shall
have such powers and duties as

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<PAGE>

the Board determines. Any two (2) or more offices may be held by the same
person, except the offices of President and Secretary, except that when all of
the issued and outstanding stock of the Corporation is owned by one person, such
person may hold all or any combination of offices.

Section 2. Duties.

(a) The Chairman. The Chairman shall be the chief executive officer
of the Corporation and shall preside at all meetings of the shareholders and of
the Board. The Chairman shall be an ex officio member of all committees
established by the Board.

(b) The President. The President shall be the chief operating
officer of the Corporation with such powers as the Board or the Chairman shall
from time to time give him.

(c) The Vice President. The Vice President or, if there shall be
more than one, the Vice Presidents, in the order of their seniority or in any
other order determined by the Board, shall perform, in the absence or disability
of the Chairman and the President, the duties and exercise the powers of such
officers and shall have such other powers and duties as the Board, the Chairman
or the President assigns to him.

(d) The Secretary. Except as otherwise provided in these By-laws or
as directed by the Board, the Secretary shall

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<PAGE>

attend all meetings of the shareholders and the Board; he shall record the
minutes of all proceedings in books to be kept for that purpose; he shall give
notice of all meetings of the shareholders and special meetings of the Board;
and he shall keep in safe custody the seal of the Corporation and, when
authorized by the Board, he shall affix the same to any corporate instrument.
The Secretary shall have such other powers and duties as the Board, the Chairman
or the President assigns to him.

(e) The Treasurer. Subject to the control of the Board, the
Treasurer shall have the care and custody of the corporate funds and the books
relating thereto; he shall perform all other duties incident to the office of
Treasurer; and he shall have such other powers and duties as the Board, the
Chairman or the President assigns to him.

Section 3. Election; Removal. Subject to his earlier death, resignation
or removal as hereinafter provided, each officer shall hold his office until the
next annual meeting of the Board and until his successor shall have been duly
elected or appointed and shall have qualified. The authority of any officer to
act as such may be suspended for cause at any time by the Board. Any officer
may be removed with or without cause at any time by the Board.

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<PAGE>

Section 4. Resignations. Any officer may resign at any time by giving written
notice of his resignation to the Corporation. A resignation shall take effect
at the time specified therein or, if the time when it shall become effective
shall not be specified therein, immediately upon its receipt, and, unless
otherwise specified therein, the acceptance of a resignation shall not be
necessary to make it effective.

Section 5. Vacancies. If an office becomes vacant for any reason, the
Board may fill the vacancy, and each officer elected to fill a vacancy shall
hold his office until the next annual meeting of shareholders and until his
successor shall have been duly elected or appointed and shall have qualified.

ARTICLE VI

Provisions Relating to Stock Certificates and Shareholders

Section 1. Certificates. Certificates for the Corporation's capital stock
shall be in such form as required by law and as approved by the Board. Each
certificate shall be signed in the name of the Corporation by the Chairman or
President and by the Secretary or the Treasurer or any Assistant Secretary or
any Assistant Treasurer and shall bear the seal of the Corporation or a
facsimile thereof. If any certificate is countersigned by a transfer agent or
registered by a registrar,

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<PAGE>

other than the Corporation or its employees, the signature of any officer may be
a facsimile signature. In case any officer who shall have signed or whose
facsimile signature was placed on any certificate shall have ceased to be such
officer before the certificate shall be issued, it nevertheless may be issued by
the Corporation with the same effect as if he were such officer at the date of
issue.

Section 2. Lost Certificates, etc. The Corporation may issue a new
certificate for shares in place of any certificate theretofore issued by it,
alleged to have been lost, mutilated, stolen or destroyed, and the Board may
require the owner of such lost, mutilated, stolen or destroyed certificate, or
his legal representatives, to make an affidavit of that fact and to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation on account of the alleged loss,
mutilation, theft or destruction of any such certificate or the issuance of any
such new certificate.

Section 3. Transfers of Shares. Transfers of shares shall be registered
on the books of the Corporation maintained for that purpose upon presentation of
stock certificates appropriately indorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, and upon the

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<PAGE>

satisfaction of any other conditions precedent to transfer as are contained in
any agreement to which the Corporation is a party.

Section 4. Record Date. For the purpose of determining the shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to express consent to or dissent from any proposal
without a meeting, or for the purpose of determining shareholders entitled to
receive payment of any dividend or the allotment of any rights, or for the
purpose of any other action, the Board may fix, in advance, a record date, which
shall be not more than fifty (50) nor less than ten (10) days before the date of
any such meeting, nor more than fifty (50) days prior to any other action.

ARTICLE VII

General Provisions

Section 1. Dividends, etc. To the extent permitted by law, the Board
shall have full power and discretion, subject to the provisions of the
Certificate of Incorporation of the Corporation and the terms of any other
corporate document or instrument binding upon the Corporation, to determine
what, if any, dividends or distributions shall be declared and paid or made.

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<PAGE>

Section 2. Seal. The Corporation's seal shall be in such form as is
required by law and as shall be approved by the Board.

Section 3. Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board.

ARTICLE VIII

Indemnification

The Corporation shall indemnify its directors and officers to the fullest
extent permitted and in the manner provided by law.

ARTICLE IX

Amendments

By-laws may be adopted, amended or repealed only by vote of the holders of
the shares at the time entitled to vote in the election of any directors.

* * * * *

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<PAGE>

TOWN SPORTS INTERNATIONAL, INC.

SHAREHOLDERS' RESOLUTIONS

RESOLVED, that a new office of Chief Executive Officer of the Corporation,
separate from the office of Chairman, be created, and that the duties of the
office of Chairman be revised accordingly;

RESOLVED, that for this purpose, in accordance with Section 601 of the
Business Corporation Law, Sections 1 and 2 of Article V of the By-laws of the
Corporation be amended as follows, and the Secretary of the Corporation be
directed to file such amendments in the minute book of the Corporation:

Section 1. Executive officers, etc. The executive officers
of the Corporation shall be a Chairman, a Chief Executive
Officer, a President, a Secretary and a Treasurer, each of whom
shall be elected by the Board. The Board also may elect or
appoint one or more Vice Presidents (any of whom may be
designated as Executive Vice Presidents or otherwise), and any
other officers as it deems necessary or desirable for the conduct
of the business of the Corporation, each of whom shall have such
powers and duties as the Board determines. Any two (2) or more
offices may be held by the same person, except the offices of
President and Secretary, except that when all of the issued and
outstanding stock of the corporation is owned by one person, such
person may hold all or any combination of offices.

Section 2. Duties.

(a) The Chairman. The Chairman shall preside at all
meetings of the shareholders and of the Board and have such
powers and perform such duties as from time to time may be
assigned to him by the board of directors.

(b) The Chief Executive Officer. The Chief Executive
Officer ("CEO") shall have the general powers and duties of
representation, supervision and management vested in the office
of a chief executive officer of a corporation. In addition, the
CEO shall have such powers and perform such duties as from time
to time may be assigned to him by the board of directors.

<PAGE>
(c) The President. The President shall be the chief
operating officer of the Corporation with such powers as the
Board or the Chief Executive Officer shall from time to time give
him.

(d) The Vice President. The Vice President or, if there
shall be more than one, the Vice Presidents, in the order of
their seniority or in any other order determined by the Board,
shall perform, in the absence or disability of the Chairman, the
Chief Executive Officer, and the President, the duties and
exercise the powers of such officers and shall have such other
powers and duties as the Board, the Chief Executive Officer or
the President assigns to him.

(e) The Secretary. Except as otherwise provided in these
By-laws or as directed by the Board, the Secretary shall attend
all meetings of the shareholders and the Board; he shall record
the minutes of all proceedings in books to be kept for that
purpose; he shall give notice of all meetings of the shareholders
and special meetings of the Board; and he shall keep in safe
custody the seal of the Corporation and, when authorized by the
Board, he shall affix the same to any corporate instrument. The
Secretary shall have such other powers and duties as the Board,
the Chief Executive Officer or the President assigns to him.

(f) The Treasurer. Subject to the control of the Board,
the Treasurer shall have the care and custody of the corporate
funds and the books relating thereto; he shall perform all other
duties incident to the office of Treasurer; and he shall have
such other powers and duties as the Board, the Chief Executive
Officer or the President assigns to him.

RESOLVED, that the above resolutions and the changes to the by-laws to be
effected thereby be effective as of September 13, 1995.

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<PAGE>

EXHIBIT 4.1

---------------------------------------------------------------------------
---------------------------------------------------------------------------

TOWN SPORTS INTERNATIONAL, INC.,

as Company

and

UNITED STATES TRUST COMPANY OF NEW YORK,

as Trustee

INDENTURE

Dated as of October 16, 1997

up to $125,000,000

9 3/4% Senior Notes due 2004

---------------------------------------------------------------------------
---------------------------------------------------------------------------

<PAGE>

CROSS-REFERENCE TABLE
TIA INDENTURE
SECTION SECTION

310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.10
(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.10
(a)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(a)(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(a)(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.10
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.08; 7.10;
10.02
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
311(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.11
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.11
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
312(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.05
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10.03
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10.03
313(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.06
(b)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(b)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.06
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.06; 10.02
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.06
314(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.06; 4.08;
10.02
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(c)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . .10.04
(c)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . .10.04
(c)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10.05
(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
315(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.01(b)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.05; 10.02
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.01(a)
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.01(c)
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.11
316(a)(last sentence) . . . . . . . . . . . . . . . . . . . . . .2.09
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . .6.05
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . .6.04
(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.07
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.04
317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.08
(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.09
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.04
318(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10.01
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10.01

N.A. means Not Applicable.
_________________
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be
part of the Indenture.

<PAGE>

TABLE OF CONTENTS
Page
ARTICLE ONE

DEFINITIONS AND INCORPORATION BY REFERENCE

SECTION 1.01 Definitions. . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02 Incorporation by Reference of TIA. . . . . . . . . . 24
SECTION 1.03 Rules of Construction. . . . . . . . . . . . . . . . 24

ARTICLE TWO

THE NOTES

SECTION 2.01 Form and Dating. . . . . . . . . . . . . . . . . . . 25
SECTION 2.02 Execution and Authentication;
Aggregate Principal Amount . . . . . . . . . . . . 26
SECTION 2.03 Registrar and Paying Agent.. . . . . . . . . . . . . 27
SECTION 2.04 Paying Agent To Hold Assets in Trust.. . . . . . . . 27
SECTION 2.05 Holder Lists.. . . . . . . . . . . . . . . . . . . . 28
SECTION 2.06 Transfer and Exchange. . . . . . . . . . . . . . . . 28
SECTION 2.07 Replacement Notes. . . . . . . . . . . . . . . . . . 29
SECTION 2.08 Outstanding Notes. . . . . . . . . . . . . . . . . . 29
SECTION 2.09 Treasury Notes.. . . . . . . . . . . . . . . . . . . 30
SECTION 2.10 Temporary Notes. . . . . . . . . . . . . . . . . . . 30
SECTION 2.11 Cancellation.. . . . . . . . . . . . . . . . . . . . 30
SECTION 2.12 Defaulted Interest.. . . . . . . . . . . . . . . . . 31
SECTION 2.13 CUSIP Number.. . . . . . . . . . . . . . . . . . . . 32
SECTION 2.14 Deposit of Monies. . . . . . . . . . . . . . . . . . 32
SECTION 2.15 Restrictive Legends. . . . . . . . . . . . . . . . . 32
SECTION 2.16 Book-Entry Provisions for Global Security. . . . . . 34
SECTION 2.17 Special Transfer Provisions. . . . . . . . . . . . . 36

ARTICLE THREE

REDEMPTION

SECTION 3.01 Notices to Trustee.. . . . . . . . . . . . . . . . . 38
SECTION 3.02 Selection of Notes To Be Redeemed. . . . . . . . . . 39
SECTION 3.03 Optional Redemption. . . . . . . . . . . . . . . . . 39
SECTION 3.04 Notice of Redemption.. . . . . . . . . . . . . . . . 40
SECTION 3.05 Effect of Notice of Redemption.. . . . . . . . . . . 42
SECTION 3.06 Deposit of Redemption Price. . . . . . . . . . . . . 42
SECTION 3.07 Notes Redeemed in Part.. . . . . . . . . . . . . . . 42

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<PAGE>

ARTICLE FOUR

COVENANTS

SECTION 4.01 Payment of Notes.. . . . . . . . . . . . . . . . . . 42
SECTION 4.02 Maintenance of Office or Agency. . . . . . . . . . . 43
SECTION 4.03 Corporate Existence. . . . . . . . . . . . . . . . . 43
SECTION 4.04 Payment of Taxes and Other Claims. . . . . . . . . . 43
SECTION 4.05 Maintenance of Properties and Insurance. . . . . . . 44
SECTION 4.06 Compliance Certificate; Notice of Default. . . . . . 44
SECTION 4.07 Compliance with Laws.. . . . . . . . . . . . . . . . 45
SECTION 4.08 Reports to Holders.. . . . . . . . . . . . . . . . . 45
SECTION 4.09 Waiver of Stay, Extension or Usury Laws. . . . . . . 46
SECTION 4.10 Limitation on Restricted Payments. . . . . . . . . . 46
SECTION 4.11 Limitations on Transactions with Affiliates. . . . . 48
SECTION 4.12 Limitation on Incurrence of Additional Indebtedness. 49
SECTION 4.13 Limitation on Dividend and Other Payment Restrictions
Affecting Subsidiaries . . . . . . . . . . . . . . 50
SECTION 4.14 Change of Control. . . . . . . . . . . . . . . . . . 50
SECTION 4.15 Limitation on Asset Sales. . . . . . . . . . . . . . 52
SECTION 4.16 Limitation on Preferred Stock of Restricted
Subsidiaries.. . . . . . . . . . . . . . . . . . . 57
SECTION 4.17 Limitation on Liens. . . . . . . . . . . . . . . . . 57
SECTION 4.18 Limitation of Guarantees by Restricted Subsidiaries. 57
SECTION 4.19 Limitation on Designations of Unrestricted
Subsidiaries.. . . . . . . . . . . . . . . . . . . 58

ARTICLE FIVE

SUCCESSOR CORPORATION

SECTION 5.01 Merger, Consolidation and Sale of Assets.. . . . . . 60
SECTION 5.02 Successor Corporation Substituted. . . . . . . . . . 61

ARTICLE SIX

REMEDIES

SECTION 6.01 Events of Default. . . . . . . . . . . . . . . . . . 61
SECTION 6.02 Acceleration.. . . . . . . . . . . . . . . . . . . . 63
SECTION 6.03 Other Remedies.. . . . . . . . . . . . . . . . . . . 64
SECTION 6.04 Waiver of Past Defaults. . . . . . . . . . . . . . . 64
SECTION 6.05 Control by Majority. . . . . . . . . . . . . . . . . 64

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<PAGE>

SECTION 6.06 Limitation on Suits. . . . . . . . . . . . . . . . . 65
SECTION 6.07 Right of Holders To Receive Payment. . . . . . . . . 65
SECTION 6.08 Collection Suit by Trustee.. . . . . . . . . . . . . 65
SECTION 6.09 Trustee May File Proofs of Claim.. . . . . . . . . . 66
SECTION 6.10 Priorities.. . . . . . . . . . . . . . . . . . . . . 66
SECTION 6.11 Undertaking for Costs. . . . . . . . . . . . . . . . 67
SECTION 6.12 Restoration of Rights and Remedies.. . . . . . . . . 67

ARTICLE SEVEN

TRUSTEE

SECTION 7.01 Duties of Trustee. . . . . . . . . . . . . . . . . . 67
SECTION 7.02 Rights of Trustee. . . . . . . . . . . . . . . . . . 69
SECTION 7.03 Individual Rights of Trustee.. . . . . . . . . . . . 70
SECTION 7.04 Trustee's Disclaimer.. . . . . . . . . . . . . . . . 70
SECTION 7.05 Notice of Default. . . . . . . . . . . . . . . . . . 70
SECTION 7.06 Reports by Trustee to Holders. . . . . . . . . . . . 71
SECTION 7.07 Compensation and Indemnity.. . . . . . . . . . . . . 71
SECTION 7.08 Replacement of Trustee.. . . . . . . . . . . . . . . 72
SECTION 7.09 Successor Trustee by Merger, Etc.. . . . . . . . . . 73
SECTION 7.10 Eligibility; Disqualification. . . . . . . . . . . . 74
SECTION 7.11 Preferential Collection of Claims Against Company. . 74

ARTICLE EIGHT

DISCHARGE OF INDENTURE; DEFEASANCE

SECTION 8.01 Termination of Company's Obligations.. . . . . . . . 74
SECTION 8.02 Application of Trust Money.. . . . . . . . . . . . . 77
SECTION 8.03 Repayment to the Company.. . . . . . . . . . . . . . 78
SECTION 8.04 Reinstatement. . . . . . . . . . . . . . . . . . . . 78
SECTION 8.05 Acknowledgment of Discharge by Trustee.. . . . . . . 79

ARTICLE NINE

MODIFICATION OF THE INDENTURE

SECTION 9.01 Without Consent of Holders.. . . . . . . . . . . . . 79
SECTION 9.02 With Consent of Holders. . . . . . . . . . . . . . . 80
SECTION 9.03 Compliance with TIA. . . . . . . . . . . . . . . . . 81
SECTION 9.04 Revocation and Effect of Consents. . . . . . . . . . 81
SECTION 9.05 Notation on or Exchange of Notes.. . . . . . . . . . 82
SECTION 9.06 Trustee To Sign Amendments, Etc. . . . . . . . . . . 82

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<PAGE>

ARTICLE TEN

GUARANTEE OF NOTES

SECTION 10.01 Unconditional Guarantee. . . . . . . . . . . . . . . 83
SECTION 10.02 Limitations on Guarantees. . . . . . . . . . . . . . 84
SECTION 10.03 Execution and Delivery of Guarantee. . . . . . . . . 85
SECTION 10.04 Release of the Guarantor.. . . . . . . . . . . . . . 85
SECTION 10.05 Waiver of Subrogation. . . . . . . . . . . . . . . . 86
SECTION 10.06 Immediate Payment. . . . . . . . . . . . . . . . . . 87
SECTION 10.07 Obligations Continuing.. . . . . . . . . . . . . . . 87
SECTION 10.08 Obligations Reinstated.. . . . . . . . . . . . . . . 87
SECTION 10.09 Obligations Not Affected.. . . . . . . . . . . . . . 87
SECTION 10.10 Waiver.. . . . . . . . . . . . . . . . . . . . . . . 88
SECTION 10.11 No Obligation To Take Action Against the Company.. . 88
SECTION 10.12 Dealing with the Company and Others. . . . . . . . . 88
SECTION 10.13 Default and Enforcement. . . . . . . . . . . . . . . 89
SECTION 10.14 Amendment, Etc.. . . . . . . . . . . . . . . . . . . 89
SECTION 10.15 Acknowledgment.. . . . . . . . . . . . . . . . . . . 89
SECTION 10.16 Costs and Expenses.. . . . . . . . . . . . . . . . . 89
SECTION 10.17 No Waiver; Cumulative Remedies.. . . . . . . . . . . 89
SECTION 10.18 Survival of Obligations. . . . . . . . . . . . . . . 90
SECTION 10.19 Guarantee in Addition to Other Obligations.. . . . . 90
SECTION 10.20 Severability.. . . . . . . . . . . . . . . . . . . . 90
SECTION 10.21 Successors and Assigns.. . . . . . . . . . . . . . . 90

ARTICLE ELEVEN

MISCELLANEOUS

SECTION 11.01 TIA Controls.. . . . . . . . . . . . . . . . . . . . 90
SECTION 11.02 Notices. . . . . . . . . . . . . . . . . . . . . . . 91
SECTION 11.03 Communications by Holders with Other Holders.. . . . 92
SECTION 11.04 Certificate and Opinion as to Conditions Precedent.. 92
SECTION 11.05 Statements Required in Certificate or Opinion. . . . 92
SECTION 11.06 Rules by Trustee, Paying Agent, Registrar. . . . . . 93
SECTION 11.07 Legal Holidays.. . . . . . . . . . . . . . . . . . . 93
SECTION 11.08 Governing Law. . . . . . . . . . . . . . . . . . . . 93
SECTION 11.09 No Adverse Interpretation of Other Agreements. . . . 93
SECTION 11.10 No Personal Liability. . . . . . . . . . . . . . . . 93
SECTION 11.11 Successors.. . . . . . . . . . . . . . . . . . . . . 94
SECTION 11.12 Duplicate Originals. . . . . . . . . . . . . . . . . 94
SECTION 11.13 Severability.. . . . . . . . . . . . . . . . . . . . 94
SECTION 11.14 Independence of Covenants. . . . . . . . . . . . . . 94

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Exhibit A - Form of Initial Note. . . . . . . . . . . . . . . . . . A-1
Exhibit B - Form of Exchange Note . . . . . . . . . . . . . . . . . B-1
Exhibit C - Form of Certificate To Be Delivered in Connection with
Transfers to Non-QIB Accredited Investors . . . . . . . C-1
Exhibit D - Form of Certificate To Be Delivered in Connection with
Transfers Pursuant to Regulation S. . . . . . . . . . . D-1
Exhibit E - Form of Guarantee . . . . . . . . . . . . . . . . . . . E-1
Note: This Table of Contents shall not, for any purpose, be
deemed to be part of this Indenture

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INDENTURE, dated as of October 16, 1997, between TOWN SPORTS
INTERNATIONAL, INC., a New York corporation (the "Company"), and UNITED STATES
TRUST COMPANY OF NEW YORK, as Trustee (the "Trustee").

Each party hereto agrees as follows for the benefit of
the other party and for the equal and ratable benefit of the Holders of the
Company's 9 3/4% Senior Notes due 2004 Series A (the "Initial Notes") and,
when and if issued as provided in the Registration Rights Agreement of even
date herewith, the Company's 9 3/4% Senior Notes due 2004 Series B (the
"Exchange Notes" and together with the Initial Notes, the "Notes").

ARTICLE ONE

DEFINITIONS AND INCORPORATION BY REFERENCE

SECTION 1.01. DEFINITIONS.

"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or
any of its Subsidiaries existing at the time such Person becomes a Restricted
Subsidiary or at the time it merges or consolidates with the Company or any
of the Restricted Subsidiaries or assumed in connection with the acquisition
of assets from such Person and in each case not incurred by such Person in
connection with, or in anticipation or contemplation of, such Person becoming
a Restricted Subsidiary or such acquisition, merger or consolidation.

"ADDITIONAL INTEREST" shall have the meaning set forth in
the Registration Rights Agreement.

"AFFILIATE" means, with respect to any specified Person,
any other Person who directly or indirectly through one or more
intermediaries controls, or is controlled by, or is under common control
with, such specified Person. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative of the foregoing.

"AFFILIATE TRANSACTION" has the meaning provided in
Section 4.11.

"AGENT" means any Registrar, Paying Agent or co-Registrar.

<PAGE>

"AGENT MEMBERS" has the meaning provided in Section 2.16.

"APPLICABLE PREMIUM" means, with respect to a Note at any
Redemption Date, the greater of (i) 1.0% of the principal amount of such Note
and (ii) the excess of (A) the present value at such time of (1) the
redemption price of such Note at October 15, 2002 (such redemption price
being described in Section 3.03) plus (2) all required interest payments
(excluding accrued but unpaid interest) due on such Note through ,
2002, computed using a discount rate equal to the Treasury Rate plus 75 basis
points, over (B) the principal amount of such Note.

"ASSET ACQUISITION" means (a) an Investment by the
Company or any Restricted Subsidiary in any other Person pursuant to which
such Person shall become a Restricted Subsidiary or shall be merged with or
into the Company or any Restricted Subsidiary, or (b) the acquisition by the
Company or any Restricted Subsidiary of the assets of any Person (other than
a Restricted Subsidiary) which constitute all or substantially all of the
assets of such Person or comprise any division or line of business of such
Person or any other properties or assets of such Person other than in the
ordinary course of business.

"ASSET SALE" means any direct or indirect sale, issuance,
conveyance, transfer, lease (other than operating leases entered into in the
ordinary course of business), assignment or other transfer for value by the
Company or any of its Restricted Subsidiaries (including any Sale and
Leaseback Transaction) to any Person other than the Company or a Restricted
Subsidiary of the Company of (a) any Capital Stock of any Restricted
Subsidiary or (b) any other property or assets of the Company or any
Restricted Subsidiary, other than in the ordinary course of business;
PROVIDED that Asset Sales shall not include (i) a transaction or series of
related transactions for which the Company or its Restricted Subsidiaries
receive aggregate consideration of less than $1 million, (ii) the sale,
lease, conveyance, disposition or other transfer of all or substantially all
of the assets of the Company as permitted under Section 5.01, (iii) disposals
or replacements of obsolete equipment in the ordinary course of business,
(iv) the sale, lease, conveyance, disposition or other transfer by the
Company or any Restricted Subsidiary of assets or property to the Company or
one or more Restricted Subsidiaries and (v) any Restricted Payment.

"AUTHENTICATING AGENT" has the meaning provided in
Section 2.02.

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<PAGE>

"BANKRUPTCY LAW" means Title 11, U.S. Code or any similar
Federal, state or foreign law for the relief of debtors.

"BOARD OF DIRECTORS" means, as to any Person, the board
of directors of such Person or any duly authorized committee thereof.

"BOARD RESOLUTION" means, with respect to any Person, a
copy of a resolution certified by the secretary or an assistant secretary of
such Person to have been duly adopted by the Board of Directors of such
Person and to be in full force and effect on the date of such certification
and delivered to the Trustee.

"BRS GROUP" means Bruckman, Rosser, Sherrill & Co., Inc.
and its Affiliates.

"BUSINESS DAY" means any day other than a Saturday,
Sunday or any other day on which commercial banking institutions in the City
of New York are required or authorized by law or other governmental action to
be closed.

"CAPITAL STOCK" means (i) with respect to any Person that
is a corporation, any and all shares, interests, participations or other
equivalents (however designated and whether or not voting) of corporate
stock, including each class of Common Stock and Preferred Stock of such
Person and (ii) with respect to any Person that is not a corporation, any and
all partnership or other equity interests of such Person.

"CAPITALIZED LEASE OBLIGATION" means, as to any Person,
the obligations of such Person under a lease that are required to be
classified and accounted for as capital lease obligations under GAAP and, for
purposes of this definition, the amount of such obligations at any date shall
be the capitalized amount of such obligations at such date, determined in
accordance with GAAP.

"CASH EQUIVALENTS" means (i) marketable direct
obligations issued by, or unconditionally guaranteed by, the United States
Government or issued by any agency thereof and backed by the full faith and
credit of the United States, in each case maturing within one year from the
date of acquisition thereof; (ii) marketable direct obligations issued by any
state of the United States of America or any political subdivision of any
such state or any public instrumentality thereof maturing within one year
from the date of acquisition thereof and, at the time of acquisition, having
one of the two highest ratings obtainable from either Standard & Poor's
Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (iii)
commercial

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<PAGE>

paper maturing no more than one year from the date of creation thereof and, at
the time of acquisition, having a rating of at least A-1 from S&P or at least
P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing
within one year from the date of acquisition thereof issued by any bank
organized under the laws of the United States of America or any state thereof or
the District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than
$250,000,000; (v) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clause (i) above entered
into with any bank meeting the qualifications specified in clause (iv) above;
and (vi) investments in money market funds which invest substantially all their
assets in securities of the types described in clauses (i) through (v) above.

"CERTIFICATED SECURITIES" means Notes in definitive
registered form.

"CHANGE OF CONTROL" means the occurrence of one or more
of the following events: (i) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all or substantially
all of the assets of the Company to any Person or group of related Persons
for purposes of Section 13(d) of the Exchange Act (a "Group"), together with
any Affiliates thereof (whether or not otherwise in compliance with the
provisions of this Indenture); (ii) the approval by the holders of the
Capital Stock of the Company of any plan or proposal for the liquidation or
dissolution of the Company (whether or not otherwise in compliance with the
provisions of this Indenture); (iii) any Person or Group, other than a
Permitted Holder, shall become the owner, directly or indirectly,
beneficially or of record, of shares representing more than 50% of the
aggregate ordinary voting power represented by the issued and outstanding
Capital Stock of the Company; or (iv) the replacement of a majority of the
Board of Directors of the Company over a two-year period from the directors
who constituted the Board of Directors of the Company at the beginning of
such period, and such replacement shall not have been approved by a vote of
at least a majority of the Board of Directors of the Company then still in
office who either were members of such Board of Directors at the beginning of
such period or whose election as a member of such Board of Directors was
previously so approved.

"CHANGE OF CONTROL OFFER" has the meaning provided in
Section 4.14.

"CHANGE OF CONTROL PAYMENT DATE" has the meaning provided in
Section 4.14.

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<PAGE>

"COMMISSION" means the U.S. Securities and Exchange
Commission.

"COMMON STOCK" of any Person means any and all shares,
interests or other participations in, and other equivalents (however
designated and whether voting or non-voting) of such Person's common stock,
whether outstanding on the Issue Date or issued after the Issue Date, and
includes, without limitation, all series and classes of such common stock.

"COMPANY" means Town Sports International, Inc., a New York
Corporation.

"CONSOLIDATED EBITDA" means, for any period, the sum
(without duplication) of (i) Consolidated Net Income and (ii) to the extent
Consolidated Net Income has been reduced thereby, (A) all income taxes of the
Company and its Restricted Subsidiaries paid or accrued in accordance with
GAAP for such period (other than income taxes attributable to extraordinary,
unusual or nonrecurring gains or losses or taxes attributable to sales or
dispositions outside the ordinary course of business), (B) Consolidated
Interest Expense and (C) Consolidated Non-cash Charges less any non-cash
items increasing Consolidated Net Income for such period, all as determined
on a consolidated basis for the Company and its Restricted Subsidiaries in
accordance with GAAP.

"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means the
ratio of Consolidated EBITDA during the four full fiscal quarters (the "Four
Quarter Period") ending on or prior to the date of the transaction giving
rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio
(the "Transaction Date") to Consolidated Fixed Charges for the Four Quarter
Period. In addition to and without limitation of the foregoing, for purposes
of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges"
shall be calculated after giving effect on a pro forma (including any pro
forma expense and cost reductions calculated on a basis consistent with
Regulation S-X under the Securities Act) basis for the period of such
calculation to (i) the incurrence or repayment of any Indebtedness of the
Company or any of the Restricted Subsidiaries (and the application of the
proceeds thereof) giving rise to the need to make such calculation and any
incurrence or repayment of other Indebtedness (and the application of the
proceeds thereof), other than the incurrence or repayment of Indebtedness in
the ordinary course of business for working capital purposes pursuant to
working capital facilities, occurring during the Four Quarter Period or at
any time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such incurrence or repayment, as the
case may be (and the application of the proceeds thereof), occurred on the
first day

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<PAGE>

of the Four Quarter Period and (ii) any Asset Sales or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the need to
make such calculation as a result of the Company or one of the Restricted
Subsidiaries (including any Person who becomes a Restricted Subsidiary as a
result of the Asset Acquisition) incurring, assuming or otherwise being liable
for Acquired Indebtedness and also including any Consolidated EBITDA
attributable to the assets which are the subject of the Asset Acquisition or
Asset Sale during the Four Quarter Period) occurring during the Four Quarter
Period or at any time subsequent to the last day of the Four Quarter Period and
on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition
(including the incurrence, assumption or liability for any such Acquired
Indebtedness) occurred on the first day of the Four Quarter Period. If the
Company or any of its Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding sentence shall give effect to the
incurrence of such guaranteed Indebtedness as if the Company or any Restricted
Subsidiary had directly incurred or otherwise assumed such guaranteed
Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding
Indebtedness determined on a fluctuating basis as of the Transaction Date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date, (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period, and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.

"CONSOLIDATED FIXED CHARGES" means, with respect to the
Company for any period, the sum, without duplication, of (i) Consolidated
Interest Expense, plus (ii) the product of (x) the amount of all dividend
payments on any series of Preferred Stock of the Company (other than
dividends paid in Qualified Capital Stock) paid, accrued or scheduled to be
paid or accrued during such period times (y) a fraction, the numerator of
which is one and the denominator of which is one minus the then current
effective consolidated federal, state and local tax rate of the Company,
expressed as a decimal.

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<PAGE>

"CONSOLIDATED INTEREST EXPENSE" means, with respect to
the Company for any period, the sum of, without duplication: (i) the
aggregate of the interest expense of the Company and its Restricted
Subsidiaries for such period determined on a consolidated basis in accordance
with GAAP, including, without limitation, (a) any amortization of debt
discount, (b) the net costs under Interest Swap Obligations, (c) all
capitalized interest and (d) the interest portion of any deferred payment
obligation; and (ii) the interest component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by the Company and its
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.

"CONSOLIDATED NET INCOME" means, with respect to the
Company, for any period, the aggregate net income (or loss) of the Company
and its Restricted Subsidiaries for such period on a consolidated basis,
determined in accordance with GAAP; provided that there shall be excluded
therefrom (a) after-tax gains and losses from Asset Sales or abandonments or
reserves relating thereto, (b) after-tax items classified as extraordinary or
nonrecurring gains and losses, (c) the net income (or loss) of any Person
acquired in a "pooling of interests" transaction accrued prior to the date it
becomes a Restricted Subsidiary or is merged or consolidated with the Company
or any Restricted Subsidiary, (d) the net income (but not loss) of any
Restricted Subsidiary to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is
restricted by contract, operation of law or otherwise, (e) the net income of
any Person, other than the Company or a Restricted Subsidiary, except to the
extent of cash dividends or distributions paid to the Company or to a
Restricted Subsidiary by such Person, (f) income or loss attributable to
discontinued operations (including, without limitation, operations disposed
of during such period whether or not such operations were classified as
discontinued), and (g) in the case of a successor to the Company by
consolidation or merger or as a transferee of the Company's assets, any net
income of the successor corporation prior to such consolidation, merger or
transfer of assets.

"CONSOLIDATED NET WORTH" of any Person means the
consolidated stockholders' equity of such Person, determined on a
consolidated basis in accordance with GAAP, less (without duplication)
amounts attributable to Disqualified Capital Stock of such Person; PROVIDED
that the Consolidated Net Worth of any Person shall exclude the effect of any
non-cash charges relating to the acceleration of stock options or similar
securities of such Person or another Person with which such Person is merged
or consolidated.

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<PAGE>

"CONSOLIDATED NON-CASH CHARGES" means, with respect to
the Company, for any period, the aggregate depreciation, amortization and
other non-cash expenses of the Company and the Restricted Subsidiaries
reducing Consolidated Net Income of the Company and its Restricted
Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP (including deferred rent but excluding any such charge
which requires an accrual of or a reserve for cash charges for any future
period).

"CORPORATE TRUST OFFICE" means the office of the Trustee
at which at any particular time its corporate trust business shall be
principally administered, which office at the date of execution of this
Indenture is located at 114 West 47th Street, New York, NY 10036.

"COVENANT DEFEASANCE" has the meaning set forth in
Section 8.01.

"CREDIT FACILITY" means the amended and restated Credit
Agreement dated as of the Issue Date by and among the Company, Bankers Trust
Company and certain lenders from time to time a party thereto, together with
the related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder or adding
Subsidiaries of the Company as additional borrowers or guarantors thereunder)
all or any portion of the Indebtedness under such agreement or any successor
or replacement agreement and whether by the same or any other agent, lender
or group of lenders.

"CURRENCY AGREEMENT" means any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement designed to
protect the Company or any Restricted Subsidiary of the Company against
fluctuations in currency values.

"CUSTODIAN" means any receiver, trustee, assignee,
liquidator, sequestrator or similar official under any Bankruptcy Law.

"DEFAULT" means an event or condition the occurrence of
which is, or with the lapse of time or the giving of notice or both would be,
an Event of Default.

"DEPOSITORY" means The Depository Trust Company, its
nominees and successors.

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<PAGE>

"DESIGNATION" has the meaning provided in Section 4.19.

"DESIGNATION AMOUNT" has the meaning provided in Section
4.19.

"DISQUALIFIED CAPITAL STOCK" means that portion of any
Capital Stock which, by its terms (or by the terms of any security into which
it is convertible or for which it is exchangeable), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the sole option of the holder
thereof, on or prior to the final maturity date of the Notes.

"EVENT OF DEFAULT" has the meaning provided in Section
6.01.

"EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended, or any successor statute or statutes thereto.

"EXCHANGE NOTES" means the 9 3/4% Senior Notes due 2004
Series B to be issued pursuant to this Indenture in connection with the offer
to exchange Notes for the Initial Notes pursuant to the Registration Rights
Agreement.

"EXCHANGE OFFER REGISTRATION STATEMENT" means the
registration statement filed by the Company pursuant to the Registration
Rights Agreement.

"FAIR MARKET VALUE" means, with respect to any asset or
property, the price which could be negotiated in an arm's-length, free market
transaction, for cash, between a willing seller and a willing and able buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction. Fair Market Value shall be determined by the Board of Directors
of the Company acting reasonably and in good faith and shall be evidenced by
a Board Resolution of the Board of Directors of the Company.

"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession of the United States, which are in effect as of the
Issue Date. All ratios and computations based on GAAP contained in this
Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance
with the terms of the covenants and with other provisions of this Inden

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<PAGE>

ture shall be made without giving effect to (i) the deduction or amortization
of any premiums, fees and expenses incurred in connection with any financings
or any other permitted incurrence of Indebtedness and (ii) depreciation,
amortization or other expenses recorded as a result of the application of
purchase accounting in accordance with Accounting Principles Board Opinion
Nos. 16 and 17.

"GLOBAL NOTE" has the meaning provided in Section 2.01.

"GUARANTEE" means, as applied to any obligation, (a) a
guarantee (other than by endorsement of negotiable instruments for collection
in the ordinary course of business), direct or indirect, in any manner, of
any part or all of such obligation and (b) an agreement, direct or indirect,
contingent or otherwise, the practical effect of which is to assure in any
way the payment or performance (or payment of damages in the event of
non-performance) of all or any part of such obligation, including, without
limiting the foregoing, the payment of amounts drawn down by letters of credit

"GUARANTEE" has the meaning set forth in Section 10.01.

"GUARANTOR" means each Restricted Subsidiary that
executes a Guarantee in accordance with Section 4.18.

"HOLDER" means a holder of Notes.

"INCUR" has the meaning set forth in Section 4.12.

"INDEBTEDNESS" means, with respect to any Person, without
duplication, (i) all Obligations of such Person for borrowed money, (ii) all
Obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments, (iii) all Capitalized Lease Obligations of such Person,
(iv) all Obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
Obligations under any title retention agreement (but excluding trade accounts
payable and other accrued liabilities arising in the ordinary course of
business that are not overdue by 160 days or more or are being contested in
good faith by appropriate proceedings promptly instituted and diligently
conducted), (v) all Obligations for the reimbursement of any obligor on any
letter of credit, bankers' acceptance or similar credit transaction, (vi)
guarantees and other contingent obligations in respect of Indebtedness
referred to in clauses (i) through (v) above and clause (viii) below, (vii)
all Obligations of any other Person of the type referred to in clauses (i)
through (vi) which are secured by any lien on any property

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<PAGE>

or asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of the
Obligation so secured, (viii) all Obligations under currency agreements and
interest swap agreements of such Person and (ix) all Disqualified Capital Stock
issued by such Person with the amount of Indebtedness represented by such
Disqualified Capital Stock being equal to the greater of its voluntary or
involuntary liquidation preference and its maximum fixed repurchase price. For
purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to this Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the Board of Directors of the Company. The amount of Indebtedness of
any Person at any date shall be the outstanding balance on such date of all
unconditional Obligations as described above, and the maximum liability upon the
occurrence of the contingency giving rise to the Obligation, on any contingent
Obligations at such date; PROVIDED, HOWEVER, that the amount outstanding at any
time of any Indebtedness incurred with original issue discount is the face
amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at such time as determined in
conformity with GAAP.

"INDENTURE" means this Indenture, as amended or
supplemented from time to time in accordance with the terms hereof.

"INDEPENDENT FINANCIAL ADVISOR" means a firm (i) which
does not, and whose directors, officers and employees or Affiliates do not,
have a direct or indirect financial interest in the Company and (ii) which,
in the judgment of the Board of Directors of the Company, is otherwise
independent and qualified to perform the task for which it is to be engaged.

"INITIAL NOTES" means the 9 3/4% Senior Notes due 2004
Series A, issued under this Indenture on or about the date hereof.

"INITIAL PURCHASER" means BT Alex. Brown Incorporated.

"INTEREST" when used with respect to any Note means the
amount of all interest accruing on such Note, including any applicable
defaulted interest pursuant to Section 2.12 and any

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<PAGE>

Additional Interest pursuant to the Registration Rights Agreement.

"INTEREST PAYMENT DATE" means the stated maturity of an
installment of interest on the Notes.

"INTEREST SWAP OBLIGATIONS" means the obligations of any
Person pursuant to any arrangement with any other Person, whereby, directly
or indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest
on a stated notional amount in exchange for periodic payments made by such
other Person calculated by applying a fixed or a floating rate of interest on
the same notional amount and shall include, without limitation, interest rate
swaps, caps, floors, collars and similar agreements.

"INTERNAL REVENUE CODE" means the Internal Revenue Code
of 1986, as amended to the date hereof and from time to time hereafter.

"INVENTORY" means, as of any date, all inventory of the
Company and any of its Restricted Subsidiaries, wherever located, valued in
accordance with GAAP and shown on the balance sheet of the Company for the
quarterly period most recently ended prior to such date for which financial
statements of the Company are available.

"INVESTMENT" means, with respect to any Person, any
direct or indirect loan, advance or other extension of credit (including,
without limitation, a guarantee) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others) to, or any purchase or acquisition
by such Person of any Capital Stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued by, any Person. "Investment"
shall exclude extensions of trade credit by the Company and its Restricted
Subsidiaries on commercially reasonable terms in accordance with normal trade
practices of the Company or such Restricted Subsidiary, as the case may be.
If the Company or any Restricted Subsidiary sells or otherwise disposes of
any Common Stock of any direct or indirect Restricted Subsidiary such that,
after giving effect to any such sale or disposition, it ceases to be a
Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair
market value of the Common Stock of such Restricted Subsidiary not sold or
disposed of.

"ISSUE DATE" means October 9, 1997.

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<PAGE>

"LEGAL DEFEASANCE" has the meaning set forth in Section
8.01.

"LEGAL HOLIDAY" has the meaning provided in Section 11.07.

"LIEN" means any lien, mortgage, deed of trust, pledge,
security interest, charge or encumbrance of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof and any agreement to give any security interest).

"MATURITY DATE" means October 15, 2004.

"MOODY'S" means Moody's Investors Service, Inc. and its
successors.

"NET CASH PROCEEDS" means, with respect to any Asset
Sale, the proceeds in the form of cash or Cash Equivalents including payments
in respect of deferred payment obligations when received in the form of cash
or Cash Equivalents (other than the portion of any such deferred payment
constituting interest) received by the Company or any of its Restricted
Subsidiaries from such Asset Sale net of (a) reasonable out-of-pocket
expenses and fees relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees and sales commissions), (b)
taxes paid or payable after taking into account any reduction in consolidated
tax liability due to available tax credits or deductions and any tax sharing
arrangements, (c) repayment of Indebtedness that is required to be repaid in
connection with such Asset Sale and (d) appropriate amounts to be provided by
the Company or any Restricted Subsidiary, as the case may be, as a reserve,
in accordance with GAAP, against any liabilities associated with such Asset
Sale and retained by the Company or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale.

"NET PROCEEDS OFFER" has the meaning set forth in Section
4.15.

"NET PROCEEDS OFFER AMOUNT" has the meaning set forth in
Section 4.15.

"NET PROCEEDS OFFER PAYMENT DATE" has the meaning set
forth in Section 4.15.

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<PAGE>

"NET PROCEEDS OFFER TRIGGER DATE" has the meaning set
forth in Section 4.15.

"NOTES" means, collectively, the Initial Notes and, when
and if issued as provided in the Registration Rights Agreement, the Exchange
Notes.

"OBLIGATIONS" means all obligations for principal,
premium, interest, penalties, fees, indemnifications, reimbursements, damages
and other liabilities payable under the documentation governing any
Indebtedness.

"OFFERING MEMORANDUM" means the confidential Offering
Memorandum dated October 9, 1997 of the Company relating to the offering of
the Notes.

"OFFICER" means, with respect to any Person, the Chairman
of the Board of Directors, the Chief Executive Officer, the President, any
Vice President, the Chief Financial Officer, the Treasurer, the Controller,
or the Secretary of such Person, or any other officer designated by the Board
of Directors serving in a similar capacity.

"OFFICERS' CERTIFICATE" means a certificate signed by two
Officers of the Company.

"OPINION OF COUNSEL" means a written opinion from legal
counsel who is reasonably acceptable to the Trustee complying with the
requirements of Sections 11.04 and 11.05, as they relate to the giving of an
Opinion of Counsel.

"PAYING AGENT" has the meaning provided in Section 2.03.

"PERMITTED HOLDERS" means BRS Group, Farallon and their
respective Affiliates.

"PERMITTED INDEBTEDNESS" means, without duplication, each
of the following:

(i)Indebtedness under the Notes and this Indenture
incurred as of the Issue Date;

(ii)Indebtedness incurred pursuant to the Credit Facility in an
aggregate principal amount at any time outstanding not to exceed
$25 million, less any required permanent repayments under all revolving
credit facilities in accordance with the provisions of Section 4.15 (which
are accompanied by a corresponding permanent commitment reduction
thereunder);

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<PAGE>

(iii)other Indebtedness (including Capitalized Lease Obligations) of
the Company and the Restricted Subsidiaries outstanding on the Issue Date;

(iv)Purchase Money Indebtedness of the Company and Capitalized Lease
Obligations of the Company and, to the extent constituting Acquired
Indebtedness, of the Restricted Subsidiaries in an aggregate amount for all
Indebtedness incurred pursuant to this subclause (iv) not to exceed $20
million outstanding at any one time;

(v)Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of the Restricted Subsidiaries; PROVIDED, HOWEVER, that
such Interest Swap Obligations are entered into to protect the Company and
the Restricted Subsidiaries from fluctuations in interest rates on
Indebtedness incurred in accordance with this Indenture to the extent the
notional principal amount of such Interest Swap Obligation does not exceed
the principal amount of the Indebtedness to which such Interest Swap
Obligation relates;

(vi)Indebtedness under Currency Agreements; PROVIDED that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and the
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;

(vii)Indebtedness of a Restricted Subsidiary to the Company or to a
Restricted Subsidiary for so long as such Indebtedness is held by the
Company or a Restricted Subsidiary, in each case subject to no Lien held by
a Person other than the Company or a Restricted Subsidiary; PROVIDED that
if as of any date any Person other than the Company or a Restricted
Subsidiary owns or holds any such Indebtedness or holds a Lien in respect
of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the issuer of such
Indebtedness;

(viii)Indebtedness of the Company to a Restricted Subsidiary for so
long as such Indebtedness is held by a Restricted Subsidiary, in each case
subject to no Lien; PROVIDED that (a) any Indebtedness of the Company to
any Restricted Subsidiary is unsecured and subordinated, pursuant to a
written agreement, to the Company's obligations under this Indenture and
the Notes and (b) if as of any date any Person other than a Restricted
Subsidiary owns or holds any such Indebtedness or any Person holds a Lien
in

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<PAGE>

respect of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the Company;

(ix)Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; PROVIDED, HOWEVER, that such
Indebtedness is extinguished within two business days of incurrence;

(x)Indebtedness of the Company or any of the Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;

(xi)Refinancing Indebtedness; and

(xii)additional Indebtedness of the Company in an aggregate principal
amount not to exceed $10 million at any one time outstanding.

"PERMITTED INVESTMENTS" means (i) Investments by the
Company or any Restricted Subsidiary in any Person that is or will become
immediately after such Investment a Restricted Subsidiary or that will merge
or consolidate into the Company or a Restricted Subsidiary, (ii) Investments
in the Company by any Restricted Subsidiary; PROVIDED that any Indebtedness
incurred by the Company evidencing such Investment by a Restricted Subsidiary
is unsecured and subordinated, pursuant to a written agreement, to the
Company's obligations under the Notes and this Indenture; (iii) investments
in cash and Cash Equivalents; (iv) loans and advances to employees and
officers of the Company and the Restricted Subsidiaries in the ordinary
course of business for bona fide business purposes not in excess of
$5,000,000 at any one time outstanding; (v) Currency Agreements and Interest
Swap Obligations entered into in the ordinary course of the Company's or a
Restricted Subsidiary's businesses and otherwise in compliance with this
Indenture; (vi) other Investments, including Investments in Unrestricted
Subsidiaries not to exceed $5,000,000 at any one time outstanding; (vii)
Investments in securities of trade creditors or customers received pursuant
to any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of such trade creditors or customers; and (viii) Investments made
by the Company or the Restricted Subsidiaries as a result of considera

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<PAGE>

tion received in connection with an Asset Sale made in compliance with
Section 4.15.

"PERMITTED LIENS" means the following types of Liens:

(i)Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or the Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;

(ii)statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;

(iii)Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance,
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);

(iv)judgment Liens not giving rise to an Event of Default;

(v)easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
and its Restricted Subsidiaries;

(vi)any interest or title of a lessor under any Capitalized Lease
Obligation, provided that such Liens do not extend to any property or asset
which is not leased property subject to such Capitalized Lease Obligation;

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<PAGE>

by any property or assets of the Company or any Restricted Subsidiary other
than the property and assets so acquired and (B) the Lien securing such
Indebtedness shall be created within 90 days of such acquisition;

(viii)Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;

(ix)Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;

(x)Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;

(xi)Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under this
Indenture;

(xii)Liens securing Indebtedness under Currency Agreements; and

(xiii)Liens securing Acquired Indebtedness incurred in accordance with
Section 4.12; PROVIDED that (A) such Liens secured such Acquired
Indebtedness at the time of and prior to the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary and were not granted
in connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary and (B) such Liens
do not extend to or cover any property or assets of the Company or of any
of its Restricted Subsidiaries other than the property or assets that
secured the Acquired Indebtedness prior to the time such Indebtedness
became Acquired Indebtedness of the Company or a Restricted Subsidiary and
are no more favorable to the lienholders than those securing the Acquired
Indebtedness prior to the incurrence of such Acquired Indebtedness by the
Company or a Restricted Subsidiary.

"PERSON" means an individual, partnership, corporation,
unincorporated organization, trust or joint venture, or a governmental agency
or political subdivision thereof.

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<PAGE>

"PHYSICAL NOTES" has the meaning provided in Section 2.01.

"PLAN OF LIQUIDATION" means, with respect to any Person,
a plan (including by operation of law) that provides for, contemplates or the
effectuation of which is preceded or accompanied by (whether or not
substantially contemporaneously) (a) the sale, lease, conveyance or other
disposition of all or substantially all of the assets of such Person
otherwise than as an entirety or substantially as an entirety and (b) the
distribution of all or substantially all of the proceeds of such sale, lease,
conveyance or other disposition and all or substantially all of the remaining
assets of such Person to holders of Capital Stock of such Person.

"PREFERRED STOCK" of any Person means any Capital Stock
of such Person that has preferential rights to any other Capital Stock of
such Person with respect to dividends or redemptions or upon liquidation.

"PRINCIPAL" of any Indebtedness (including the Notes)
means the principal amount of such Indebtedness plus the premium, if any, on
such Indebtedness.

"PRIVATE EXCHANGE NOTES" has the meaning set forth in the
Registration Rights Agreement.

"PRIVATE PLACEMENT LEGEND" means the legend initially set
forth on the Notes in the form set forth in Section 2.15.

"PRO FORMA" means, with respect to any calculation made
or required to be made pursuant to the terms of this Indenture, a calculation
in accordance with Article 11 of Regulation S-X under the Securities Act, as
determined by the Board of Directors of the Company in consultation with its
independent public accountants.

"PUBLIC EQUITY OFFERING" means an underwritten public
offering of Qualified Capital Stock of the Company pursuant to a registration
statement filed with the Commission in accordance with the Securities Act.

"PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the
Company or its Restricted Subsidiaries incurred for the purpose of financing
all or any part of the purchase price or the cost of installation,
construction or improvement of any property.

"QUALIFIED CAPITAL STOCK" means any Capital Stock that is
not Disqualified Capital Stock.

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<PAGE>

"QUALIFIED INSTITUTIONAL BUYER" or "QIB" shall have the
meaning specified in Rule 144A under the Securities Act.

"RECEIVABLES" means, as of any date, all accounts
receivable of the Company and any of its Restricted Subsidiaries arising out
of the sale of inventory in the ordinary course of business, valued in
accordance with GAAP and shown on the balance sheet of the Company for the
quarterly period most recently ended prior to such date for which financial
statements of the Company are available.

"RECORD DATE" means the Record Date specified in the Notes.

"REDEMPTION DATE," when used with respect to any Note to
be redeemed, means the date fixed for such redemption pursuant to this
Indenture and the Notes.

"REDEMPTION PRICE," when used with respect to any Note to
be redeemed, means the price fixed for such redemption, including principal
and premium, if any, pursuant to this Indenture and the Notes.

"REFERENCE DATE" has the meaning set forth in Section 4.10.

"REFINANCE" means, in respect of any security or
Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem,
defease or retire, or to issue a security or Indebtedness in exchange or
replacement for, such security or Indebtedness in whole or in part.
"Refinanced" and "Refinancing" shall have correlative meanings.

"REFINANCING INDEBTEDNESS" means any Refinancing by the
Company or any Restricted Subsidiary of Indebtedness incurred in accordance
with Section 4.12 (other than pursuant to clause (ii), (iv), (v), (vi),
(vii), (viii), (ix), (x) or (xii) of the definition of Permitted
Indebtedness), in each case that does not (1) result in an increase in the
aggregate principal amount of Indebtedness of such Person as of the date of
such proposed Refinancing (plus the amount of any premium required to be paid
under the terms of the instrument governing such Indebtedness and plus the
amount of reasonable expenses incurred by the Company or any Restricted
Subsidiary in connection with such Refinancing) or (2) create Indebtedness
with (A) a Weighted Average Life to Maturity that is less than the Weighted
Average Life to Maturity of the Indebtedness being Refinanced or (B) a final
maturity earlier than the final maturity of the Indebtedness being
Refinanced; provided that (x) if such Indebtedness being Refinanced is
Indebtedness of the Company or a guarantor, then such Refinancing
Indebtedness shall

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<PAGE>

be Indebtedness solely of the Company or such guarantor, as the case may be, and
(y) if such Indebtedness being Refinanced is subordinate or junior to the Notes,
then such Refinancing Indebtedness shall be subordinate to the Notes at least to
the same extent and in the same manner as the Indebtedness being Refinanced.

"REGISTRAR" has the meaning provided in Section 2.03.

"REGISTRATION RIGHTS AGREEMENT" means the Registration
Rights Agreement dated as of the Issue Date between the Company and the
Initial Purchaser.

"REGULATION S" means Regulation S under the Securities Act.

"REPLACEMENT ASSETS" means assets of a kind used or
usable in the business of the Company and its Restricted Subsidiaries as
conducted on the date of the relevant Asset Sale.

"RESTRICTED PAYMENT" shall have the meaning set forth in
Section 4.10.

"RESTRICTED SECURITY" has the meaning assigned to such
term in Rule 144(a)(3) under the Securities Act; PROVIDED, HOWEVER, that the
Trustee shall be entitled to request and conclusively rely on an Opinion of
Counsel with respect to whether any Note constitutes a Restricted Security.

"RESTRICTED SUBSIDIARY" means any Subsidiary of the
Company that has not been designated by the Board of Directors of the
Company, by a Board Resolution delivered to the Trustee, as an Unrestricted
Subsidiary pursuant to and in compliance with Section 4.19. Any such
Designation may be revoked by a Board Resolution of the Company delivered to
the Trustee, subject to the provisions of such covenant.

"REVOCATION" has the meaning set forth in Section 4.19.

"RULE 144A" means Rule 144A under the Securities Act.

"SALE AND LEASEBACK TRANSACTION" means any direct or
indirect arrangement with any Person or to which any such Person is a party,
providing for the leasing to the Company or a Restricted Subsidiary of any
property, whether owned by the Company or any Restricted Subsidiary at the
Issue Date or later acquired, which has been or is to be sold or transferred
by the Company or such Restricted Subsidiary to such Person or to any other
Person from whom funds have been or are to be advanced by such Person on the
security of such Property.

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<PAGE>

"S&P" means Standard & Poor's Rating Services, a division
of The McGraw Hill Companies, Inc., and its successors.

"SECURITIES ACT" means the Securities Act of 1933, as
amended, and the rules and regulations of the Commission promulgated
thereunder.

"SIGNIFICANT SUBSIDIARY" shall have the meaning set forth
in Rule 1.02(w) of Regulation S-X under the Securities Act.

"SUBSIDIARY" of any Person means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii)
any other Person of which at least a majority of the voting interest under
ordinary circumstances is at the time, directly or indirectly, owned by such
Person.

"SURVIVING ENTITY" shall have the meaning set forth in
Section 5.01.

"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
Sections 77aaa-77bbbb), as amended, as in effect on the date of this
Indenture, except as otherwise provided in Section 9.03.

"TOTAL CAPITALIZATION" means the sum of (i) the total
consolidated indebtedness of the Company and (ii) the Company's consolidated
shareholders' equity (excluding any goodwill reserve).

"TREASURY RATE" means the yield to maturity at the time
of computation of United States Treasury securities with a constant maturity
(as compiled and published in the most recent Federal Reserve Statistical
Release H. 15(519) which has become publicly available at least two Business
Days prior to the Redemption Date (or, if such Statistical Release is no
longer published, any publicly available source or similar market data)) most
nearly equal to the period from the Redemption Date to October 15, 2002,
PROVIDED, HOWEVER, that if the period from the Redemption Date to October 15,
2002 is not equal to the constant maturity of a United States Treasury
security for which a weekly average yield is given, the Treasury Rate shall
be obtained by linear interpolation (calculated to the nearest one-twelfth of
a year) from the weekly average yields of United States Treasury securities
for which such yields are given, except that if the period from the
Redemption Date to October 15, 2002 is less than one year, the weekly average
yield on

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<PAGE>

actually traded United States Treasury securities adjusted to a constant
maturity of one year shall be used.

"TRUST OFFICER" means any officer or assistant officer of
the Trustee assigned by the Trustee to administer this Indenture, or in the
case of a successor trustee, an officer assigned to the department, division
or group performing the corporation trust work of such successor and assigned
to administer this Indenture.

"TRUSTEE" means the party named as such in this Indenture
until a successor replaces it in accordance with the provisions of this
Indenture and thereafter means such successor.

"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the
Company designated as such pursuant to and in compliance with Section 4.19.
Any such designation may be revoked by a Board Resolution of the Company
delivered to the Trustee, subject to the provisions of Section 4.19.

"U.S. GOVERNMENT OBLIGATIONS" mean direct obligations of,
and obligations guaranteed by, the United States of America for the payment
of which the full faith and credit of the United States of America is pledged.

"U.S. LEGAL TENDER" means such coin or currency of the
United States of America as at the time of payment shall be legal tender for
the payment of public and private debts.

"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied
to any Indebtedness at any date, the number of years obtained by dividing (a)
the then outstanding aggregate principal amount of such Indebtedness into (b)
the sum of the total of the products obtained by multiplying (i) the amount
of each then remaining installment, sinking fund, serial maturity or other
required payment of principal, including payment at final maturity, in
respect thereof, by (ii) the number of years (calculated to the nearest
one-twelfth) which will elapse between such date and the making of such
payment.

"WHOLLY OWNED RESTRICTED SUBSIDIARY" means any Restricted
Subsidiary of which all the outstanding voting securities (other than in the
case of a foreign Restricted Subsidiary, directors' qualifying shares or an
immaterial amount of shares required to be owned by other Persons pursuant to
applicable law) are owned by the Company or any Wholly Owned Restricted
Subsidiary.

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<PAGE>

SECTION 1.02. INCORPORATION BY REFERENCE OF TIA.

Whenever this Indenture refers to a provision of the TIA,
such provision is incorporated by reference in, and made a part of, this
Indenture. The following TIA terms used in this Indenture have the following
meanings:

"indenture securities" means the Notes.

"indenture security holder" means a Holder.

"indenture to be qualified" means this Indenture.

"indenture trustee" or "institutional trustee" means the
Trustee.

"obligor" on the Indenture securities means the Company
or any other obligor on the Notes.

All other TIA terms used in this Indenture that are
defined by the TIA, defined by TIA reference to another statute or defined by
Commission rule and not otherwise defined herein have the meanings assigned
to them therein.

SECTION 1.03. RULES OF CONSTRUCTION.

Unless the context otherwise requires:

(1) a term has the meaning assigned to it;

(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP of any date of
determination;

(3) "or" is not exclusive;

(4) words in the singular include the plural, and words in
the plural include the singular;

(5) "herein," "hereof" and other words of similar import
refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision; and

(6) any reference to a statute, law or regulation means
that statute, law or regulation as amended and in effect from
time to time and includes any successor statute, law or
regulation; PROVIDED, HOWEVER, that any reference to the
Bankruptcy Law shall mean the Bankruptcy Law as applicable
to the relevant case.

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<PAGE>

ARTICLE TWO

THE NOTES

SECTION 2.01. FORM AND DATING.

The Initial Notes and the Trustee's certificate of
authentication relating thereto shall be substantially in the form of EXHIBIT
A. The Exchange Notes and the Trustee's certificate of authentication
relating thereto shall be substantially in the form of EXHIBIT B. The Notes
may have notations, legends or endorsements required by law, stock exchange
rule or depository rule or usage. The Company and the Trustee shall approve
the form of the Notes and any notation, legend or endorsement on them. If
required, the Notes may bear the appropriate legend regarding any original
issue discount for federal income tax purposes. Each Note shall be dated the
date of its issuance and shall show the date of its authentication.

The terms and provisions contained in the Notes, annexed
hereto as EXHIBITS A AND B, shall constitute, and are hereby expressly made,
a part of this Indenture and, to the extent applicable, the Company and the
Trustee, by their execution and delivery of this Indenture, expressly agree
to such terms and provisions and to be bound thereby.

Notes offered and sold in reliance on Rule 144A and Notes
offered and sold in reliance on Regulation S shall be issued initially in the
form of one or more permanent global Notes in registered form, substantially
in the form set forth in EXHIBIT A (the "Global Note"), deposited with the
Trustee, as custodian for the Depository, duly executed by the Company and
authenticated by the Trustee as hereinafter provided and shall bear the
legend set forth in Section 2.15. The aggregate principal amount of the
Global Note may from time to time be increased or decreased by adjustments
made on the records of the Trustee, as custodian for the Depository, as
hereinafter provided.

Notes issued in exchange for interests in a Global Note
pursuant to Section 2.16 may be issued in the form of permanent certificated
Notes in registered form in substantially the form set forth in EXHIBIT A
(the "Physical Notes"). All Notes offered and sold in reliance on Regulation
S shall remain in the form of a Global Note until the consummation of the
Exchange Offer pursuant to the Registration Rights Agreement; PROVIDED,
HOWEVER, that all of the time periods specified in the Registration Rights
Agreement to be complied with by the Company have been so complied with.

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<PAGE>

SECTION 2.02. EXECUTION AND AUTHENTICATION;
AGGREGATE PRINCIPAL AMOUNT.

Two Officers of the Company shall sign (each of whom
shall have been duly authorized by all requisite corporate actions) the Notes
for the Company by manual or facsimile signature.

If an Officer whose signature is on a Note was an Officer
at the time of such execution but no longer holds that office or position at
the time the Trustee authenticates the Note, the Note shall nevertheless be
valid.

A Note shall not be valid until an authorized signatory
of the Trustee manually signs the certificate of authentication on the Note.
The signature shall be conclusive evidence that the Note has been
authenticated under this Indenture.

The Trustee shall authenticate (i) Initial Notes for
original issue in the aggregate principal amount not to exceed $85,000,000
and (ii) Exchange Notes for issue only in a Registered Exchange Offer,
pursuant to the Registration Rights Agreement, for a like principal amount of
Initial Notes, in each case upon a written order of the Company in the form
of an Officers' Certificate of the Company. Each such written order shall
specify the amount of Notes to be authenticated and the date on which the
Notes are to be authenticated, whether the Notes are to be Initial Notes or
Exchange Notes and whether the Notes are to be issued as Physical Notes or
Global Notes or such other information as the Trustee may reasonably request.
In addition, with respect to authentication pursuant to clause (ii) of the
first sentence of this paragraph, the first such written order from the
Company shall be accompanied by an Opinion of Counsel of the Company in a
form reasonably satisfactory to the Trustee stating that the issuance of the
Exchange Notes does not give rise to an Event of Default, complies with this
Indenture and has been duly authorized by the Company. The aggregate
principal amount of Notes outstanding at any time may not exceed
$125,000,000, except as provided in Sections 2.07 and 2.08.

The Trustee may appoint an authenticating agent (the
"Authenticating Agent") reasonably acceptable to the Company to authenticate
Notes. Unless otherwise provided in the appointment, an Authenticating Agent
may authenticate Notes whenever the Trustee may do so. Each reference in
this Indenture to authentication by the Trustee includes authentication by
such Authenticating Agent. An Authenticating Agent has the same rights as an
Agent to deal with the Company or with any Affiliate of the Company.

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<PAGE>

The Notes shall be issuable in fully registered form
only, without coupons, in denominations of $1,000 and any integral multiple
thereof.

SECTION 2.03. REGISTRAR AND PAYING AGENT.

The Company shall maintain an office or agency (which
shall be located in the Borough of Manhattan in the City of New York, State
of New York) where (a) Notes may be presented or surrendered for registration
of transfer or for exchange ("Registrar"), (b) Notes may be presented or
surrendered for payment ("Paying Agent") and (c) notices and demands to or
upon the Company in respect of the Notes and this Indenture may be served.
The Registrar shall keep a register of the Notes and of their transfer and
exchange. The Company, upon prior written notice to the Trustee, may have
one or more co-Registrars and one or more additional paying agents reasonably
acceptable to the Trustee. The term "Paying Agent" includes any additional
Paying Agent. The Company may act as its own Paying Agent, except that for
the purposes of payments on the Notes pursuant to Sections 4.14 and 4.15,
neither the Company nor any Affiliate of the Company may act as Paying Agent.

The Company shall enter into an appropriate agency
agreement with any Agent not a party to this Indenture, which agreement shall
incorporate the provisions of the TIA and implement the provisions of this
Indenture that relate to such Agent. The Company shall notify the Trustee,
in advance, of the name and address of any such Agent. If the Company fails
to maintain a Registrar or Paying Agent, or fails to give the foregoing
notice, the Trustee shall act as such and shall be entitled to appropriate
compensation in accordance with Section 7.07.

The Company initially appoints the Trustee as Registrar,
Paying Agent and agent for service of demands and notices in connection with
the Notes, until such time as the Trustee has resigned or a successor has
been appointed. Any of the Registrar, the Paying Agent or any other agent
may resign upon 30 days' notice to the Company.

SECTION 2.04. PAYING AGENT TO HOLD ASSETS IN TRUST.

The Company shall require each Paying Agent other than
the Trustee to agree in writing that such Paying Agent shall hold in trust
for the benefit of the Holders or the Trustee all assets held by the Paying
Agent for the payment of principal of, premium, if any, or interest on, the
Notes (whether such assets have been distributed to it by the Company or any
other obligor on the Notes), and the Company and the Paying Agent shall
notify the Trustee of any Default by the

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Company (or any other obligor on the Notes) in making any such payment. The
Company at any time may require a Paying Agent to distribute all assets held
by it to the Trustee and account for any assets disbursed and the Trustee may
at any time during the continuance of any payment Default, upon written
request to a Paying Agent, require such Paying Agent to distribute all assets
held by it to the Trustee and to account for any assets distributed. Upon
distribution to the Trustee of all assets that shall have been delivered by
the Company to the Paying Agent, the Paying Agent shall have no further
liability for such assets.

SECTION 2.05. HOLDER LISTS.

The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of the Holders. If the Trustee is not the Registrar, the Company
shall furnish or cause the Registrar to furnish to the Trustee before each
Record Date and at such other times as the Trustee may request in writing a
list as of such date and in such form as the Trustee may reasonably require
of the names and addresses of the Holders, which list may be conclusively
relied upon by the Trustee.

SECTION 2.06. TRANSFER AND EXCHANGE.

When Notes are presented to the Registrar or a
co-Registrar with a request to register the transfer of such Notes or to
exchange such Notes for an equal principal amount of Notes or other
authorized denominations, the Registrar or co-Registrar shall register the
transfer or make the exchange as requested if its requirements for such
transaction are met; PROVIDED, HOWEVER, that the Notes presented or
surrendered for registration of transfer or exchange shall be duly endorsed
or accompanied by a written instrument of transfer in form satisfactory to
the Company, the Trustee and the Registrar or co-Registrar, duly executed by
the Holder thereof or his attorney duly authorized in writing. To permit
registration of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Notes. No service charge shall be made for any
registration of transfer or exchange, but the Company may require payment of
a sum sufficient to cover any transfer tax, fee or similar governmental
charge payable in connection therewith (other than any such transfer taxes or
similar governmental charge payable upon exchanges or transfers pursuant to
Section 2.10, 3.04, 4.14, 4.15 or 9.05, in which event the Company shall be
responsible for the payment of such taxes).

The Registrar or co-Registrar shall not be required to
register the transfer of or exchange of any Note (i) during a period
beginning at the opening of business 15 days before

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the mailing of a notice of redemption of Notes and ending at the close of
business on the day of such mailing,(ii) selected for redemption in whole or
in part pursuant to Article Three, except the unredeemed portion of any Note
being redeemed in part or (iii) between a Record Date and the next succeeding
Interest Payment Date.

Any Holder of a beneficial interest in a Global Note
shall, by acceptance of such Global Note, agree that transfers of beneficial
interests in such Global Notes may be effected only through a book entry
system maintained by the Holder of such Global Note (or its agent), and that
ownership of a beneficial interest in the Note shall be required to be
reflected in a book entry system.

SECTION 2.07. REPLACEMENT NOTES.

If a mutilated Note is surrendered to the Trustee or if
the Holder of a Note claims that the Note has been lost, destroyed or
wrongfully taken, the Company shall issue and the Trustee shall authenticate
a replacement Note. If required by the Trustee or the Company, such Holder
must provide satisfactory evidence of such loss, destruction or taking, and
an indemnity bond or other indemnity of reasonable tenor, sufficient in the
reasonable judgment of the Company and the Trustee, to protect the Company,
the Trustee or any Agent from any loss which any of them may suffer if a Note
is replaced. Every replacement Note shall constitute an obligation of the
Company. The Company and the Trustee each may charge such Holder for its
expenses in replacing such Note.

SECTION 2.08. OUTSTANDING NOTES.

Notes outstanding at any time are all the Notes that have
been authenticated by the Trustee except those canceled by it, those
delivered to it for cancellation and those described in this Section as not
outstanding. Subject to the provisions of Section 2.09, a Note does not cease
to be outstanding because an Company or any of its Affiliates holds the Note.

If a Note is replaced pursuant to Section 2.07 (other
than a mutilated Note surrendered for replacement), it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Note is held by a BONA FIDE purchaser. A mutilated Note ceases to
be outstanding upon surrender of such Note and replacement thereof pursuant
to Section 2.07.

If on a Redemption Date or the Maturity Date the Paying
Agent holds U.S. Legal Tender or U.S. Government Obligations sufficient to
pay all of the principal, premium, if any,

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and interest due on the Notes payable on that date and is not prohibited from
paying such money to the Holders thereof pursuant to the terms of this
Indenture, then on and after that date such Notes shall be deemed not to be
outstanding and interest on them shall cease to accrue.

SECTION 2.09. TREASURY NOTES.

In determining whether the Holders of the required
principal amount of Notes have concurred in any direction, waiver, consent or
notice, Notes owned by the Company or an Affiliate of the Company shall be
considered as though they are not outstanding, except that for the purposes
of determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Notes which a Trust Officer of the Trustee
actually knows are so owned shall be so considered. The Company shall notify
the Trustee, in writing, when it or, to its knowledge, any of its Affiliates
repurchases or otherwise acquires Notes, of the aggregate principal amount of
such Notes so repurchased or otherwise acquired and such other information as
the Trustee may reasonably request and the Trustee shall be entitled to rely
thereon.

SECTION 2.10. TEMPORARY NOTES.

Until definitive Notes are ready for delivery, the
Company may prepare and the Trustee shall authenticate temporary Notes upon
receipt of a written order of the Company in the form of an Officers'
Certificate. The Officers' Certificate shall specify the amount of temporary
Notes to be authenticated and the date on which the temporary Notes are to be
authenticated. Temporary Notes shall be substantially in the form of
definitive Notes but may have variations that the Company considers
appropriate for temporary Notes and so indicate in the Officers' Certificate.
Without unreasonable delay, the Company shall prepare and the Trustee shall
authenticate, upon receipt of a written order of the Company pursuant to
Section 2.02, definitive Notes in exchange for temporary Notes.

SECTION 2.11. CANCELLATION.

The Company at any time may deliver Notes to the Trustee
for cancellation. The Registrar and the Paying Agent shall forward to the
Trustee any Notes surrendered to them for transfer, exchange or payment. The
Trustee, or at the direction of the Trustee, the Registrar or the Paying
Agent, and no one else, shall cancel and, at the written direction of the
Company, shall dispose, in its customary manner, of all Notes surrendered for
transfer, exchange, payment or cancellation. Subject to Section 2.07, the
Company may not issue new Notes to replace Notes that it has paid or
delivered to the Trustee for

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cancellation. If the Company shall acquire any of the Notes, such acquisition
shall not operate as a redemption or satisfaction of the Indebtedness
represented by such Notes unless and until the same are surrendered to the
Trustee for cancellation pursuant to this Section 2.11.

SECTION 2.12. DEFAULTED INTEREST.

The Company will pay interest on overdue principal from
time to time on demand at the rate of interest then borne by the Notes. The
Company shall, to the extent lawful, pay interest on overdue installments of
interest (without regard to any applicable grace periods) from time to time
on demand at the rate of interest then borne by the Notes. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months,
and, in the case of a partial month, the actual number of days elapsed.

If the Company defaults in a payment of interest on the
Notes, it shall pay the defaulted interest, plus (to the extent lawful) any
interest payable on the defaulted interest, to the Persons who are Holders on
a subsequent special record date, which special record date shall be the
fifteenth day next preceding the date fixed by the Company for the payment of
defaulted interest or the next succeeding Business Day if such date is not a
Business Day. The Company shall notify the Trustee in writing of the amount
of defaulted interest proposed to be paid on each Note and the date of the
proposed payment (a "Default Interest Payment Date"), and at the same time
the Company shall deposit with the Trustee an amount of money equal to the
aggregate amount proposed to be paid in respect of such defaulted interest or
shall make arrangements satisfactory to the Trustee for such deposit on or
prior to the date of the proposed payment, such money when deposited to be
held in trust for the benefit of the Persons entitled to such defaulted
interest as provided in this Section; PROVIDED, HOWEVER, that in no event
shall the Company deposit monies proposed to be paid in respect of defaulted
interest later than 11:00 a.m. New York City time of the proposed Default
Interest Payment Date. At least 15 days before the subsequent special record
date, the Company shall mail (or cause to be mailed) to each Holder, as of a
recent date selected by the Company, with a copy to the Trustee, a notice
that states the subsequent special record date, the payment date and the
amount of defaulted interest, and interest payable on such defaulted
interest, if any, to be paid. Notwithstanding the foregoing, any interest
which is paid prior to the expiration of the 30-day period set forth in
Section 6.01(a) shall be paid to Holders as of the regular record date for
the Interest Payment Date for which interest has not been paid.
Notwithstanding the foregoing, the Company may make payment of any defaulted
interest in any other lawful man

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<PAGE>

ner not inconsistent with the requirements of any securities exchange on
which the Notes may be listed, and upon such notice as may be required by
such exchange.

SECTION 2.13. CUSIP NUMBER.

The Company in issuing the Notes may use a "CUSIP"
number, and, if so, the Trustee shall use the CUSIP number in notices of
redemption or exchange as a convenience to Holders; PROVIDED, HOWEVER, that
no representation is hereby deemed to be made by the Trustee as to the
correctness or accuracy of the CUSIP number printed in the notice or on the
Notes, and that reliance may be placed only on the other identification
numbers printed on the Notes. The Company shall promptly notify the Trustee
of any change in the CUSIP number.

SECTION 2.14. DEPOSIT OF MONIES.

Prior to 11:00 a.m. New York City time on each Interest
Payment Date, Maturity Date, Redemption Date, Change of Control Payment Date
and Net Proceeds Offer Payment Date, the Company shall have deposited with
the Paying Agent in immediately available funds money sufficient to make cash
payments, if any, due on such Interest Payment Date, Maturity Date,
Redemption Date, Change of Control Payment Date and Net Proceeds Offer
Payment Date, as the case may be, in a timely manner which permits the Paying
Agent to remit payment to the Holders on such Interest Payment Date, Maturity
Date, Redemption Date, Change of Control Payment Date and Net Proceeds Offer
Payment Date, as the case may be.

SECTION 2.15. RESTRICTIVE LEGENDS.

Each Global Note and Physical Note that constitutes a
Restricted Security or is sold in compliance with Regulation S shall bear the
following legend (the "Private Placement Legend") on the face thereof until
after the second anniversary of the later of the Issue Date and the last date
on which the Company or any Affiliate of the Company was the owner of such
Note (or any predecessor security) (or such shorter period of time as
permitted by Rule 144(k) under the Securities Act or any successor provision
thereunder) (or such longer period of time as may be required under the
Securities Act or applicable state securities laws in the opinion of counsel
for the Company, unless otherwise agreed by the Company and the Holder
thereof):

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES
OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT

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AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS
THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A
UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING
THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 903 OR 904
UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT WITHIN TWO YEARS
AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY RESELL OR OTHERWISE TRANSFER
THIS SECURITY EXCEPT (A) TO THE COMPANY THEREOF OR ANY SUBSIDIARY THEREOF,
(B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN
COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED
STATES TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES
(OR HAS FURNISHED ON ITS BEHALF BY A U.S. BROKER-DEALER) TO THE TRUSTEE A
SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO
THE RESTRICTIONS ON TRANSFER OF THIS SECURITY (THE FORM OF WHICH LETTER CAN
BE OBTAINED FROM THE TRUSTEE FOR THIS SECURITY), (D) OUTSIDE THE UNITED
STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE
SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY
RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), OR (F) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES
THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A
NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY
TRANSFER OF THIS SECURITY WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF
THIS SECURITY, IF THE PROPOSED TRANSFEREE IS AN ACCREDITED INVESTOR, THE
HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE COMPANY
SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM
MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT
TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANING GIVEN TO
THEM BY REGULATION S UNDER THE SECURITIES ACT.

Each Global Note shall also bear the following legend on the face
thereof

UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN
DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY
THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY, OR

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<PAGE>

BY ANY SUCH NOMINEE OF THE DEPOSITORY, OR BY THE DEPOSITORY OR NOMINEE OF
SUCH SUCCESSOR DEPOSITORY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR
A NOMINEE OF SUCH SUCCESSOR DEPOSITORY. UNLESS THIS CERTIFICATE IS
PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY,
A NEW YORK CORPORATION ("DTC"), TO AN COMPANY OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED
IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE &
CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY
OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF,
CEDE & CO., HAS AN INTEREST HEREIN.

TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF
OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL
SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN SECTION 2.17 OF THE INDENTURE GOVERNING THIS
NOTE.

SECTION 2.16. BOOK-ENTRY PROVISIONS
FOR GLOBAL SECURITY.

(a) The Global Notes initially shall (i) be registered
in the name of the Depository or the nominee of such Depository, (ii) be
delivered to the Trustee as custodian for such Depository and (iii) bear
legends as set forth in Section 2.15.

Members of, or participants in, the Depository ("Agent
Members") shall have no rights under this Indenture with respect to any
Global Note held on their behalf by the Depository, or the Trustee as its
custodian, or under the Global Notes, and the Depository may be treated by
the Company, the Trustee and any Agent of the Company or the Trustee as the
absolute owner of such Global Note for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee or any Agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the
Depository or impair, as between the Depository and its Agent Members, the
operation of customary practices governing the exercise of the rights of a
Holder of any Note.

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<PAGE>

(b) Transfers of a Global Note shall be limited to
transfers in whole, but not in part, to the Depository, its successors or
their respective nominees. Interests of beneficial owners in a Global Note
may be transferred or exchanged for Physical Notes in accordance with the
rules and procedures of the Depository and the provisions of Section 2.17.
In addition, Physical Notes shall be transferred to all beneficial owners in
exchange for their beneficial interests in a Global Note if (i) the
Depository notifies the Company that it is unwilling or unable to continue as
Depository for the Global Notes and a successor depositary is not appointed
by the Company within 90 days of such notice or (ii) an Event of Default has
occurred and is continuing and the Registrar has received a written request
from the Depository to issue Physical Notes.

(c) In connection with any transfer or exchange of a
portion of the beneficial interest in a Global Note to beneficial owners
pursuant to paragraph (b), the Registrar shall (if one or more Physical Notes
are to be issued) reflect on its books and records the date and a decrease in
the principal amount of such Global Note in an amount equal to the principal
amount of the beneficial interest in the Global Note to be transferred, and
the Company shall execute and the Trustee shall authenticate and deliver, one
or more Physical Notes of like tenor and amount.

(d) In connection with the transfer of an entire Global
Note to beneficial owners pursuant to paragraph (b), such Global Note shall
be deemed to be surrendered to the Trustee for cancellation, and the Company
shall execute and the Trustee shall authenticate and deliver, to each
beneficial owner identified by the Depository in exchange for its beneficial
interest in the Global Note, an equal aggregate principal amount of Physical
Notes of authorized denominations.

(e) Any Physical Note constituting a Restricted Security
delivered in exchange for an interest in a Global Note pursuant to paragraph
(b) or (c) shall, except as otherwise provided by paragraphs (a)(i)(x) and
(c) of Section 2.17, bear the legend regarding transfer restrictions
applicable to the Physical Notes set forth in Section 2.15.

(f) The Holder of a Global Note may grant proxies and
otherwise authorize any Person, including Agent Members and Persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.

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SECTION 2.17. SPECIAL TRANSFER PROVISIONS.

(a) TRANSFERS TO NON-QIB INSTITUTIONAL ACCREDITED
INVESTORS AND NON-U.S. PERSONS. The following provisions shall apply with
respect to the registration of any proposed transfer of a Note constituting a
Restricted Security to any Institutional Accredited Investor which is not a
QIB or to any Non-U.S. Person:

(i) the Registrar shall register the transfer of any Note
constituting a Restricted Security, whether or not such Note bears the
Private Placement Legend, if (x) the requested transfer is after the second
anniversary of the Issue Date (PROVIDED, HOWEVER, that neither the Company
nor any Affiliate of the Company has held any beneficial interest in such
Note, or portion thereof, at any time on or prior to the second anniversary
of the Issue Date) or (y) (1) in the case of a transfer to an Institutional
Accredited Investor which is not a QIB (excluding Non-U.S. Persons), the
proposed transferee has delivered to the Registrar a certificate
substantially in the form of EXHIBIT C and any legal opinions and
certifications required thereby or (2) in the case of a transfer to a
Non-U.S. Person, the proposed transferor has delivered to the Registrar a
certificate substantially in the form of EXHIBIT D; and

(ii) if the proposed transferor is an Agent Member holding a
beneficial interest in the Global Note, upon receipt by the Registrar of
(x) the certificate, if any, required by paragraph (i) above and (y)
written instructions given in accordance with the Depository's and the
Registrar's procedures,

whereupon (a) the Registrar shall reflect on its books and records the date and
(if the transfer does not involve a transfer of outstanding Physical Notes) a
decrease in the principal amount of such Global Note in an amount equal to the
principal amount of the beneficial interest in the Global Note to be
transferred, and (b) the Company shall execute and the Trustee shall
authenticate and deliver one or more Physical Notes of like tenor and amount.

(b) TRANSFERS TO QIBS. The following provisions shall
apply with respect to the registration of any proposed transfer of a Note
constituting a Restricted Security to a QIB (excluding transfers to Non-U.S.
Persons):

(i) the Registrar shall register the transfer if such transfer is
being made by a proposed transferor who has checked the box provided for on
the form of Note

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<PAGE>

stating, or has otherwise advised the Company and the Registrar in writing,
that the sale has been made in compliance with the provisions of Rule 144A
to a transferee who has signed the certification provided for on the form
of Note stating, or has otherwise advised the Company and the Registrar in
writing, that it is purchasing the Note for its own account or an account
with respect to which it exercises sole investment discretion and that it
and any such account is a QIB within the meaning of Rule 144A, and is aware
that the sale to it is being made in reliance on Rule 144A and acknowledges
that it has received such information regarding the Company as it has
requested pursuant to Rule 144A or has determined not to request such
information and that it is aware that the transferor is relying upon its
foregoing representations in order to claim the exemption from registration
provided by Rule 144A; and

(ii) if the proposed transferee is an Agent Member, and the Notes to
be transferred consist of Physical Notes which after transfer are to be
evidenced by an interest in a Global Note, upon receipt by the Registrar of
written instructions given in accordance with the Depository's and the
Registrar's procedures, the Registrar shall reflect on its books and
records the date and an increase in the principal amount of such Global
Note in an amount equal to the principal amount of the Physical Notes to be
transferred, and the Trustee shall cancel the Physical Notes so
transferred.

(c) PRIVATE PLACEMENT LEGEND. Upon the transfer,
exchange or replacement of Notes not bearing the Private Placement Legend,
the Registrar shall deliver Notes that do not bear the Private Placement
Legend. Upon the transfer, exchange or replacement of Notes bearing the
Private Placement Legend, the Registrar shall deliver only Notes that bear
the Private Placement Legend unless (i) the requested transfer is after the
second anniversary of the Issue Date (PROVIDED, HOWEVER, that neither the
Company nor any Affiliate of the Company has held any beneficial interest in
such Note, or portion thereof, at any time prior to or on the second
anniversary of the Issue Date), or (ii) there is delivered to the Registrar
an Opinion of Counsel reasonably satisfactory to the Company and the Trustee
to the effect that neither such legend nor the related restrictions on
transfer are required in order to maintain compliance with the provisions of
the Securities Act.

(d) GENERAL. By its acceptance of any Note bearing the
Private Placement Legend, each Holder of such a Note acknowledges the
restrictions on transfer of such Note set forth in this Indenture and in the
Private Placement Legend and

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<PAGE>

agrees that it will transfer such Note only as provided in this Indenture.

The Registrar shall retain copies of all letters, notices
and other written communications received pursuant to Section 2.16 or this
Section 2.17. The Company shall have the right to inspect and make copies of
all such letters, notices or other written communications at any reasonable
time during the Registrar's normal business hours upon the giving of
reasonable written notice to the Registrar.

(e) TRANSFERS OF NOTES HELD BY AFFILIATES. Any
certificate (i) evidencing a Note that has been transferred to an Affiliate
of an Company within three years after the Issue Date, as evidenced by a
notation on the Assignment Form for such transfer or in the representation
letter delivered in respect thereof or (ii) evidencing a Note that has been
acquired from an Affiliate (other than by an Affiliate) in a transaction or a
chain of transactions not involving any public offering, shall, until two
years after the last date on which either the Company or any Affiliate of the
Company was an owner of such Note, in each case, bear a legend in
substantially the form set forth in Section 2.15, unless otherwise agreed by
the Company (with written notice thereof to the Trustee).

ARTICLE THREE

REDEMPTION

SECTION 3.01. NOTICES TO TRUSTEE.

If the Company elects to redeem Notes pursuant to
Paragraph 5 of the Notes and Section 3.03, it shall notify the Trustee and
the Paying Agent in writing of the Redemption Date and the principal amount
of the Notes to be redeemed.

The Company shall give each notice provided for in this
Section 3.01 at least 45 but not more than 60 days before the Redemption Date
(unless a shorter notice period shall be satisfactory to the Trustee, as
evidenced in a writing signed on behalf of the Trustee), together with an
Officers' Certificate stating that such redemption shall comply with the
conditions contained herein and in the Notes, the Redemption Date, the
redemption price and the principal amount of the Notes to be redeemed.

If the Company is required to make an offer to redeem
Notes pursuant to the provisions of Section 4.14 or 4.15 hereof, it shall
furnish to the Trustee at least 30 days but

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<PAGE>

not more than 60 days before a Redemption Date (or such shorter period as may be
agreed to by the Trustee in writing), an Officers' Certificate setting forth
(i) the Section of this Indenture pursuant to which the redemption shall occur,
(ii) the Redemption Date, (iii) the principal amount of Notes to be redeemed,
(iv) the redemption price and (v) a statement to the effect that (a) the Company
or one of its Subsidiaries has effected an Asset Sale and the conditions set
forth in Section 4.15 have been satisfied or (b) a Change of Control has
occurred and the conditions set forth in Section 4.14 have been satisfied, as
applicable.

SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED.

In the event that less than all of the Notes are to be
redeemed at any time, selection of such Notes for redemption will be made by
the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which such Notes are listed or, if such Notes
are not then listed on a national securities exchange, on a PRO RATA basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
PROVIDED, HOWEVER, that no Notes of a principal amount of U.S. $1,000 or less
shall be redeemed in part; PROVIDED, FURTHER, that if a partial redemption is
made with the proceeds of a Public Equity Offering, selection of the Notes or
portions thereof for redemption shall be made by the Trustee only on a PRO
RATA basis or on as nearly a PRO RATA basis as is practicable (subject to DTC
procedures), unless such method is otherwise prohibited. Notice of redemption
shall be mailed by first-class mail at least 30 but not more than 60 days
before the redemption date to each Holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice
of redemption that relates to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Note. On and after the
redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption as long as the Company has deposited with the Paying
Agent funds in satisfaction of the applicable redemption price pursuant to
this Indenture.

SECTION 3.03. OPTIONAL REDEMPTION.

(a) The Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and after
October 15, 2001, upon not less than 30 nor more than 60 days' notice, at the
following redemption prices (expressed as percentages of the principal amount
thereof) if redeemed during the twelve-month period commencing on October 15
of the

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year set forth below, plus, in each case, accrued and unpaid interest thereon,
if any, to the date of redemption:

YEAR PERCENTAGE
---- ----------

2001............................ 104.875%
2002............................ 102.438%
2003 and thereafter............. 100.000%

(b) At any time, or from time to time, on or prior to
October 15, 2000, the Company may, at its option, use the net cash proceeds
of one or more Public Equity Offerings to redeem up to 35% of the Notes at a
redemption price equal to 109.750% of the principal amount thereof plus
accrued and unpaid interest thereon, if any, to the date of redemption;
provided that a least 65% of the principal amount of Notes originally issued
remains outstanding immediately after any such redemption. In order to
effect the foregoing redemption with the proceeds of any Public Equity
Offering, the Company shall make such redemption not more than 120 days after
the consummation of any such Public Equity Offering.

(c) At any time on or prior to October 15, 2002, the
Notes may also be redeemed as a whole but not in part at the option of the
Company upon the occurrence of a Change of Control, upon not less than 30 nor
more than 60 days' prior notice (but in no event more than 90 days after the
occurrence of such Change of Control) mailed by first-class mail to each
Holder's registered address, at a redemption price equal to 100% of the
principal amount thereof plus the Applicable Premium as of, and accrued but
unpaid interest, in any, to, the date of redemption (the "Redemption Date")
(subject to the rights of Holders on the relevant record date to receive
interest due on the relevant interest payment date).

SECTION 3.04. NOTICE OF REDEMPTION.

At least 30 days but not more than 60 days before the
Redemption Date, the Company shall mail or cause to be mailed a notice of
redemption by first class mail to each Holder of Notes to be redeemed at its
registered address, with a copy to the Trustee and any Paying Agent. At the
Company's request, the Trustee shall give the notice of redemption in the
Company's name and at the Company's expense. The Company shall provide such
notices of redemption to the Trustee at least five days before the intended
mailing date. In any case, failure to give such notice or any defect in the
notice to the holder of any Note shall not affect the validity of the
proceeding for the redemption of any other Note.

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Each notice of redemption shall identify (including the
CUSIP number) the Notes to be redeemed and shall state:

(1) the Redemption Date;

(2) the redemption price and the amount of accrued interest, if any,
to be paid;

(3) the name and address of the Paying Agent;

(4) the subparagraph of the Notes pursuant to which such redemption
is being made;

(5) that Notes called for redemption must be surrendered to the
Paying Agent to collect the redemption price plus accrued interest, if any;

(6) that, unless the Company defaults in making the redemption
payment, interest on Notes or applicable portions thereof called for
redemption ceases to accrue on and after the Redemption Date, and the only
remaining right of the Holders of such Notes is to receive payment of the
redemption price plus accrued interest as of the Redemption Date, if any,
upon surrender to the Paying Agent of the Notes redeemed;

(7) if any Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the Redemption
Date, and upon surrender of such Note, a new Note or Notes in the aggregate
principal amount equal to the unredeemed portion thereof will be issued;
and

(8) if fewer than all the Notes are to be redeemed, the
identification of the particular Notes (or portion thereof) to be redeemed,
as well as the aggregate principal amount of Notes to be redeemed and the
aggregate principal amount of Notes to be outstanding after such partial
redemption.

No representation is made as to the accuracy of the CUSIP
numbers listed in such notice or printed on the Notes.

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SECTION 3.05. EFFECT OF NOTICE OF REDEMPTION.

Once notice of redemption is mailed in accordance with
Section 3.04, such notice of redemption shall be irrevocable and Notes called
for redemption become due and payable on the Redemption Date and at the
redemption price plus accrued interest as of such date, if any. Upon
surrender to the Trustee or Paying Agent, such Notes called for redemption
shall be paid at the redemption price plus accrued interest thereon to the
Redemption Date, but installments of interest, the maturity of which is on or
prior to the Redemption Date, shall be payable to Holders of record at the
close of business on the relevant record dates referred to in the Notes.
Interest shall accrue on or after the Redemption Date and shall be payable
only if the Company defaults in payment of the redemption price.

SECTION 3.06. DEPOSIT OF REDEMPTION PRICE.

On or before the Redemption Date and in accordance with
Section 2.14, the Company shall deposit with the Paying Agent U.S. Legal
Tender sufficient to pay the redemption price plus accrued interest, if any,
of all Notes to be redeemed on that date. The Paying Agent shall promptly
return to the Company any U.S. Legal Tender so deposited which is not
required for that purpose, except with respect to monies owed as obligations
to the Trustee pursuant to Article Seven.

Unless the Company fails to comply with the preceding
paragraph and defaults in the payment of such redemption price plus accrued
interest, if any, interest on the Notes to be redeemed will cease to accrue
on and after the applicable Redemption Date, whether or not such Notes are
presented for payment.

SECTION 3.07. NOTES REDEEMED IN PART.

Upon surrender of a Note that is to be redeemed in part,
the Trustee shall authenticate for the Holder a new Note or Notes equal in
principal amount to the unredeemed portion of the Note surrendered.

ARTICLE FOUR

COVENANTS

SECTION 4.01. PAYMENT OF NOTES.

(a) The Company shall pay the principal of, premium, if
any, and interest on the Notes on the dates and in the manner provided in the
Notes and in this Indenture.

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(b) An installment of principal of or interest on the
Notes shall be considered paid on the date it is due if the Trustee or Paying
Agent (other than the Company or any of its Affiliates) holds, prior to 11:00
a.m. New York City time on that date, U.S. Legal Tender designated for and
sufficient to pay the installment in full and is not prohibited from paying
such money to the Holders pursuant to the terms of this Indenture or the
Notes.

(c) Notwithstanding anything to the contrary contained
in this Indenture, the Company may, to the extent it is required to do so by
law, deduct or withhold income or other similar taxes imposed by the United
States of America from principal or interest payments hereunder.

SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY.

The Company shall maintain the office or agency required
under Section 2.03. The Company shall give prior written notice to the
Trustee of the location, and any change in the location, of such office or
agency. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be made or
served at the address of the Trustee set forth in Section 11.02.

SECTION 4.03. CORPORATE EXISTENCE.

Except as provided in Article Five, the Company shall do
or shall cause to be done all things necessary to preserve and keep in full
force and effect its corporate existence and the corporate, partnership or
other existence of each of the Subsidiaries in accordance with the respective
organizational documents of the Company and the Subsidiaries and the rights
(charter and statutory) and material franchises of the Company and the
Subsidiaries.

SECTION 4.04. PAYMENT OF TAXES AND OTHER CLAIMS.

The Company shall pay or discharge or cause to be paid or
discharged, before the same shall become delinquent, (i) all material taxes,
assessments and governmental charges (including withholding taxes and any
penalties, interest and additions to taxes) levied or imposed upon the
Company or any of the Subsidiaries or properties of the Company or any of the
Subsidiaries and (ii) all material lawful claims for labor, materials and
supplies that, if unpaid, might by law become a Lien upon the property of the
Company or any of the Subsidiaries; PROVIDED, HOWEVER, that the Company shall
not be required to pay or discharge or cause to be paid or discharged any
such

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tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate negotiations or proceedings
properly instituted and diligently conducted for which adequate reserves, to
the extent required under GAAP, have been taken.

SECTION 4.05. MAINTENANCE OF PROPERTIES
AND INSURANCE.

(a) The Company and each of its Subsidiaries shall cause
all material properties owned by or leased to it and used or useful in the
conduct of its business to be maintained and kept in normal condition, repair
and working order and supplied with all necessary equipment and shall cause
to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the judgment of the Company or such
Subsidiary may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times;
PROVIDED, HOWEVER, that nothing in this Section shall prevent the Company or
any of its Subsidiaries from discontinuing the use, operation or maintenance
of any of such properties, or disposing of any of them, if such
discontinuance or disposal is, in the judgment of the Board of Directors of
the Company or of the Board of Directors of the Subsidiary concerned, or of
an officer (or other agent employed by the Company or any of its
Subsidiaries) of the Company or such Subsidiary having managerial
responsibility for any such property, desirable in the conduct of the
business of the Company or any of its Subsidiaries.

(b) The Company and the Subsidiaries shall cause to be
provided insurance (including appropriate self-insurance) against loss or
damage of the kinds that, in the good faith judgment of the respective Boards
of Directors or other governing body or officer of the Company or such
Subsidiaries, as the case may be, are adequate and appropriate for the
conduct of the business of the Company or such Subsidiaries, as the case may
be, with reputable insurers or with the government of the United States of
America or an agency or instrumentality thereof, in such amounts, with such
deductibles, and by such methods as shall be customary, in the good faith
judgment of the respective Boards of Directors or other governing body or
officer of the Company or such Subsidiary, as the case may be, for companies
similarly situated in the industry.

SECTION 4.06. COMPLIANCE CERTIFICATE;
NOTICE OF DEFAULT.

(a) The Company shall deliver to the Trustee, within 105
days after the end of its fiscal years, an Officers' Certificate (PROVIDED,
HOWEVER, that one of the signatories to

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such Officers' Certificate shall be the Company's principal executive
officer, principal financial officer or principal accounting officer), as to
such Officers' knowledge of the Company's compliance with all conditions and
covenants under this Indenture (without regard to any period of grace or
requirement of notice provided hereunder) and in the event any Default of the
Company exists, such Officers shall specify the nature of such Default. Each
such Officers' Certificate shall also notify the Trustee should the Company
elect to change the manner in which it fixes its fiscal year end.

(b) (i) If any Default or Event of Default has occurred
and is continuing or (ii) if any Holder seeks to exercise any remedy
hereunder with respect to a claimed Default under this Indenture or the
Notes, the Company shall deliver to the Trustee, at its address set forth in
Section 11.02, by registered or certified mail or by facsimile transmission
followed by hard copy by registered or certified mail an Officers'
Certificate specifying such event, notice or other action within 10 days of
its becoming aware of such occurrence.

SECTION 4.07. COMPLIANCE WITH LAWS.

The Company shall comply, and shall cause each of its
Subsidiaries to comply, with all applicable statutes, rules, regulations,
orders and restrictions of the United States of America, all states and
municipalities thereof and of any governmental department, commission, board,
regulatory authority, bureau, agency and instrumentality of the foregoing, in
respect of the conduct of their respective businesses and the ownership of
their respective properties, except for such noncompliances as could not
singly or in the aggregate reasonably be expected to have a material adverse
effect on the financial condition, business, prospects or results of
operations of the Company and its Subsidiaries taken as a whole.

SECTION 4.08. REPORTS TO HOLDERS.

The Company will deliver to the Trustee within 15 days
after the filing of the same with the Commission, copies of the quarterly and
annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, upon the earlier of the
effectiveness of the Exchange Offer Registration Statement and 150 days
following the Issue Date, and provide the Trustee and Holders with such
annual reports and such information, documents and other reports specified in
Sections 13 and 15(d) of the Exchange Act. The

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Company will also comply with the other provisions of TIA Section 314(a).

SECTION 4.09. WAIVER OF STAY, EXTENSION
OR USURY LAWS.

The Company covenants (to the extent that it may lawfully
do so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay or extension
law or any usury law or other law that would prohibit or forgive the Company
from paying all or any portion of the principal of or interest on the Notes
as contemplated herein, wherever enacted, now or at any time hereafter in
force, or which may affect the covenants or the performance of this
Indenture; and (to the extent that it may lawfully do so) the Company hereby
expressly waives all benefit or advantage of any such law, and covenants that
it shall not hinder, delay or impede the execution of any power herein
granted to the Trustee, but shall suffer and permit the execution of every
such power as though no such law had been enacted.

SECTION 4.10. LIMITATION ON RESTRICTED
PAYMENTS.

The Company will not, and will not cause or permit any of
the Restricted Subsidiaries to, directly or indirectly, (a) declare or pay
any dividend or make any distribution (other than dividends or distributions
payable in Qualified Capital Stock of the Company) on or in respect of shares
of the Company's Capital Stock to holders of such Capital Stock, (b)
purchase, redeem or otherwise acquire or retire for value any Capital Stock
of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock, (c) make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire or retire
for value, prior to any scheduled maturity, scheduled or mandatory repayment
or scheduled sinking fund payment, any Indebtedness of the Company or its
Subsidiaries that is subordinate or junior in right of payment to the Notes,
or (d) make any Investment (other than Permitted Investments) (each of the
foregoing actions set forth in clauses (a), (b), (c) and (d) being referred
to as a "Restricted Payment"), if at the time of such Restricted Payment or
immediately after giving effect thereto, (i) a Default or an Event of Default
shall have occurred and be continuing or (ii) the Company is not able to
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with Section 4.12 or (iii) the aggregate amount
of Restricted Payments (including such proposed Restricted Payment) made
subsequent to the Issue Date (the amount expended for such purposes, if other
than in cash, being the fair market value of such property as determined
reasonably and

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in good faith by the Board of Directors of the Company) shall exceed the sum,
without duplication, of: (w) 50% of the cumulative Consolidated Net Income (or
if cumulative Consolidated Net Income shall be a loss, minus 100% of such loss)
of the Company earned subsequent to the Issue Date and on or prior to the date
the Restricted Payment occurs (the "Reference Date") (treating such period as a
single accounting period); plus (x) 100% of the aggregate net cash proceeds
received by the Company from any Person (other than a Subsidiary of the Company)
from the issuance and sale subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Capital Stock of the Company; plus (y) without
duplication of any amounts included in clause (iii)(x) above, 100% of the
aggregate net cash proceeds of any equity contribution received by the Company
from a holder of the Company's Capital Stock; plus (z) an amount equal to the
sum of (1) the net reduction in Investments in Unrestricted Subsidiaries
resulting from dividends, repayments of loans or advances or other transfers of
assets by any Unrestricted Subsidiary to the Company or any Restricted
Subsidiary or the receipt of proceeds by the Company or any Restricted
Subsidiary from the sale or other disposition of any portion of the Capital
Stock of any Unrestricted Subsidiary, in each case occurring subsequent to the
Issue Date, and (2) the consolidated net Investments on the date of Revocation
made by the Company or any of the Restricted Subsidiaries in any Subsidiary of
the Company that has been designated an Unrestricted Subsidiary after the Issue
Date upon its redesignation as a Restricted Subsidiary in accordance with
Section 4.18.

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shall have occurred and be continuing, repurchases by the Company of Capital
Stock of the Company or options to purchase Capital Stock of the Company, stock
appreciation rights or any similar equity interest in the Company from directors
and employees of the Company or any of its Subsidiaries or their authorized
representatives upon the death, disability or termination of employment of such
employees, in an aggregate amount not to exceed $500,000 in any calendar year;
and (5) so long as no Default or Event of Default shall have occurred and be
continuing, repurchases by the Company of shares of its Series B Preferred Stock
held by directors and employees of the Company pursuant to provisions thereof
requiring the redemption thereof at the election of the holders thereof at any
time following an initial public offering of the Company. In determining the
aggregate amount of Restricted Payments made subsequent to the Issue Date in
accordance with clause (iii) of the immediately preceding paragraph, amounts
expended pursuant to clauses (1), (2)(ii), (3)(ii)(A), (4) and (5) above shall
be included in such calculation.

Not later than the date of making any Restricted Payment,
the Company shall deliver to the Trustee an officers' certificate stating
that such Restricted Payment complies with the Indenture and setting forth in
reasonable detail the basis upon which the required calculations were
computed, which calculations may be based upon the Company's latest available
internal quarterly financial statements.

SECTION 4.11. LIMITATIONS ON TRANSACTIONS
WITH AFFILIATES.

(a) The Company will not, and will not permit any of the
Restricted Subsidiaries to, directly or indirectly, enter into or permit to
exist any transaction or series of related transactions (including, without
limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service) with, or for the benefit of, any of its Affiliates
(each an "Affiliate Transaction"), other than (x) Affiliate Transactions
permitted under paragraph (b) below and (y) Affiliate Transactions on terms
that are no less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis
from a Person that is not an Affiliate of the Company or such Restricted
Subsidiary. All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $2,500,000
shall be approved by the Board of Directors of the Company or such Restricted
Subsidiary, as the case may be, such approval to be evidenced by a Board
Resolution stating that such Board of Directors has determined that such
transaction complies with the

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foregoing provisions. If the Company or any Restricted Subsidiary enters into
an Affiliate Transaction (or a series of related Affiliate Transactions related
to a common plan) that involves an aggregate fair market value of more than
$10,000,000, the Company or such Restricted Subsidiary, as the case may be,
shall, prior to the consummation thereof, obtain an opinion stating that such
transaction or series of related transactions are fair to the Company or the
relevant Restricted Subsidiary, as the case may be, from a financial point of
view, from an Independent Financial Advisor.

(b) The restrictions set forth in clause (a) shall not
apply to (i) reasonable fees and compensation paid to and indemnity provided
on behalf of, officers, directors, employees or consultants of the Company or
any Restricted Subsidiary as determined in good faith by the Company's Board
of Directors; (ii) transactions exclusively between or among the Company and
any of the Restricted Subsidiaries or exclusively between or among such
Restricted Subsidiaries, provided such transactions are not otherwise
prohibited by this Indenture; (iii) Restricted Payments permitted by this
Indenture; and (iv) advisory fees pursuant to the Professional Services
Agreement between the Company and BRS Group in effect on the Issue Date.

SECTION 4.12. LIMITATION ON INCURRENCE
OF ADDITIONAL INDEBTEDNESS.

The Company will not, and will not permit any of the
Restricted Subsidiaries to, directly or indirectly, create, incur, assume,
guarantee, acquire, become liable, contingently or otherwise, with respect
to, or otherwise become responsible for payment of (collectively, "incur")
any Indebtedness (other than Permitted Indebtedness); PROVIDED, HOWEVER, that
if no Default or Event of Default shall have occurred and be continuing at
the time of or as a consequence of the incurrence of any such Indebtedness,
the Company may incur Indebtedness (including, without limitation, Acquired
Indebtedness) if on the date of the incurrence of such Indebtedness, after
giving effect to the incurrence thereof, the Consolidated Fixed Charge
Coverage Ratio of the Company is greater than 2.00 to 1.00.

The Company will not, directly or indirectly, in any
event incur any Indebtedness which by its terms (or by the terms of any
agreement governing such Indebtedness) is subordinated to any other
Indebtedness of the Company unless such Indebtedness is also by its terms (or
by the terms of any agreement governing such Indebtedness) made expressly
subordinate to the Notes to the same extent and in the same manner as such
Indebtedness is subordinated pursuant to subordination provisions that are
most favorable to the holders of any other Indebtedness of the Company.

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SECTION 4.13. LIMITATION ON DIVIDEND AND
OTHER PAYMENT RESTRICTIONS
AFFECTING SUBSIDIARIES.

The Company will not, and will not cause or permit any of
the Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or permit to exist or become effective any encumbrance or restriction
on the ability of any Restricted Subsidiary to (a) pay dividends or make any
other distributions on or in respect of its Capital Stock; (b) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company
or any other Restricted Subsidiary; or (c) transfer any of its property or
assets to the Company or any other Restricted Subsidiary, except for such
encumbrances or restrictions existing under or by reason of: (1) applicable
law; (2) this Indenture and the Notes; (3) customary non-assignment
provisions of any contract or any lease governing a leasehold interest of any
Restricted Subsidiary; (4) any instrument governing Acquired Indebtedness,
which encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person or the properties
or assets of the Person so acquired (including, but not limited to, such
Person's direct and indirect Subsidiaries); (5) agreements existing on the
Issue Date to the extent and in the manner such agreements are in effect on
the Issue Date; or (6) an agreement governing Indebtedness incurred to
Refinance the Indebtedness issued, assumed or incurred pursuant to an
agreement referred to in clause (2), (4) or (5) above; PROVIDED, HOWEVER,
that the provisions relating to such encumbrance or restriction contained in
any such Indebtedness are no less favorable to the Company in any material
respect as determined by the Board of Directors of the Company in its
reasonable and good faith judgment than the provisions relating to such
encumbrance or restriction contained in agreements referred to in such clause
(2), (4) or (5).

SECTION 4.14. CHANGE OF CONTROL.

(a) Upon the occurrence of a Change of Control, each
Holder shall have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, thereon to
the date of purchase.

(b) Within 30 days following the date upon which the
Change of Control occurred, the Company shall send, by first class mail, a
notice to each Holder at such Holder's last registered address, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. The notice to

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the Holders shall contain all instructions and materials necessary to enable
such Holders to tender Notes pursuant to the Change of Control Offer. Such
notice shall state:

(i) that the Change of Control Offer is being made pursuant to
this Section 4.14 and that all Notes tendered and not withdrawn shall be
accepted for payment;

(ii) the purchase price (including the amount of accrued interest)
and the purchase date (which shall be no earlier than 30 days nor later
than 45 days from the date such notice is mailed, other than as may be
required by law) (the "Change of Control Payment Date");

(iii) that any Note not tendered shall continue to accrue interest;

(iv) that, unless the Company defaults in making payment therefor,
any Note accepted for payment pursuant to the Change of Control Offer shall
cease to accrue interest after the Change of Control Payment Date;

(v) that Holders electing to have a Note purchased pursuant to a
Change of Control Offer shall be required to surrender the Note, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the
Note completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the third business day prior to the
Change of Control Payment Date;

(vi) that Holders shall be entitled to withdraw their election if
the Paying Agent receives, not later than the second business day prior to
the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Notes the Holder delivered for purchase and a statement that
such Holder is withdrawing his election to have such Notes purchased;

(vii) that Holders whose Notes are purchased only in part shall be
issued new Notes in a principal amount equal to the unpurchased portion of
the Notes surrendered; PROVIDED, HOWEVER, that each Note purchased and each
new Note issued shall be in an original principal amount of $1,000 or
integral multiples thereof; and

(viii) the circumstances and relevant facts regarding such Change of
Control.

On the Change of Control Payment Date, the Company shall, to the
extent permitted by law, (i) accept for payment

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all Notes or portions thereof properly tendered pursuant to the Change of
Control Offer, (ii) deposit with the Paying Agent an amount equal to the
aggregate Change of Control Payment in respect of all Notes or portions thereof
so tendered and (iii) deliver, or cause to be delivered, to the Trustee for
cancellation the Notes so accepted together with an Officers' Certificate
stating that such Notes or portions thereof have been tendered to and purchased
by the Company. The Paying Agent will promptly either (x) pay to the Holder
against presentation and surrender (or, in the case of partial payment,
endorsement) of the Global Notes or (y) in the case of Certificated Securities,
mail to each Holder of Notes the Change of Control Payment for such Notes, and
the Trustee will promptly authenticate and deliver to the Holder of the Global
Notes a new Global Note or Notes or, in the case of Definitive Notes, mail to
each Holder new Certificated Securities, as applicable, equal in principal
amount to any unpurchased portion of the Notes surrendered, if any, provided
that each new Certificated Security will be in a principal amount of $1,000 or
an integral multiple thereof. The Company will notify the Trustee and the
Holders of the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.

The Company shall not be required to make a Change of Control Offer
upon a Change of Control if a third party makes the Change of Control Offer at
the Change of Control Purchase Price, at the same times and otherwise in
compliance with the requirements applicable to a Change of Control Offer made by
the Company and purchases all Notes validly tendered and not withdrawn under
such Change of Control Offer.

Neither the Board of Directors of the Company nor the Trustee may
waive the provisions of this Section 4.14 relating to the Company's obligation
to make a Change of Control Offer or a Holder's right to redemption upon a
Change of Control.

The Company shall comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the
provisions of this Section 4.14, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached their
obligations under the provisions of this Section 4.14 by virtue thereof.

SECTION 4.15. LIMITATION ON ASSET SALES.

The Company will not, and will not permit any of the Restricted
Subsidiaries to, consummate an Asset Sale unless (i)

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the Company or the applicable Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the fair
market value of the assets sold or otherwise disposed of (as determined in good
faith by the Company's Board of Directors), (ii) at least 80% of the
consideration received by the Company or the Restricted Subsidiary, as the case
may be, from such Asset Sale shall be in the form of cash or Cash Equivalents
and is received at the time of such disposition; PROVIDED, HOWEVER, that the
amount of (A) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet or the notes thereto), of the Company or
any Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Notes) that are assumed by the transferee in such Asset Sale
and from which the Company or such Restricted Subsidiary is released and (B) any
notes or other obligations received by the Company or any such Restricted
Subsidiary from such transferee that are immediately converted by the Company or
such Restricted Subsidiary into cash or Cash Equivalents (to the extent of the
cash or Cash Equivalents received), shall be deemed to be cash for the purposes
of this provision; and (iii) upon the consummation of an Asset Sale, the Company
shall apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds
relating to such Asset Sale within 360 days of receipt thereof either (A) to
prepay any Indebtedness ranking at least PARI PASSU with the Notes (including
amounts under the Credit Facility) and, in the case of any such Indebtedness
under any revolving credit facility, effect a permanent reduction in the
availability under such revolving credit facility, (B) to make an investment in
properties and assets that replace the properties and assets that were the
subject of such Asset Sale or in properties and assets that will be used in the
business of the Company and the Restricted Subsidiaries as existing on the Issue
Date or in businesses reasonably related thereto ("Replacement Assets"), or (C)
a combination of prepayment and investment permitted by the foregoing clauses
(iii)(A) and (iii)(B). On the 361st day after an Asset Sale or such earlier
date, if any, as the Board of Directors of the Company or of such Restricted
Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset
Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next
preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate
amount of Net Cash Proceeds which have not been applied on or before such Net
Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and
(iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount")
shall be applied by the Company or such Restricted Subsidiary to make an offer
to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer
Payment Date") not less than 45 nor more than 60 days following the applicable
Net Proceeds Offer Trigger Date, from all Holders on a PRO RATA basis, that
amount of Notes equal to the Net

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Proceeds Offer Amount at a price equal to 100% of the principal amount of the
Notes to be purchased, plus accrued and unpaid interest thereon, if any, to the
date of purchase; PROVIDED, HOWEVER, that if at any time any non-cash
consideration received by the Company or any Restricted Subsidiary, as the case
may be, in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash (other than interest received with respect to any such
non-cash consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this Section 4.15. The Company may defer the Net
Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount
equal to or in excess of $5 million resulting from one or more Asset Sales (at
which time, the entire unutilized Net Proceeds Offer Amount, not just the amount
in excess of $5 million, shall be applied as required pursuant to this
paragraph).

In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under Section 5.01, the
successor corporation shall be deemed to have sold the properties and assets of
the Company and the Restricted Subsidiaries not so transferred for purposes of
this covenant, and shall comply with the provisions of this covenant with
respect to such deemed sale as if it were an Asset Sale. In addition, the fair
market value of such properties and assets of the Company or the Restricted
Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for
purposes of this covenant.

Notwithstanding the two immediately preceding paragraphs, the Company
and the Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 80% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value; PROVIDED that any consideration not
constituting Replacement Assets received by the Company or any of the Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the provisions of
the two preceding paragraphs.

Each Net Proceeds Offer will be mailed to the record Holders as shown
on the register of Holders within 30 days following the Net Proceeds Offer
Trigger Date, with a copy to the Trustee, and shall comply with the procedures
set forth in this Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly tender
Notes in an amount exceeding the

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Net Proceeds Offer Amount, Notes of tendering Holders will be purchased on a PRO
RATA basis (based on amounts tendered). A Net Proceeds Offer shall remain open
for a period of 20 business days or such longer period as may be required by
law.

If the Net Proceeds Offer is on or after a Record Date and on or
before the related Interest Payment Date, any accrued interest shall be paid to
the Person in whose name a Note is registered at the close of business on such
Record Date, and no additional interest shall be payable to Holders who tender
Notes pursuant to the Net Proceeds Offer.

The notice, which shall govern the terms of the Net Proceeds Offer,
shall include such disclosures as are required by law and shall state:

(i) that the Net Proceeds Offer is being made pursuant to this
Section 4.15;

(ii) the purchase price (including the amount of accrued interest,
if any) to be paid for Notes purchased pursuant to the Net Proceeds Offer
and teh Net Proceeds Payment Date;

(iii) that any Note not tendered for payment will continue to accrue
interest in accordance with the terms thereof;

(iv) that, unless the Company defaults on making the payment, any
Note accepted for payment pursuant to the Net Proceeds Offer shall cease to
accrue interest after the Net Proceeds Payment Date;

(v) that Holders accepting the Offer to have their Notes purchased
pursuant to the Net Proceeds Offer will be required to surrender their
Notes to the Paying Agent at the address specified in the notice prior to
the close of business on the Excess Net Payment Date;

(vi) that Holders will be entitled to withdraw their acceptance if
the Paying Agent receives, not later than the close of business on the
second Business Day prior to the Net Proceeds Payment Date, a facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Notes the Holder delivered for purchase and a statement that
such Holder is withdrawing his election to have such Notes purchased;

(vii) that Holders whose Notes are purchased only in part will be
issued new Notes in a principal amount equal to the unpurchased portion of
the Notes surrendered;

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PROVIDED that each Note purchased and each such new Note issued shall be in an
original principal amount in denominations of $1,000 and integral multiples
thereof;

(viii) any other procedures that a Holder must follow to accept a Net
Proceeds Offer or effect withdrawal of such acceptance; and

(ix) the name and address of the Paying Agent.

On the Net Proceeds Payment Date, the Company shall (i) accept for
payment Notes or portions thereof tendered pursuant to the Net Proceeds Offer in
accordance with this Section 4.15, (ii) deposit with the Paying Agent U.S. Legal
Tender sufficient to pay the purchase price, plus accrued interest, if any, of
all Notes to be purchased in accordance with this Section 4.15 and (iii) deliver
to the Trustee Notes so accepted together with an Officers' Certificate stating
the Notes or portions thereof tendered to and accepted for payment by the
Company.

For purposes of this Section 4.15, the Trustee shall act as the Paying
Agent. The Paying Agent shall promptly (but in any case no later than 10
calendar days after the Net Proceeds Payment Date) mail or deliver to the
Holders of Notes so accepted payment in an amount equal to the purchase price
for such Notes, and the Company shall execute and issue, and the Trustee shall
promptly authenticate and mail to such Holders, a new Note equal in principal
amount to any unpurchased portion of the Note surrendered; PROVIDED that each
such new Note shall be issued in an original principal amount in denominations
of $1,000 and integral multiples thereof. The Company will send to the Trustee
and the Holders of Notes on or as soon as practicable after the Net Proceeds
Payment Date a notice setting forth the results of the Net Proceeds Offer. Any
Notes not so accepted shall be promptly mailed or delivered by the Company to
the Holder thereof.

The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of this Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under this Section 4.15 by virtue thereof.

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SECTION 4.16. LIMITATION ON PREFERRED
STOCK OF RESTRICTED SUBSIDIARIES.

The Company shall not permit any of its Restricted Subsidiaries to
issue any Preferred Stock (other than to the Company or to a Wholly Owned
Restricted Subsidiary) or permit any Person (other than the Company or a Wholly
Owned Restricted Subsidiary) to own any Preferred Stock of any Restricted
Subsidiary.

SECTION 4.17. LIMITATION ON LIENS.

The Company will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
permit or suffer to exist any Liens upon any property or assets of the Company
or any of the Restricted Subsidiaries whether owned on the Issue Date or
acquired after the Issue Date, or any proceeds therefrom, or assign or otherwise
convey any right to receive income or profits therefrom unless (i) in the case
of Liens securing Indebtedness that is expressly subordinate or junior in right
of payment to the Notes, the Notes are secured by a Lien on such property,
assets or proceeds that is senior in priority to such Liens and (ii) in all
other cases, the Notes are secured on an equal and ratable basis, except for (a)
Liens existing as of the Issue Date to the extent and in the manner such Liens
are in effect on the Issue Date; (b) Liens securing Indebtedness under the
Credit Facility; (c) Liens securing the Notes; (d) Liens of the Company or a
Restricted Subsidiary on assets of any Restricted Subsidiary of the Company; (e)
Liens securing Refinancing Indebtedness which is incurred to Refinance any
Indebtedness which has been secured by a Lien permitted under the Indenture and
which has been incurred in accordance with the provisions of the Indenture;
PROVIDED, HOWEVER, that such Liens (A) are no less favorable to the Holders and
are not more favorable to the lienholders with respect to such Liens than the
Liens in respect of the Indebtedness being Refinanced and (B) do not extend to
or cover any property or assets of the Company or any of the Restricted
Subsidiaries not securing the Indebtedness so Refinanced; (f) Liens in favor of
the Company; and (g) Permitted Liens.

SECTION 4.18. LIMITATION OF GUARANTEES BY
RESTRICTED SUBSIDIARIES

The Company will not permit any Restricted Subsidiary, directly or
indirectly, by way of the pledge of any intercompany note or otherwise, to
assume, guarantee or in any other manner become liable with respect to any
Indebtedness of the Company (other than Indebtedness incurred under the Credit
Facility) unless, in any such case (a) such Restricted Subsidiary

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executes and delivers a supplemental indenture to the Indenture, providing a
guarantee of payment of the Notes by such Restricted Subsidiary substantially in
the form of Exhibit E (the "Guarantee") and (b) if such assumption, guarantee or
other liability of such Restricted Subsidiary is provided in respect of
Indebtedness that is expressly subordinated to the Notes, the guarantee or other
instrument provided by such Restricted Subsidiary in respect of such subordinate
Indebtedness shall be subordinated to the Guarantee pursuant to subordination
provisions not less favorable to the Holders of the Notes than those contained
in the indenture or similar document governing such subordinated Indebtedness.

Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary of the Notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged, without any further
action required on the part of the Trustee or any Holder, upon: (i) the
unconditional release of such Restricted Subsidiary from its liability in
respect of the Indebtedness in connection with which such Guarantee was executed
and delivered pursuant to the preceding paragraph; or (ii) any sale or other
disposition (by merger or otherwise) to any Person which is not a Restricted
Subsidiary of the Company, of all of the Company's Capital Stock in, or all or
substantially all of the assets of, such Restricted Subsidiary; PROVIDED,
HOWEVER, that (a) such sale or disposition of such Capital Stock or assets is
otherwise in compliance with the terms of the Indenture and (b) such assumption,
guarantee or other liability of such Restricted Subsidiary has been released by
the holders of the other Indebtedness so guaranteed.

SECTION 4.19. LIMITATION ON DESIGNATIONS
OF UNRESTRICTED SUBSIDIARIES.

The Company may designate any Subsidiary of the Company (other than a
Subsidiary of the Company which owns Capital Stock of a Restricted Subsidiary)
as an "Unrestricted Subsidiary" under the Indenture (a "Designation") only if:

(a) no Default shall have occurred and be continuing at the time of
or after giving effect to such Designation; and

(b) the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the sum of
(i) fair market value of the Capital Stock of such Subsidiary owned by the
Company and the Restricted Subsidiaries on such date and (ii) the aggregate
amount of other

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Investments of the Company and the Restricted Subsidiaries in such
Subsidiary on such date; and

(c) the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to Section 4.12
at the time of Designation (assuming the effectiveness of such
Designation).

In the event of any such Designation, the Company shall be deemed to
have made an Investment constituting a Restricted Payment pursuant to
Section 4.10 for all purposes of this Indenture in the Designation Amount. The
Company shall not, and shall not permit any Restricted Subsidiary to, at any
time (x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including of any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except, in the case of
clause (x) or (y), to the extent permitted under Section 4.10

The Company may revoke any Designation of a Subsidiary as an
Unrestricted Subsidiary (a "Revocation"), whereupon such Subsidiary shall then
constitute a Restricted Subsidiary, if:

(a) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation; and

(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of this
Indenture.

All Designations and Revocations must be evidenced by Board
Resolutions of the Company certifying compliance with the foregoing provisions.

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ARTICLE FIVE

SUCCESSOR CORPORATION

SECTION 5.01. MERGER, CONSOLIDATION
AND SALE OF ASSETS.

The Company shall not, in a single transaction or series of related
transactions, consolidate or merge with or into any Person, or sell, assign,
transfer, lease, convey or otherwise dispose of (or cause or permit any
Restricted Subsidiary to sell, assign, transfer, lease, convey or otherwise
dispose of) all or substantially all of the Company's assets (determined on a
consolidated basis for the Company and the Restricted Subsidiaries) whether as
an entirety or substantially as an entirety to any Person unless (i) either
(a) the Company shall be the surviving or continuing corporation or (b) the
Person (if other than the Company) formed by such consolidation or into which
the Company is merged or the Person which acquires by sale, assignment,
transfer, lease, conveyance or other disposition the properties and assets of
the Company and of the Restricted Subsidiaries substantially as an entirety (the
"Surviving Entity") (x) shall be a corporation organized and validly existing
under the laws of the United States, any state thereof or the District of
Columbia and (y) shall expressly assume, by supplemental indenture (in form and
substance satisfactory to the Trustee), executed and delivered to the Trustee,
the due and punctual payment of the principal of, and premium, if any, and
interest on all of the Notes and the performance of every covenant of the Notes,
this Indenture, and the Registration Rights Agreement on the part of the Company
to be performed or observed; (ii) immediately after giving effect to such
transaction and the assumption contemplated by clause (i)(b)(y) above (including
giving effect to any Indebtedness and Acquired Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such
transaction), the Company or such Surviving Entity, as the case may be,
(1) shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction and
(2) shall be able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to Section 4.12; (iii) immediately before and
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(b)(y) above (including, without limitation giving
effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to
be incurred and any Lien granted in connection with or in respect of the
transaction), no Default or Event of Default shall have occurred and be
continuing; and (iv) the Company or the Surviving Entity shall have delivered to
the Trustee an Officers'

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Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, sale, assignment, transfer, lease, conveyance or other disposition and,
if a supplemental indenture is required in connection with such transaction,
such supplemental indenture comply with the applicable provisions of this
Indenture and that all conditions precedent in this Indenture relating to such
transaction have been satisfied.

For purposes of the foregoing, the transfer (by lease, assignment,
sale or otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.

SECTION 5.02. SUCCESSOR CORPORATION
SUBSTITUTED.

Upon any consolidation, combination or merger or any transfer of all
or substantially all of the assets of the Company in accordance with Section
5.01 in which the Company is not the Surviving Entity, the Surviving Entity
shall succeed to, and be substituted for, and may exercise every right and power
of, the Company under this Indenture and the Notes with the same effect as if
such Surviving Entity had been named as such.

ARTICLE SIX

REMEDIES

SECTION 6.01. EVENTS OF DEFAULT.

An "Event of Default" means any of the following events:

(a) the failure to pay interest on any Notes when the same becomes
due and payable and the default continues for a period of 30 days;

(b) the failure to pay the principal on any Notes, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds Offer);

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(c) a default in the observance or performance of any other covenant
or agreement contained in this Indenture which default continues for a
period of 30 days after the Company receives written notice specifying the
default (and demanding that such default be remedied) from the Trustee or
the Holders of at least 25% of the outstanding principal amount of the
Notes (except in the case of a default with respect to Section 5.01, which
will constitute an Event of Default with such notice requirement but
without such passage of time requirement);

(d) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Subsidiary or the
acceleration of the final stated maturity of any such Indebtedness if the
aggregate principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to
pay principal at final maturity or which has been accelerated, aggregates
$2,500,000 or more at any time;

(e) one or more judgments in an aggregate amount in excess of
$2,500,000 shall have been rendered against the Company or any of its
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non-appealable;

(f) the Company or any of its Significant Subsidiaries pursuant to or
under or within the meaning of any Bankruptcy Law:

(i) commences a voluntary case or proceeding;

(ii) consents to the entry of an order for relief against it
in an involuntary case or proceeding;

(iii) consents to the appointment of a Custodian of it or for
all or substantially all of its property;

(iv) makes a general assignment for the benefit of its
creditors; or

(v) shall generally not pay its debts when such debts
become due or shall admit in writing its inability to pay its debts
generally; or

(g) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:

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(i) is for relief against the Company or any of its
Significant Subsidiaries in an involuntary case or proceeding,

(ii) appoints a Custodian of the Company or any of its
Significant Subsidiaries for all or substantially all of their
properties taken as a whole, or

(iii) orders the liquidation of the Company, the Company or
any of their Significant Subsidiaries,
and in each case the order or decree remains unstayed and in effect for 60
days.

SECTION 6.02. ACCELERATION.

If an Event of Default (other than an Event of Default specified in
Section 6.01 (f) or (g) relating to the Company) shall occur and be continuing,
the Trustee or the Holders of at least 25% in principal amount of outstanding
Notes may declare the principal of and accrued interest on all the Notes to be
due and payable by notice in writing to the Company and the Trustee specifying
the respective Event of Default and the same shall become immediately due and
payable. If an Event of Default specified in Section 6.01 (f) or (g) with
respect to the Company occurs and is continuing, then all unpaid principal of,
and premium, if any, and accrued and unpaid interest on all of the outstanding
Notes shall IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.

At any time after a declaration of acceleration with respect to the
Notes as described in the preceding paragraph, the Holders of a majority in
principal amount of the Notes may rescind and cancel such declaration and its
consequences (a) if the rescission would not conflict with any judgment or
decree, (b) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of the
acceleration, (c) to the extent the payment of such interest is lawful, interest
on overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid, (d) if the
Company has paid the Trustee its reasonable compensation and reimbursed the
Trustee for its expenses, disbursements and advances and (e) in the event of the
cure or waiver of an Event of Default of the type described in Section 6.01, the
Trustee shall have received an Officers' Certificate and an opinion of counsel
that such Event of Default has been cured or waived. No such rescission shall
affect any subsequent Default or impair any right consequent thereto.

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SECTION 6.03. OTHER REMEDIES.

(a) If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy by proceeding at law or in equity to collect the
payment of the principal of, premium, if any, or interest on the Notes or to
enforce the performance of any provision of the Notes or this Indenture.

(b) All rights of action and claims under this Indenture or the Notes
may be enforced by the Trustee even if it does not possess any of the Notes or
does not produce any of them in the proceeding. A delay or omission by the
Trustee or any Holder in exercising any right or remedy accruing upon an Event
of Default shall not impair the right or remedy or constitute a waiver of or
acquiescence in the Event of Default. No remedy is exclusive of any other
remedy. All available remedies are cumulative to the extent permitted by law.

SECTION 6.04. WAIVER OF PAST DEFAULTS.

Prior to the acceleration of the Notes, the Holders of a majority in
aggregate principal amount of the Notes then outstanding by notice to the
Trustee may, on behalf of the Holders of all the Notes, waive any existing
Default or Event of Default and its consequences under this Indenture, except a
Default or Event of Default specified in Section 6.01(a) or (b) or in respect of
any provision hereof which cannot be modified or amended without the consent of
the Holder so affected pursuant to Section 9.02. When a Default or Event of
Default is so waived, it shall be deemed cured and shall cease to exist. This
Section 6.04 shall be in lieu of Section 316(a)(1)(B) of the TIA and such
Section 316(a)(1)(B) of the TIA is hereby expressly excluded from this
Indenture and the Notes, as permitted by the TIA.

SECTION 6.05. CONTROL BY MAJORITY.

Holders of the Notes may not enforce this Indenture or the Notes
except as provided in this Article Six and under the TIA. The Holders of a
majority in aggregate principal amount of the then outstanding Notes have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee, PROVIDED, HOWEVER, that the Trustee may refuse to follow any
direction (a) that conflicts with any rule of law or this Indenture, (b) that
the Trustee, in its sole discretion, determines may be unduly prejudicial to the
rights of another Holder, or (c) that may expose the Trustee to personal
liability for which adequate indemnity provided to the Trustee against such
liability is not reasonably assured to it; PROVIDED, FURTHER, HOWEVER, that the
Trustee may take any other action deemed proper by the Trustee that is not

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inconsistent with such direction or this Indenture. This Section 6.05 shall be
in lieu of Section 316(a)(1)(A) of the TIA, and such Section 316(a)(1)(A) of
the TIA is hereby expressly excluded from this Indenture and the Notes, as
permitted by the TIA.

SECTION 6.06. LIMITATION ON SUITS.

No Holder of any Notes shall have any right to institute any
proceeding with respect to this Indenture or the Notes or any remedy hereunder,
unless the Holders of at least 25% in aggregate principal amount of the
outstanding Notes have made written request, and offered reasonable indemnity,
to the Trustee to institute such proceeding as Trustee under the Notes and this
Indenture, the Trustee has failed to institute such proceeding within 30 days
after receipt of such notice, request and offer of indemnity and the Trustee,
within such 30-day period, has not received directions inconsistent with such
written request by Holders of a majority in aggregate principal amount of the
outstanding Notes.

The foregoing limitations shall not apply to a suit instituted by a
Holder of a Note for the enforcement of the payment of the principal of,
premium, if any, or interest on, such Note on or after the respective due dates
expressed or provided for in such Note.

A Holder may not use this Indenture to prejudice the rights of any
other Holders or to obtain priority or preference over such other Holders.

SECTION 6.07. RIGHT OF HOLDERS TO RECEIVE PAYMENT.

Notwithstanding any other provision in this Indenture, the right of
any Holder of a Note to receive payment of the principal of, premium, if any,
and interest on such Note, on or after the respective due dates expressed or
provided for in such Note, or to bring suit for the enforcement of any such
payment on or after the respective due dates, is absolute and unconditional and
shall not be impaired or affected without the consent of the Holder.

SECTION 6.08. COLLECTION SUIT BY TRUSTEE.

If an Event of Default specified in clause (a) or (b) of Section 6.01
occurs and is continuing, the Trustee may recover judgment in its own name and
as trustee of an express trust against the Company, or any other obligor on the
Notes for the whole amount of the principal of, premium, if any, and accrued
interest remaining unpaid, together with interest on overdue principal and, to
the extent that payment of such interest is lawful, interest on overdue
installments of interest,

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in each case at the rate per annum provided for by the Notes and such further
amount as shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel and any other amounts due the Trustee
pursuant to the provisions of Section 7.07.

SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM.

The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents, counsel, accountants and
experts) and the Holders allowed in any judicial proceedings relative to the
Company (or any other obligor upon the Notes), its creditors or its property and
shall be entitled and empowered to collect and receive any monies or other
property payable or deliverable on any such claims and to distribute the same,
and any Custodian in any such judicial proceedings is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay to
the Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agent and counsel, and any other
amounts due the Trustee under Section 7.07. Nothing herein contained shall be
deemed to authorize the Trustee to authorize or consent to or accept or adopt on
behalf of any Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Holder in any such
proceeding.

SECTION 6.10. PRIORITIES.

If the Trustee collects any money pursuant to this Article Six it
shall pay out such money in the following order:

First: to the Trustee, its agents and attorneys for amounts due under
Section 7.07, including payment of all compensation, expense and
liabilities incurred, and all advances made, by the Trustee and the cost
and expenses of collection;

Second: to Holders for interest accrued on the Notes, ratably,
without preference or priority of any kind, according to the amounts due
and payable on the Notes for interest;

Third: to Holders for the principal amounts (including any premium)
owing under the Notes, ratably,

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without preference or priority of any kind, according to the amounts due
and payable on the Notes for the principal (including any premium); and

Fourth: the balance, if any, to the Company.

The Trustee, upon prior written notice to the Company, may fix a
record date and payment date for any payment to Holders pursuant to this Section
6.10.

SECTION 6.11. UNDERTAKING FOR COSTS.

In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court may in its discretion require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section 6.11 does not apply to any suit by the Trustee, any suit by a
Holder pursuant to Section 6.07, or a suit by a Holder or Holders of more than
10% in aggregate principal amount of the outstanding Notes.

SECTION 6.12. RESTORATION OF RIGHTS AND REMEDIES.

If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture or any Note and such proceeding has
been discontinued or abandoned for any reason, or has been determined adversely
to the Trustee or to such Holder, then and in every such case the Company, the
Trustee and the Holders shall, subject to any determination in such proceeding,
be restored severally and respectively to their former positions hereunder, and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.

ARTICLE SEVEN

TRUSTEE

SECTION 7.01. DUTIES OF TRUSTEE.

(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture and use the same degree of care and skill in its exercise thereof as a
prudent person

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would exercise or use under the circumstances in the conduct of his own affairs.

(b) Except during the continuance of an Event of Default:

(1) The Trustee need perform only those duties as are specifically
set forth in this Indenture and no covenants or obligations shall be
implied in this Indenture that are adverse to the Trustee.

(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture. However,
in the case of any such certificates or opinions that by any provision
hereof are specifically required to be furnished to the Trustee, the
Trustee shall examine the certificates and opinions to determine whether or
not they conform to the requirements of this Indenture.

(c) Notwithstanding anything to the contrary herein contained, the
Trustee may not be relieved from liability for its own negligent action, its own
negligent failure to act, or its own willful misconduct, except that:

(1) This paragraph does not limit the effect of paragraph (b) of
this Section 7.01.

(2) The Trustee shall not be liable for any error of judgment made
in good faith by a Trust Officer, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts.

(3) The Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.02, 6.04 or 6.05.

(d) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.

(e) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section 7.01 and
Section 7.02.

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(f) The Trustee shall not be liable for interest on any money or
assets received by it except as the Trustee may agree in writing with the
Company. Assets held in trust by the Trustee need not be segregated from other
assets except to the extent required by law.

SECTION 7.02. RIGHTS OF TRUSTEE.

Subject to Section 7.01:

(a) The Trustee may rely and shall be fully protected in acting or
refraining from acting upon any document believed by it to be genuine and
to have been signed or presented by the proper Person. The Trustee need
not investigate any fact or matter stated in the document.

(b) Before the Trustee acts or refrains from acting, it may consult
with counsel of its selection and may require an Officers' Certificate or
an Opinion of Counsel, which shall conform to Sections 11.04 and 11.05.
The Trustee shall not be liable for any action it takes or omits to take in
good faith in reliance on such Officers' Certificate or Opinion of Counsel.
The Trustee may consult with counsel and the written advice of such counsel
or any Opinion of Counsel shall be full and complete authorization and
protection from liability in respect to any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon.

(c) The Trustee may act through its attorneys and agents and shall
not be responsible for the misconduct or negligence of any agent appointed
with due care.

(d) The Trustee shall not be liable for any action that it takes or
omits to take in good faith which it reasonably believes to be authorized
or within its rights or powers.

(e) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, notice, request, direction, consent, order, bond,
debenture, or other paper or document, but the Trustee, in its discretion,
may make such further inquiry or investigation into such facts or matters
as it may see fit, and, if the Trustee shall determine to make such further
inquiry or investigation, it shall be entitled, upon reasonable notice to
the Company, to examine the books, records, and premises of the Company,
personally or by agent or attorney and to consult with the officers and
representatives

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of the Company, including the Company's accountants and attorneys.

(f) The Trustee shall be under no obligation to exercise any of its
rights or powers vested in it by this Indenture at the request, order or
direction of any of the Holders pursuant to the provisions of this
Indenture, unless such Holders have offered to the Trustee reasonable
indemnity satisfactory to the Trustee against the costs, expenses and
liabilities which may be incurred by it in compliance with such request,
order or direction.

(g) The Trustee shall not be required to give any bond or surety in
respect of the performance of its powers and duties hereunder.

(h) Delivery of reports, information and documents to the Trustee
under Section 4.08 is for informational purposes only and the Trustee's
receipt of the foregoing shall not constitute constructive notice of any
information contained therein or determinable from information contained
therein, including the Company's compliance with any of their covenants
hereunder (as to which the Trustee is entitled to rely exclusively on
Officers' Certificates).

SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE.

The Trustee in its individual or any other capacity may become the
owner or pledgee of Notes and may otherwise deal with the Company, the Company,
or any of the Subsidiaries, or their respective Affiliates with the same rights
it would have if it were not Trustee. Any Agent may do the same with like
rights. However, the Trustee must comply with Sections 7.10 and 7.11.

SECTION 7.04. TRUSTEE'S DISCLAIMER.

The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Notes, and it shall not be accountable for the Company's
use of the proceeds from the Notes, it shall not be responsible for the use or
application of any money received by any Paying Agent other than the Trustee,
and it shall not be responsible for any statement of the Company in this
Indenture or the Notes other than the Trustee's certificate of authentication.

SECTION 7.05. NOTICE OF DEFAULT.

If a Default or an Event of Default occurs and is continuing and if it
is known to a Trust Officer, the Trustee

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shall mail to each Holder notice of the uncured Default or Event of Default
within 90 days after obtaining knowledge thereof. Except in the case of a
Default or an Event of Default in payment of principal of, or interest on, any
Note, including an accelerated payment, a Default in payment on the Change of
Control Payment Date pursuant to a Change of Control Offer or on the Net
Proceeds Offer Payment Date pursuant to a Net Proceeds Offer and a Default in
compliance with Article Five hereof, the Trustee may withhold the notice if and
so long as its Board of Directors, the executive committee of its Board of
Directors or a committee of its directors and/or Trust Officers in good faith
determines that withholding the notice is in the interest of the Holders. The
foregoing sentence of this Section 7.05 shall be in lieu of the proviso to
Section 315(b) of the TIA and such proviso to Section 315(b) of the TIA is
hereby expressly excluded from this Indenture and the Notes, as permitted by the
TIA.

SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS.

Within 60 days after May 15 of each year beginning with 1998, the
Trustee shall, to the extent that any of the events described in TIA Section
313(a) occurred within the previous twelve months, but not otherwise, mail to
each Holder a brief report dated as of such date that complies with TIA Section
313(a). The Trustee also shall comply with TIA Sections 313(b), (c) and (d).

A copy of each report at the time of its mailing to Holders shall be
mailed to the Company and filed with the Commission and each stock exchange, if
any, on which the Notes are listed.

The Company shall promptly notify the Trustee if the Notes become
listed on any stock exchange and the Trustee shall comply with TIA Section
313(d).

SECTION 7.07. COMPENSATION AND INDEMNITY.

The Company shall pay to the Trustee from time to time such
compensation for its services as has been agreed to in writing signed by the
Company and the Trustee. The Trustee's compensation shall not be limited by any
law on compensation of a trustee of an express trust. The Company shall
reimburse the Trustee upon request for all reasonable out-of-pocket expenses
incurred or made by it in connection with the performance of its duties under
this Indenture. Such expenses shall include the reasonable fees and expenses of
the Trustee's agents, counsel, accountants and experts.

The Company shall indemnify each of the Trustee (or any predecessor
Trustee) and its agents, employees, stockhold-

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ers, Affiliates and directors and officers for, and hold them each harmless
against, any and all loss, liability, damage, claim or expense (including
reasonable fees and expenses of counsel), including taxes (other than taxes
based on the income of the Trustee) incurred by them except for such actions to
the extent caused by any negligence, bad faith or willful misconduct on their
part, arising out of or in connection with the acceptance or administration of
this trust including the reasonable costs and expenses of defending themselves
against any claim or liability in connection with the exercise or performance of
any of their rights, powers or duties hereunder. The Trustee shall notify the
Company promptly of any claim asserted against the Trustee for which it may seek
indemnity. Failure by the Trustee to so notify the Company shall not relieve
the Company of its Obligations hereunder except to the extent such failure shall
have prejudiced the Company. At the Trustee's sole discretion, the Company
shall defend the claim and the Trustee shall cooperate and may participate in
the defense; PROVIDED, HOWEVER, that any settlement of a claim shall be approved
in writing by the Trustee if such settlement would result in an admission of
liability by the Trustee or if such settlement would not be accompanied by a
full release of the Trustee for all liability arising out of the events giving
rise to such claim. Alternatively, the Trustee may at its option have separate
counsel of its own choosing and the Company shall pay the reasonable fees and
expenses of such counsel.

To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a lien prior to the Notes on all assets or money held or
collected by the Trustee, in its capacity as Trustee, except assets or money
held in trust to pay principal of or premium, if any, or interest on particular
Notes.

When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.01(f) occurs, such expenses and the compensation
for such services are intended to constitute expenses of administration under
any Bankruptcy Law.

The provisions of this Section 7.07 shall survive the termination of
this Indenture.

SECTION 7.08. REPLACEMENT OF TRUSTEE.

The Trustee may resign at any time by so notifying the Company. The
Holders of a majority in principal amount of the outstanding Notes may remove
the Trustee and appoint a successor Trustee with the Company's consent, by so
notifying the Company and the Trustee. The Company may remove the Trustee if:

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(1) the Trustee fails to comply with Section 7.10;

(2) the Trustee is adjudged bankrupt or insolvent;

(3) a receiver or other public officer takes charge of the Trustee
or its property; or

(4) the Trustee becomes incapable of acting.

If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall notify each Holder of such
event and shall promptly appoint a successor Trustee. Within one year after the
successor Trustee takes office, the Holders of a majority in aggregate principal
amount of the outstanding Notes may appoint a successor Trustee to replace the
successor Trustee appointed by the Company.

A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after that,
the retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee, subject to the lien provided in Section 7.07, the resignation
or removal of the retiring Trustee shall become effective, and the successor
Trustee shall have all the rights, powers and duties of the Trustee under this
Indenture. The Company shall mail notice of such successor Trustee's
appointment to each Holder.

If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of at least 10% in aggregate principal amount of the outstanding Notes
may petition any court of competent jurisdiction for the appointment of a
successor Trustee.

If the Trustee fails to comply with Section 7.10, any Holder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.

Notwithstanding any resignation or replacement of the Trustee pursuant
to this Section 7.08, the Company's obligations under Section 7.07 shall
continue for the benefit of the retiring Trustee.

SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC.

If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the resulting, surviving

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or transferee corporation without any further act shall, if such resulting,
surviving or transferee corporation is otherwise eligible hereunder, be the
successor Trustee; PROVIDED, HOWEVER, that such corporation shall be otherwise
qualified and eligible under this Article Seven.

SECTION 7.10. ELIGIBILITY; DISQUALIFICATION.

This Indenture shall always have a Trustee who satisfies the
requirement of TIA Sections 310(a)(1), (2) and (5). The Trustee (or, in the
case of a Trustee that is a subsidiary of another Bank or a corporation included
in a bank holding company system, the related bank or bank holding company)
shall have a combined capital and surplus of at least $100,000,000 million as
set forth in its most recent published annual report of condition, and have a
Corporate Trust Office in the City of New York. In addition, if the Trustee is
a subsidiary of another Bank or a corporation included in a bank holding company
system, the Trustee, independently of such bank or bank holding company, shall
meet the capital requirements of TIA Section 310(a)(2). The Trustee shall
comply with TIA Section 310(b); PROVIDED, HOWEVER, that there shall be excluded
from the operation of TIA Section 310(b)(1) any indenture or indentures under
which other securities, or certificates of interest or participation in other
securities, of the Company are outstanding, if the requirements for such
exclusion set forth in TIA Section 310(b)(1) are met. The provisions of TIA
Section 310 shall apply to the Company, as obligor of the Notes.

SECTION 7.11. PREFERENTIAL COLLECTION OF
CLAIMS AGAINST COMPANY.

The Trustee shall comply with TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). A Trustee who has resigned
or been removed shall be subject to TIA Section 311(a) to the extent indicated
therein.

ARTICLE EIGHT

DISCHARGE OF INDENTURE; DEFEASANCE

SECTION 8.01. TERMINATION OF COMPANY'S OBLIGATIONS.

This Indenture will be discharged and will cease to be of further
effect (except as to surviving rights or registration of transfer or exchange of
the Notes, as expressly provided for in this Indenture) as to all outstanding
Notes when (a) either (i) all Notes, theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been

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replaced or paid and Notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust) have been delivered to the
Trustee for cancellation or (ii) all Notes not theretofore delivered to the
Trustee for cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (b)
the Company has paid all other sums payable under this Indenture by the Company;
and (c) the Company has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel stating that all conditions precedent under this Indenture
relating to the satisfaction and discharge of this Indenture have been complied
with; PROVIDED, HOWEVER, that such counsel may rely, as to matters of fact, on a
certificate or certificates of officers of the Company.

The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes, except for (a) the rights of Holders to receive payments in respect of
the principal of, premium, if any, and interest on the Notes when such payments
are due, (b) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payments, (c) the
rights, powers, trust, duties and immunities of the Trustee and the Company's
obligations in connection therewith and (d) the Legal Defeasance provisions of
this Section 8.01. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to covenants
contained in Sections 4.04, 4.08 and 4.10 through 4.19 and Article Five
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event of Covenant Defeasance, those events described under
Section 6.01 (except those events described in Section 6.01(a),(b),(f) and (g))
will no longer constitute an Event of Default with respect to the Notes.

In order to exercise either Legal Defeasance or Covenant Defeasance:

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(a) the Company must irrevocably deposit with the Trustee, in trust,
for the benefit of the Holders cash in United States dollars, non-callable
U.S. Government Obligations, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any,
and interest on the Notes on the stated date for payment thereof or on the
applicable Redemption Date, as the case may be;

(b) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an Opinion of Counsel in the United States reasonably
acceptable to the Trustee confirming that (i) the Company has received
from, or there has been published by, the Internal Revenue Service a ruling
or (ii) since the date of this Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the Holders will
not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and in either case, and (iii) the Holders
will be subject to U.S. federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;

(c) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders will not
recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;

(d) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default
under Section 6.01(f) or (g) from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date
of deposit;

(e) such Legal Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a default under this Indenture or
any other material agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;

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(f) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others;

(g) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance, as the case may be, have been complied with;

(h) the Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; and

(i) certain other customary conditions precedent are satisfied.

Notwithstanding the foregoing, the opinion of counsel required by
clauses (b)(i) and (c) above need not be delivered if all the Notes not
theretofore delivered to the Trustee for cancellation (i) have become due and
payable, (ii) will become due and payable on the maturity date within one year,
or (iii) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by such
Trustee in the name, and at the expense, of the Company.

SECTION 8.02. APPLICATION OF TRUST MONEY.

The Trustee or Paying Agent shall hold in trust U.S. Legal Tender or
U.S. Government Obligations deposited with it pursuant to Section 8.01, and
shall apply the deposited U.S. Legal Tender and the money from U.S. Government
Obligations in accordance with this Indenture to the payment of the principal of
and interest on the Notes. The Trustee shall be under no obligation to invest
said U.S. Legal Tender or U.S. Government Obligations.

The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the Legal Tender or U.S.
Government Obligations deposited pursuant to Section 8.01 or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of outstanding Notes.

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SECTION 8.03. REPAYMENT TO THE COMPANY.

Subject to Sections 7.07 and 8.01, the Trustee and the Paying Agent
shall promptly pay to the Company upon request any excess U.S. Legal Tender or
U.S. Government Obligations held by them at any time and thereupon shall be
relieved from all liability with respect to such money. The Trustee and the
Paying Agent shall pay to the Company upon request any money held by them for
the payment of principal or interest that remains unclaimed for one year;
PROVIDED, HOWEVER, that the Company shall, if requested by the Trustee or Paying
Agent, give to the Trustee or Paying Agent, indemnification reasonably
satisfactory to it against any and all liability which may be incurred by it by
reason of such paying; PROVIDED, FURTHER, that the Trustee or such Paying Agent,
before being required to make any payment, may at the expense of the Company
cause to be published once in a newspaper of general circulation in the City of
New York or mail to each Holder entitled to such money notice that such money
remains unclaimed and that after a date specified therein which shall be at
least 30 days from the date of such publication or mailing any unclaimed balance
of such money then remaining will be repaid to the Company. After payment to
the Company, Holders entitled to such money must look to the Company for payment
as general creditors unless an applicable law designates another Person, and all
liability of the Trustee and such Paying Agent with respect to such money shall
cease.

SECTION 8.04. REINSTATEMENT.

If the Trustee or Paying Agent is unable to apply any U.S. Legal
Tender or U.S. Government Obligations in accordance with Section 8.01 by reason
of any legal proceeding or by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, the Company's obligations under this Indenture and the Notes shall
be revived and reinstated as though no deposit had occurred pursuant to
Section 8.01 until such time as the Trustee or Paying Agent is permitted to
apply all such U.S. Legal Tender or U.S. Government Obligations in accordance
with Section 8.01; PROVIDED, HOWEVER, that if the Company has made any payment
of interest on or principal of any Notes because of the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Notes to receive such payment from the U.S. Legal Tender or U.S. Government
Obligations held by the Trustee or Paying Agent.

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SECTION 8.05. ACKNOWLEDGMENT OF DISCHARGE
BY TRUSTEE.

After (i) the conditions of Section 8.01 have been satisfied, (ii) the
Company has paid or caused to be paid all other sums payable hereunder by the
Company and (iii) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent referred to in clause (i) above relating to the satisfaction and
discharge of this Indenture have been complied with, the Trustee upon request
shall acknowledge in writing the discharge of the Company's obligations under
this Indenture except for those surviving obligations specified in Section 8.01,
PROVIDED the legal counsel delivering such Opinion of Counsel may rely as to
matters of fact on one or more Officers' Certificates of the Company.

ARTICLE NINE

MODIFICATION OF THE INDENTURE

SECTION 9.01. WITHOUT CONSENT OF HOLDERS.

Subject to the provisions of Section 9.02, the Company and the Trustee
may amend, waive or supplement this Indenture without notice to or consent of
any Holder: (a) to cure any ambiguity, defect or inconsistency; (b) to comply
with Section 5.01 of this Indenture; (c) to provide for uncertificated Notes in
addition to certificated Notes; (d) to comply with any requirements of the
Commission in order to effect or maintain the qualification of this Indenture
under the TIA; or (e) to make any change that would provide any additional
benefit or rights to the Holders or that does not adversely affect the rights of
any Holder. Notwithstanding the foregoing, the Trustee and the Company may not
make any change pursuant to this Section 9.01 that adversely affects the rights
of any Holder under this Indenture without the consent of such Holder. In
formulating its opinion on such matters, the Trustee will be entitled to rely on
such evidence as it deems appropriate, including, without limitation, solely on
an Opinion of Counsel.

Upon the request of the Company accompanied by a resolution of its
Board of Directors authorizing the execution of any such amended or supplemental
Indenture, and upon receipt by the Trustee of the documents described in
Section 9.06, the Trustee shall join with the Company in the execution of any
amended or supplemental Indenture authorized or permitted by the terms of this
Indenture and to make any further appropriate agreements and stipulations which
may be therein contained, but

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the Trustee may but shall not be obligated to enter into such amended or
supplemental Indenture which affects its own rights, duties or immunities under
this Indenture or otherwise.

SECTION 9.02. WITH CONSENT OF HOLDERS.

The Company and the Trustee may amend or supplement this Indenture or
the Notes or any amended or supplemental Indenture with the written consent of
the Holders of Notes of not less than a majority in aggregate principal amount
of the Notes then outstanding (including consents obtained in connection with a
tender offer or exchange offer for the Notes).

Upon the request of the Company accompanied by a resolution of its
Board of Directors authorizing the execution of any such amended or supplemental
Indenture, and upon the filing with the Trustee of evidence satisfactory to the
Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by
the Trustee of the documents described in Section 9.06, the Trustee shall join
with the Company in the execution of such amended or supplemental Indenture
unless such amended or supplemental Indenture affects the Trustee's own rights,
duties or immunities under this Indenture or otherwise, in which case the
Trustee may in its sole discretion, but shall not be obligated to, enter into
such amended or supplemental Indenture.

It shall not be necessary for the consent of the Holders of Notes
under this Section 9.02 to approve the particular form of any proposed amendment
or waiver, but it shall be sufficient if such consent approves the substance
thereof.

After an amendment, supplement or waiver under this Section becomes
effective, the Company shall mail to the Holders of Notes affected thereby a
notice describing the amendment, supplement or waiver. Any failure of the
Company to mail such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of any such amended or supplemental Indenture
or waiver. Subject to Sections 6.04 and 6.07, the Holders of a majority in
aggregate principal amount of the Notes then outstanding may waive compliance in
a particular instance by the Company with any provision of this Indenture or the
Notes. However, without the consent of each Holder of the Notes affected
thereby, an amendment or waiver may not, directly or indirectly: (i) reduce the
amount of Notes whose Holders must consent to an amendment; (ii) reduce the rate
of or change or have the effect of changing the time for payment of premium, if
any, and interest, including defaulted interest, on any Notes; (iii) reduce the
principal of or change or have the effect of changing the fixed maturity of any
Notes, or change the date on which any Notes may be subject

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to redemption or repurchase, or reduce the redemption or repurchase price
therefor; (iv) make any Notes payable in money other than that stated in the
Notes; (v) make any change in provisions of this Indenture protecting the right
of each Holder to receive payment of premium, if any, principal of and interest
on such Note on or after the due date thereof or to bring suit to enforce such
payment, or permitting Holders of a majority in principal amount of the Notes to
waive Defaults or Events of Default; (vi) amend, change or modify in any
material respect the obligation of the Company to make and consummate a Change
of Control Offer in the event of a Change of Control which has occurred or make
and consummate a Net Proceeds Offer with respect to any Asset Sale that has been
consummated or modify any of the provisions or definitions with respect thereto;
or (vii) modify or change any provision of this Indenture or the related
definitions affecting the ranking of the Notes in a manner which adversely
affects the Holders.

SECTION 9.03. COMPLIANCE WITH TIA.

Every amendment, waiver or supplement of this Indenture or the Notes
shall comply with the TIA as then in effect; PROVIDED, HOWEVER, that this
Section 9.03 shall not of itself require that this Indenture or the Trustee be
qualified under the TIA or constitute any admission or acknowledgment by any
party hereto that any such qualification is required prior to the time this
Indenture and the Trustee are required by the TIA to be so qualified.

SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS.

Until an amendment, waiver or supplement becomes effective, a consent
to it by a Holder is a continuing consent by the Holder and every subsequent
Holder of a Note or portion of a Note that evidences the same debt as the
consenting Holder's Note, even if notation of the consent is not made on any
Note. Subject to the following paragraph, any such Holder or subsequent Holder
may revoke the consent as to such Holder's Note or portion of such Note by
notice to the Trustee or the Company received before the date on which the
Trustee receives an Officers' Certificate certifying that the Holders of the
requisite principal amount of Notes have consented (and not theretofore revoked
such consent) to the amendment, supplement or waiver. An amendment, supplement
or waiver becomes effective upon receipt by the Trustee of such Officers'
Certificate and evidence of consent by the Holders of the requisite percentage
in principal amount of outstanding Notes.

The Company may, but shall not be obligated to, fix a Record Date for
the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver. If a Record

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Date is fixed, then notwithstanding the second sentence of the immediately
preceding paragraph, those Persons who were Holders at such Record Date (or
their duly designated proxies), and only those Persons, shall be entitled to
revoke any consent previously given, whether or not such Persons continue to be
Holders after such Record Date. No such consent shall be valid or effective for
more than 90 days after such Record Date unless consents from Holders of the
requisite percentage in principal amount of outstanding Notes required hereunder
for the effectiveness of such consents shall have also been given and not
revoked within such 90 day period.

SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES.

If an amendment, supplement or waiver changes the terms of a Note, the
Trustee may require the Holder of such Note to deliver it to the Trustee. The
Trustee may place an appropriate notation on the Note about the changed terms
and return it to the Holder. Alternatively, if the Company or the Trustee so
determine, the Company in exchange for the Note shall issue and the Trustee
shall authenticate a new Note that reflects the changed terms.

SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC.

The Trustee shall execute any amendment, supplement or waiver
authorized pursuant to this Article Nine; PROVIDED, HOWEVER, that the Trustee
may, but shall not be obligated to, execute any such amendment, supplement or
waiver which affects the Trustee's own rights, duties or immunities under this
Indenture. In executing such amendment, supplement or waiver the Trustee shall
be entitled to receive indemnity reasonably satisfactory to it, and shall be
fully protected in relying upon an Opinion of Counsel and an Officers'
Certificate of the Company, stating that no Event of Default shall occur as a
result of such amendment, supplement or waiver and that the execution of such
amendment, supplement or waiver is authorized or permitted by this Indenture,
PROVIDED, HOWEVER, that the legal counsel delivering such Opinion of Counsel may
rely as to matters of fact on one or more Officers' Certificates of the Company.
Such Opinion of Counsel shall not be an expense of the Trustee.

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ARTICLE TEN

GUARANTEE OF NOTES

SECTION 10.01. UNCONDITIONAL GUARANTEE.

Subject to the provisions of this Article Ten, each Guarantor, if any,
hereby, jointly and severally, unconditionally and irrevocably guarantees, on a
senior basis (such guarantee to be referred to herein as a "Guarantee") to each
Holder of a Note authenticated and delivered by the Trustee and to the Trustee
and its successors and assigns, irrespective of the validity and enforceability
of this Indenture, the Notes or the obligations of the Company or any other
Guarantor to the Holders or the Trustee hereunder or thereunder, that: (a) the
principal of, premium, if any, and interest on the Notes (and any Additional
Interest payable thereon) shall be duly and punctually paid in full when due,
whether at maturity, upon redemption at the option of Holders pursuant to the
provisions of the Notes relating thereto, by acceleration or otherwise, and
interest on the overdue principal and (to the extent permitted by law) interest,
if any, on the Notes and all other obligations of the Company or the Guarantors
to the Holders or the Trustee hereunder or thereunder (including amounts due the
Trustee under Section 7.07) and all other obligations shall be promptly paid in
full or performed, all in accordance with the terms hereof and thereof; and
(b) in case of any extension of time of payment or renewal of any Notes or any
of such other obligations, the same shall be promptly paid in full when due or
performed in accordance with the terms of the extension or renewal, whether at
maturity, by acceleration or otherwise. Failing payment when due of any amount
so guaranteed, or failing performance of any other obligation of the Company to
the Holders under this Indenture or under the Notes, for whatever reason, each
Guarantor shall be obligated to pay, or to perform or cause the performance of,
the same immediately. An Event of Default under this Indenture or the Notes
shall constitute an event of default under this Guarantee, and shall entitle the
Holders of Notes to accelerate the obligations of the Guarantors hereunder in
the same manner and to the same extent as the obligations of the Company.

Each of the Guarantors hereby agrees that its obligations hereunder
shall be unconditional, irrespective of the validity, regularity or
enforceability of the Notes or this Indenture, the absence of any action to
enforce the same, any waiver or consent by any Holder of the Notes with respect
to any provisions hereof or thereof, any release of any other Guarantor, the
recovery of any judgment against the Company, any action to enforce the same,
whether or not a Guarantee is

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affixed to any particular Note, or any other circumstance which might otherwise
constitute a legal or equitable discharge or defense of a Guarantor. Each of
the Guarantors hereby waives the benefit of diligence, presentment, demand of
payment, filing of claims with a court in the event of insolvency or bankruptcy
of the Company, any right to require a proceeding first against the Company,
protest, notice and all demands whatsoever and covenants that its Guarantee
shall not be discharged except by complete performance of the obligations
contained in the Notes, this Indenture and this Guarantee. This Guarantee is a
guarantee of payment and not of collection. If any Holder or the Trustee is
required by any court or otherwise to return to the Company or to any Guarantor,
or any custodian, trustee, liquidator or other similar official acting in
relation to the Company or such Guarantor, any amount paid by the Company or
such Guarantor to the Trustee or such Holder, this Guarantee, to the extent
theretofore discharged, shall be reinstated in full force and effect. Each
Guarantor further agrees that, as between it, on the one hand, and the Holders
of Notes and the Trustee, on the other hand, (a) subject to this Article Eleven,
the maturity of the obligations guaranteed hereby may be accelerated as provided
in Article Six for the purposes of this Guarantee, notwithstanding any stay,
injunction or other prohibition preventing such acceleration in respect of the
obligations guaranteed hereby, and (b) in the event of any acceleration of such
obligations as provided in Article Six, such obligations (whether or not due and
payable) shall forthwith become due and payable by the Guarantors for the
purpose of this Guarantee.

No stockholder, officer, director, employee or incorporator, past,
present or future, or any Guarantor, as such, shall have any personal liability
under this Guarantee by reason of his, her or its status as such stockholder,
officer, director, employee or incorporator.

Each Guarantor that makes a payment or distribution under its
Guarantee shall be entitled to a contribution from each other Guarantor,
determined in accordance with GAAP.

SECTION 10.02. LIMITATIONS ON GUARANTEES.

The obligations of any Guarantor under its Guarantee are limited to
the maximum amount which, after giving effect to all other contingent and fixed
liabilities of the Guarantor will result in the obligations of the Guarantor
under the Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under any laws of the United States, any state of the United States or
the District of Columbia.

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SECTION 10.03. EXECUTION AND DELIVERY OF
GUARANTEE.

To further evidence the Guarantee set forth in Section 10.01, each
Guarantor hereby agrees that a notation of such Guarantee, substantially in the
form of EXHIBIT E, shall be endorsed on each Note authenticated and delivered by
the Trustee. Such Guarantee shall be executed on behalf of each Guarantor by
either manual or facsimile signature of two Officers of the Guarantor, each of
whom, in each case, shall have been duly authorized to so execute by all
requisite corporate action. The validity and enforceability of any Guarantee
shall not be affected by the fact that it is not affixed to any particular Note.

Each of the Guarantors hereby agrees that its Guarantee set forth in
Section 10.01 shall remain in full force and effect notwithstanding any failure
to endorse on each Note a notation of such Guarantee.

If an Officer of a Guarantor whose signature is on this Indenture or a
Guarantee no longer holds that office at the time the Trustee authenticates the
Note on which such Guarantee is endorsed or at any time thereafter, such
Guarantor's Guarantee of such Note shall be valid nevertheless.

The delivery of any Note by the Trustee, after the authentication
thereof hereunder, shall constitute due delivery of any Guarantee set forth in
this Indenture on behalf of each Guarantor.

SECTION 10.04. RELEASE OF THE GUARANTOR.

(a) If no Default exists or would exist under this Indenture, upon
(i) the sale or other disposition of all of the Capital Stock of the Guarantor
by the Company, or (ii) the sale or disposition of all or substantially all of
the assets of the Guarantor in compliance with all of the terms of this
Indenture, the Guarantor's Guarantee shall be released, and the Guarantor shall
be deemed released from all obligations under this Article Ten without any
further action required on the part of the Trustee or any Holder. If the
Guarantor is not so released the Guarantor or the entity surviving the
Guarantor, as applicable, shall remain or be liable under its Guarantee as
provided in this Article Ten.

(b) The Trustee shall deliver an appropriate instrument evidencing
the release of the Guarantor upon receipt of a request by the Company or the
Guarantor accompanied by an Officers' Certificate and an Opinion of Counsel
certifying as to the compliance with this Section 10.04, PROVIDED the legal

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counsel delivering such Opinion of Counsel may rely as to matters of fact on one
or more Officers Certificates of the Company.

The Trustee shall execute any documents reasonably requested by the
Company or the Guarantor in order to evidence the release of the Guarantor from
its obligations under its Guarantee endorsed on the Notes and under this Article
Eleven.

Except as set forth in Articles Four and Five and this Section 10.04,
nothing contained in this Indenture or in any of the Notes shall prevent any
consolidation or merger of the Guarantor with or into the Company or shall
prevent any sale or conveyance of the property of the Guarantor as an entirety
or substantially as an entirety to the Company.

SECTION 10.05. WAIVER OF SUBROGATION.

Until this Indenture is discharged and all of the Notes are discharged
and paid in full, each Guarantor hereby irrevocably waives and agrees not to
exercise any claim or other rights which it may now or hereafter acquire against
the Company that arise from the existence, payment, performance or enforcement
of the Company's obligations under the Notes or this Indenture and such
Guarantor's obligations under this Guarantee and this Indenture, in any such
instance including, without limitation, any right of subrogation, reimbursement,
exoneration, contribution, indemnification, and any right to participate in any
claim or remedy of the Holders against the Company, whether or not such claim,
remedy or right arises in equity, or under contract, statute or common law,
including, without limitation, the right to take or receive from the Company,
directly or indirectly, in cash or other property or by set-off or in any other
manner, payment or security on account of such claim or other rights. If any
amount shall be paid to any Guarantor in violation of the preceding sentence and
any amounts owing to the Trustee or the Holders of Notes under the Notes, this
Indenture, or any other document or instrument delivered under or in connection
with such agreements or instruments, shall not have been paid in full, such
amount shall have been deemed to have been paid to such Guarantor for the
benefit of, and held in trust for the benefit of, the Trustee or the Holders and
shall forthwith be paid to the Trustee for the benefit of itself or such Holders
to be credited and applied to the obligations in favor of the Trustee or the
Holders, as the case may be, whether matured or unmatured, in accordance with
the terms of this Indenture. Each Guarantor acknowledges that it will receive
direct and indirect benefits from the financing arrangements contemplated by
this Indenture and that the waiver set forth in this Section 10.05 is knowingly
made in contemplation of such benefits.

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SECTION 10.06. IMMEDIATE PAYMENT.

Each Guarantor agrees to make immediate payment to the Trustee on
behalf of the Holders of all Obligations owing or payable to the respective
Holders upon receipt of a demand for payment therefor by the Trustee to such
Guarantor in writing.

SECTION 10.07. OBLIGATIONS CONTINUING.

The obligations of each Guarantor hereunder shall be continuing and
shall remain in full force and effect until all the obligations have been paid
and satisfied in full. Each Guarantor agrees with the Trustee that it will from
time to time deliver to the Trustee suitable acknowledgments of this continued
liability hereunder.

SECTION 10.08. OBLIGATIONS REINSTATED.

The obligations of each Guarantor hereunder shall continue to be
effective or shall be reinstated, as the case may be, if at any time any payment
which would otherwise have reduced the obligations of any Guarantor hereunder
(whether such payment shall have been made by or on behalf of the Company or by
or on behalf of a Guarantor) is rescinded or reclaimed from any of the Holders
upon the insolvency, bankruptcy, liquidation or reorganization of the Company or
any Guarantor or otherwise, all as though such payment had not been made. If
demand for, or acceleration of the time for, payment by the Company is stayed
upon the insolvency, bankruptcy, liquidation or reorganization of the Company,
all such Indebtedness otherwise subject to demand for payment or acceleration
shall nonetheless be payable by each Guarantor as provided herein.

SECTION 10.09. OBLIGATIONS NOT AFFECTED.

The obligations of each Guarantor hereunder shall not be affected,
impaired or diminished in any way by any act, omission, matter or thing
whatsoever, occurring before, upon or after any demand for payment hereunder
(and whether or not known or consented to by any Guarantor or any of the
Holders) which, but for this provision, might constitute a whole or partial
defense to a claim against any Guarantor hereunder or might operate to release
or otherwise exonerate any Guarantor from any of its obligations hereunder or
otherwise affect such obligations, whether occasioned by default of any of the
Holders or otherwise.

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SECTION 10.10. WAIVER.

Without in any way limiting the provisions of Section 10.01 hereof,
each Guarantor hereby waives notice or proof of reliance by the Holders upon the
obligations of any Guarantor hereunder, and diligence, presentment, demand for
payment on the Company, protest or notice of dishonor of any of the Obligations,
or other notice or formalities to the Company of any kind whatsoever.

SECTION 10.11. NO OBLIGATION TO TAKE ACTION
AGAINST THE COMPANY.

Neither the Trustee nor any other Person shall have any obligation to
enforce or exhaust any rights or remedies or to take any other steps under any
security for the Obligations or against the Company or any other Person or any
property of the Company or any other Person before the Trustee is entitled to
demand payment and performance by any or all Guarantors of their liabilities and
obligations under their Guarantees or under this Indenture.

SECTION 10.12. DEALING WITH THE COMPANY AND OTHERS.

The Holders, without releasing, discharging, limiting or otherwise
affecting in whole or in part the obligations and liabilities of any Guarantor
hereunder and without the consent of or notice to any Guarantor, may

(a) grant time, renewals, extensions, compromises, concessions,
waivers, releases, discharges and other indulgences to the Company or any
other Person;

(b) take or abstain from taking security or collateral from the
Company or from perfecting security or collateral of the Company;

(c) release, discharge, compromise, realize, enforce or otherwise
deal with or do any act or thing in respect of (with or without
consideration) any and all collateral, mortgages or other security given by
the Company or any third party with respect to the obligations or matters
contemplated by this Indenture or the Notes;

(d) accept compromises or arrangements from the Company;

(e) apply all monies at any time received from the Company or from
any security upon such part of the Obligations as the Holders may see fit
or change any such application

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in whole or in part from time to time as the Holders may see fit; and

(f) otherwise deal with, or waive or modify their right to deal with,
the Company and all other Persons and any security as the Holders or the
Trustee may see fit.

SECTION 10.13. DEFAULT AND ENFORCEMENT.

If any Guarantor fails to pay in accordance with Section 10.06, the
Trustee may proceed in its name as trustee hereunder in the enforcement of the
Guarantee of any such Guarantor and such Guarantor's obligations thereunder and
hereunder by any remedy provided by law, whether by legal proceedings or
otherwise, and to recover from such Guarantor the obligations.

SECTION 10.14. AMENDMENT, ETC.

No amendment, modification or waiver of any provision of this
Indenture relating to any Guarantor or consent to any departure by any Guarantor
or any other Person from any such provision will in any event be effective
unless it is signed by such Guarantor and the Trustee.

SECTION 10.15. ACKNOWLEDGMENT.

Each Guarantor hereby acknowledges communication of the terms of this
Indenture and the Notes and consents to and approves of the same.

SECTION 10.16. COSTS AND EXPENSES.

Each Guarantor shall pay on demand by the Trustee any and all costs,
fees and expenses (including, without limitation, legal fees on a solicitor and
client basis) incurred by the Trustee, its agents, advisors and counsel or any
of the Holders in enforcing any of their rights under any Guarantee.

SECTION 10.17. NO WAIVER; CUMULATIVE
REMEDIES.

No failure to exercise and no delay in exercising, on the part of the
Trustee or the Holders, any right, remedy, power or privilege hereunder or under
this Indenture or the Notes, shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, remedy, power or privilege hereunder or
under this Indenture or the Notes preclude any other or further exercise thereof
or the exercise of any other right, remedy, power or privilege. The rights,
remedies, powers and privileges in the Guarantee and under this Indenture, the
Notes and any other document or instrument between a Guarantor

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and/or the Company and the Trustee are cumulative and not exclusive of any
rights, remedies, powers and privilege provided by law.

SECTION 10.18. SURVIVAL OF OBLIGATIONS.

Without prejudice to the survival of any of the other obligations of
each Guarantor hereunder, the obligations of each Guarantor under Section 10.01
and shall be enforceable against such Guarantor without regard to and without
giving effect to any right of offset or counterclaim available to or which may
be asserted by the Company or any Guarantor.

SECTION 10.19. GUARANTEE IN ADDITION TO OTHER
OBLIGATIONS.

The obligations of each Guarantor under its Guarantee and this Indenture
are in addition to and not in substitution for any other obligations to the
Trustee or to any of the Holders in relation to this Indenture or the Notes
(including the Purchase Agreement and the Registration Rights Agreement).

SECTION 10.20. SEVERABILITY.

Any provision of this Article Ten which is prohibited or unenforceable
in any jurisdiction shall not invalidate the remaining provisions and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction unless its removal
would substantially defeat the basic intent, spirit and purpose of this
Indenture and this Article Ten.

SECTION 10.21. SUCCESSORS AND ASSIGNS.

Each Guarantee shall be binding upon and inure to the benefit of each
Guarantor and the Trustee and the other Holders and their respective successors
and permitted assigns, except that no Guarantor may assign any of its
obligations hereunder or thereunder.

ARTICLE ELEVEN

MISCELLANEOUS

SECTION 11.01. TIA CONTROLS.

If any provision of this Indenture limits, qualifies, or conflicts
with another provision which is required to be included in this Indenture by the
TIA, the required provision

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shall control; PROVIDED, HOWEVER, that this Section 11.01 shall not of itself
require that this Indenture or the Trustee be qualified under the TIA or
constitute any admission or acknowledgment by any party hereto that any such
qualification is required prior to the time this Indenture and the Trustee are
required by the TIA to be so qualified.

SECTION 11.02. NOTICES.

Any notices or other communications required or permitted hereunder
shall be in writing, and shall be sufficiently given if made by hand delivery,
by telex, by telecopier or registered or certified mail, postage prepaid, return
receipt requested, addressed as follows:

if to the Company:

Town Sports International, Inc.
888 Seventh Avenue
New York, NY 10106
Facsimile No. (212) 246-8422

Attention: Alex Alimanestianu, Esq.

if to the Trustee:

United States Trust Company of New York

114 West 47th Street
New York, NY 10036
Telecopier Number: (212) 856-1626

Attention: Corporate Trust Division

The Company and the Trustee by written notice to the other may
designate additional or different addresses for notices to such Person. Any
notice or communication to the Company or the Trustee shall be deemed to have
been given or made as of the date so delivered if hand delivered; when answered
back, if telexed; when receipt is acknowledged, if faxed; and five (5) calendar
days after mailing if sent by registered or certified mail, postage prepaid
(except that a notice of change of address shall not be deemed to have been
given until actually received by the addressee).

Any notice or communication mailed to a Holder shall be mailed to him
by first class mail or other equivalent means at his address as it appears on
the registration books of the Registrar ten (10) days prior to such mailing and
shall be sufficiently given to him if so mailed within the time prescribed.

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Failure to mail a notice or communication to a Holder or any defect in
it shall not affect its sufficiency with respect to other Holders. If a notice
or communication is mailed in the manner provided above, it is duly given,
whether or not the addressee receives it.

SECTION 11.03. COMMUNICATIONS BY HOLDERS
WITH OTHER HOLDERS.

Holders may communicate pursuant to TIA Section 312(b) with other
Holders with respect to their rights under this Indenture or the Notes. The
Company, the Trustee, the Registrar and any other Person shall have the
protection of TIA Section 312(c).

SECTION 11.04. CERTIFICATE AND OPINION AS
TO CONDITIONS PRECEDENT.

Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:

(1) an Officers' Certificate, in form and substance satisfactory to
the Trustee, stating that, in the opinion of the signers, all conditions
precedent to be performed by the Company, if any, provided for in this
Indenture relating to the proposed action have been complied with; and

(2) an Opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent to be performed by the Company, if
any, provided for in this Indenture relating to the proposed action have
been complied with (which counsel, as to factual matters, may rely on an
Officers' Certificate).

SECTION 11.05. STATEMENTS REQUIRED IN
CERTIFICATE OR OPINION.

Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture, other than the Officers'
Certificate required by Section 4.06, shall include:

(1) a statement that the Person making such certificate or opinion
has read such covenant or condition;

(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;

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(3) a statement that, in the opinion of such Person, he has made such
examination or investigation as is reasonably necessary to enable him to
express an informed opinion as to whether or not such covenant or condition
has been complied with; and

(4) a statement as to whether or not, in the opinion of each such
Person, such condition or covenant has been complied with.

SECTION 11.06. RULES BY TRUSTEE, PAYING
AGENT, REGISTRAR.

The Trustee may make reasonable rules in accordance with the Trustee's
customary practices for action by or at a meeting of Holders. The Paying Agent
or Registrar may make reasonable rules for its functions.

SECTION 11.07. LEGAL HOLIDAYS.

A "LEGAL HOLIDAY" used with respect to a particular place of payment
is a Saturday, a Sunday or a day on which banking institutions in New York, New
York or at such place of payment are not required to be open. If a payment date
is a Legal Holiday at such place, payment may be made at such place on the next
succeeding day that is not a Legal Holiday, and no interest shall accrue for the
intervening period.

SECTION 11.08. GOVERNING LAW.

This Indenture and the Notes shall be governed by and construed in
accordance with the laws of the State of New York but without giving effect to
applicable principles of conflicts of law.

SECTION 11.09. NO ADVERSE INTERPRETATION
OF OTHER AGREEMENTS.

This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or any of its Subsidiaries. Any such indenture,
loan or debt agreement may not be used to interpret this Indenture.

SECTION 11.10. NO PERSONAL LIABILITY.

No director, officer, employee or stockholder, as such, of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes, this Indenture or the Registration Rights Agreement or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of Notes by accepting a Note waives and

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releases all such liability. The waiver and release are part of the
consideration for the issuance of the Notes.

SECTION 11.11. SUCCESSORS.

All agreements of the Company in this Indenture and the Notes shall
bind its successors. All agreements of the Trustee in this Indenture shall bind
its successors.

SECTION 11.12. DUPLICATE ORIGINALS.

All parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together shall represent the
same agreement.

SECTION 11.13. SEVERABILITY.

In case any one or more of the provisions in this Indenture or in the
Notes shall be held invalid, illegal or unenforceable, in any respect for any
reason, the validity, legality and enforceability of any such provision in every
other respect and of the remaining provisions shall not in any way be affected
or impaired thereby, it being intended that all of the provisions hereof shall
be enforceable to the full extent permitted by law.

SECTION 11.14. INDEPENDENCE OF COVENANTS.

All covenants and agreements in this Indenture and the Notes shall be
given independent effect so that if any particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or otherwise be within the limitations of, another covenant shall
not avoid the occurrence of a Default or an Event of Default if such action is
taken or condition exists.

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SIGNATURES

IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, all as of the date first written above.

TOWN SPORTS INTERNATIONAL, INC.

By: __________________________
Name:
Title:

UNITED STATES TRUST COMPANY OF NEW YORK,
as Trustee

By: __________________________
Name:
Title:

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EXHIBIT A

CUSIP No.: [ ]

TOWN SPORTS INTERNATIONAL, INC.

9 3/4% SENIOR NOTE DUE 2004

No. [ ] $85,000,000

TOWN SPORTS INTERNATIONAL, INC., a New York corporation (the
"Company", which term includes any successor entities), for value received
promise to pay to Cede & Co. or registered assigns the principal sum of
Eighty-Five Million ($85,000,000) Dollars on October 15, 2004.

Interest Payment Dates: April 15 and October 15, commencing April 15,
1998

Record Dates: April 1 and October 1

Reference is made to the further provisions of this Note contained
herein, which will for all purposes have the same effect as if set forth at this
place.

IN WITNESS WHEREOF, the Company has caused this Note to be signed
manually or by facsimile by its duly authorized officers and a facsimile of its
corporate seal to be affixed hereto or imprinted hereon.

TOWN SPORTS INTERNATIONAL, INC.

By:____________________________
Name:
Title:

Dated:

A-1
<PAGE>

Certificate of Authentication

This is one of the 9 3/4% Senior Notes due 2004 referred to in the
within-mentioned Indenture.

UNITED STATES TRUST COMPANY OF NEW YORK,
as Trustee

By:____________________________
Authorized Signatory

Date of Authentication:

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(REVERSE OF SECURITY)

9 3/4% Senior Note due 2004

1. INTEREST. TOWN SPORTS INTERNATIONAL, INC., a New York corporation
(the "Company"), promises to pay interest on the principal amount of this Note
at the rate per annum shown above. Interest on the Notes will accrue from the
most recent date on which interest has been paid or, if no interest has been
paid, from October 16, 1997. The Company will pay interest semi-annually in
arrears on each Interest Payment Date, commencing April 15, 1998. Interest will
be computed on the basis of a 360-day year of twelve 30-day months and, in the
case of a partial month, the actual number of days elapsed.

The Company shall pay interest on overdue principal and on overdue
installments of interest from time to time on demand at the rate borne by the
Notes and on overdue installments of interest (without regard to any applicable
grace periods) to the extent lawful.

2. METHOD OF PAYMENT. The Company shall pay interest on the Notes
(except defaulted interest) to the Persons who are the registered Holders at the
close of business on the Record Date immediately preceding the Interest Payment
Date even if the Notes are cancelled on registration of transfer or registration
of exchange (including pursuant to an Exchange Offer (as defined in the
Registration Rights Agreement)) after such Record Date. Holders must surrender
Notes to a Paying Agent to collect principal payments. The Company shall pay
principal and interest in money of the United States that at the time of payment
is legal tender for payment of public and private debts ("U.S. Legal Tender").
However, the Company may pay principal and interest by its check payable in such
U.S. Legal Tender. The Company may deliver any such interest payment to the
Paying Agent or to a Holder at the Holder's registered address.

3. PAYING AGENT AND REGISTRAR. Initially, United States Trust
Company of New York (the "Trustee") will act as Paying Agent and Registrar. The
Company may change any Paying Agent, Registrar or co-Registrar without notice to
the Holders.

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Exchange Notes (as defined in the Indenture) issued in exchange for the Initial
Notes pursuant to the Registration Rights Agreement. The Initial Notes and the
Exchange Notes are treated as a single class of securities under the Indenture.
Capitalized terms herein are used as defined in the Indenture unless otherwise
defined herein. The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939 (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"), as in effect on the date
of the Indenture. Notwithstanding anything to the contrary herein, the Notes
are subject to all such terms, and Holders of Notes are referred to the
Indenture and said Act for a statement of them. The Notes are general unsecured
obligations of the Company.

Each Holder, by accepting a Note, agrees to be bound by all of the
terms and provisions of the Indenture, as the same may be amended from time to
time in accordance with its terms.

5. REDEMPTION. The Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and after October
15, 2001, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on of the year set
forth below, plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption:

YEAR PERCENTAGE
---- ----------

2001............................ 104.875%
2002............................ 102.438%
2003 and thereafter............. 100.000%

At any time, or from time to time, on or prior to October 15, 2000,
the Company may, at its option, use the net cash proceeds of one or more Public
Equity Offerings to redeem up to 35% of the Notes at a redemption price equal to
109.750% of the principal amount thereof plus accrued and unpaid interest
thereon, if any, to the date of redemption; PROVIDED that a least 65% of the
principal amount of Notes originally issued remains outstanding immediately
after any such redemption. In order to effect the foregoing redemption with the
proceeds of any Public Equity Offering, the Company shall make such redemption
not more than 120 days after the consummation of any such Public Equity
Offering.

At any time on or prior to October 15, 2002, the Notes may also be
redeemed as a whole but not in part at the option of the Company upon the
occurrence of a Change of

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Control, upon not less than 30 nor more than 60 days' prior notice (but in no
event more than 90 days after the occurrence of such Change of Control) mailed
by first-class mail to each Holder's registered address, at a redemption price
equal to 100% of the principal amount thereof plus the Applicable Premium as of,
and accrued but unpaid interest, in any, to, the date of redemption (the
"Redemption Date") (subject to the rights of Holders on the relevant record date
to receive interest due on the relevant interest payment date).

6. NOTICE OF REDEMPTION. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the Redemption Date to each
Holder of Notes to be redeemed at such Holder's registered address. Notes in
denominations larger than $1,000 may be redeemed in part.

Except as set forth in the Indenture, if monies for the redemption of
the Notes called for redemption shall have been deposited with the Paying Agent
for redemption on such Redemption Date, then, unless the Company defaults in the
payment of such redemption price plus accrued interest, if any, the Notes called
for redemption will cease to bear interest from and after such Redemption Date
and the only right of the Holders of such Notes will be to receive payment of
the redemption price plus accrued interest, if any.

7. PUT PROVISIONS. Upon a Change of Control, any Holder of Notes
will have the right, subject to certain conditions specified in the Indenture,
to cause the Company to repurchase all or any part of the Notes of such Holder
at a repurchase price equal to 101% of the principal amount of the Notes to be
repurchased plus accrued interest to the date of repurchase (subject to the
right of Holders of record on the relevant record date to receive interest due
on the related interest payment date) as provided in, and subject to the terms
of, the Indenture.

8. OFFERS TO PURCHASE. Sections 4.14 and 4.15 of the Indenture
provide that, after certain Asset Sales (as defined in the Indenture) and upon
the occurrence of a Change of Control (as defined in the Indenture), and subject
to further limitations contained therein, the Company will make an offer to
purchase certain amounts of the Notes in accordance with the procedures set
forth in the Indenture.

9. REGISTRATION RIGHTS. Pursuant to a registration rights agreement
between the Company and the Initial Purchaser, the Company will be obligated to
consummate an exchange offer pursuant to which the Holder of this Note shall
have the right to exchange this Note for Exchange Notes (as defined in the
Indenture), which have been registered under the Securities Act,

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in like principal amount and having terms identical in all material respects as
the Initial Notes. The Holders of the Initial Notes shall be entitled to
receive certain additional interest payments in the event such exchange offer is
not consummated and upon certain other conditions, all pursuant to and in
accordance with the terms of the registration rights agreement.

10. DENOMINATIONS; TRANSFER; EXCHANGE. The Notes are in registered
form, without coupons, and in denominations of $1,000 and integral multiples of
$1,000. A Holder shall register the transfer of or exchange Notes in accordance
with the Indenture. The Registrar may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and to pay certain
transfer taxes or similar governmental charges payable in connection therewith
as permitted by the Indenture. The Registrar need not register the transfer of
or exchange of any Notes or portions thereof selected for redemption.

11. PERSONS DEEMED OWNERS. The registered Holder of a Note shall be
treated as the owner of it for all purposes.

12. UNCLAIMED MONEY. If money for the payment of principal or
interest remains unclaimed for one year, the Trustee and the Paying Agent will
pay the money back to the Company. After that, all liability of the Trustee and
such Paying Agent with respect to such money shall cease.

13. DISCHARGE PRIOR TO REDEMPTION OR MATURITY. If the Company at any
time deposits with the Trustee U.S. Legal Tender or U.S. Government Obligations
sufficient to pay the principal of and interest on the Notes to redemption or
maturity and complies with the other provisions of the Indenture relating
thereto, the Company will be discharged from certain provisions of the Indenture
and the Notes (including certain covenants, but including, under certain
circumstances, its obligation to pay the principal of and interest on the Notes
but without affecting the rights of the Holders to receive such amounts from
such deposits).

14. AMENDMENT; SUPPLEMENT; WAIVER. Subject to certain exceptions set
forth in the Indenture, the Indenture or the Notes may be amended or
supplemented with the written consent of the Holders of a majority in aggregate
principal amount of the Notes then outstanding, and any past Default or Event of
Default or noncompliance with any provision may be waived with the written
consent of the Holders of a majority in aggregate principal amount of the Notes
then outstanding. Without notice to or consent of any Holder, the parties
thereto may amend or supplement the Indenture or the Notes to, among other
things, cure any ambiguity, defect or inconsistency, provide for

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uncertificated Notes in addition to or in place of certificated Notes, comply
with any requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the TIA or comply with Article Five of the
Indenture or make any other change that does not adversely affect the rights of
any Holder of a Note.

15. RESTRICTIVE COVENANTS. The Indenture imposes certain limitations
on the ability of the Company and its Restricted Subsidiaries to, among other
things, incur additional Indebtedness, make payments in respect of their Capital
Stock or certain Indebtedness, make certain Investments, create or incur liens,
enter into transactions with Affiliates, create dividend or other payment
restrictions affecting any Subsidiaries of the Company, issue Preferred Stock of
any Subsidiaries of the Company, and on the ability of the Company to merge or
consolidate with any other Person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the Company's or its
Subsidiaries' assets or adopt a plan of liquidation. Such limitations are
subject to a number of important qualifications and exceptions. Pursuant to
Section 4.06 of the Indenture, the Company must annually report to the Trustee
on compliance with such limitations.

16. SUCCESSORS. When a successor assumes, in accordance with the
Indenture, all the obligations of its predecessor under the Notes and the
Indenture, the predecessor, subject to certain exceptions, will be released from
those obligations.

17. DEFAULTS AND REMEDIES. If an Event of Default occurs and is
continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of Notes then outstanding may declare all the Notes to be due
and payable in the manner, at the time and with the effect provided in the
Indenture. Holders of Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. The Trustee is not obligated to enforce the
Indenture or the Notes unless it has received indemnity reasonably satisfactory
to it. The Indenture permits, subject to certain limitations therein provided,
Holders of a majority in aggregate principal amount of the Notes then
outstanding to direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Holders of Notes notice of any continuing Default or
Event of Default (except a Default in payment of principal or interest when due,
for any reason or a Default in compliance with Article Five of the Indenture) if
it determines that withholding notice is in their interest.

18. TRUSTEE DEALINGS WITH THE COMPANY AND ITS SUBSIDIARIES. The
Trustee under the Indenture, in its individual or any other capacity, may become
the owner or pledgee of Notes

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<PAGE>

and may otherwise deal with the Company, its Subsidiaries or their respective
Affiliates as if it were not the Trustee.

19. NO RECOURSE AGAINST OTHERS. No partner, director, officer,
employee or stockholder, as such, of the Company, as such, shall have any
liability for any obligations of the Company under the Notes, the Indenture or
the Registration Rights Agreement or for any claim based on, in respect of, or
by reason of, such obligations or their creation. Each Holder of Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for the issuance of the Notes.

20. GUARANTEES. This Note will be entitled to the benefits of
certain Guarantees, if any, made for the benefit of the Holders. Reference is
hereby made to the Indenture for a statement of the respective rights,
limitations of rights, duties and obligations thereunder of the Guarantors, the
Trustee and the Holders.

21. AUTHENTICATION. This Note shall not be valid until the Trustee
or Authenticating Agent manually signs the certificate of authentication on this
Note.

22. GOVERNING LAW. This Note and the Indenture shall be governed by
and construed in accordance with the laws of the State of New York, as applied
to contracts made and performed within the State of New York, without regard to
principles of conflict of laws. Each of the parties hereto agrees to submit to
the jurisdiction of the courts of the State of New York in any action or
proceeding arising out of or relating to this Note.

23. ABBREVIATIONS AND DEFINED TERMS. Customary abbreviations may be
used in the name of a Holder of a Note or an assignee, such as: TEN COM (=
tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint
tenants with right of survivorship and not as tenants in common), CUST (=
Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).

24. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes as a convenience to the Holders of the
Notes. No representation is made as to the accuracy of such numbers as printed
on the Notes and reliance may be placed only on the other identification numbers
printed hereon.

The Company will furnish to any Holder of a Note upon written request
and without charge a copy of the Indenture, which has the text of this Note.
Requests may be made to:

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Town Sports International, Inc., 888 Seventh Avenue, New York, New York 10106.

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ASSIGNMENT FORM

If you the Holder want to assign this Note, fill in the form below and
have your signature guaranteed:

I or we assign and transfer this Note to:

_____________________________________________________________

_____________________________________________________________
(Print or type name, address and zip code and social security or tax ID number
of assignee)

and irrevocably appoint , agent to
transfer this Note on the books of the Company. The agent may substitute
another to act for him.

Dated: Signed: _________________________________
(Sign exactly as your name
appears on the other side of
this Note)

Signature Guarantee:

In connection with any transfer of this Note occurring prior to the
date which is the earlier of (i) the date of the declaration by the Commission
of the effectiveness of a registration statement under the Securities Act of
1933, as amended (the "Securities Act") covering resales of this Note (which
effectiveness shall not have been suspended or terminated at the date of the
transfer) and (ii) the undersigned confirms that it has not utilized any general
solicitation or general advertising in connection with the transfer:

[CHECK ONE]

(1) __ to the Company or a subsidiary thereof; or

(2) __ pursuant to and in compliance with Rule 144A under the Securities
Act of 1933, as amended; or

(3) __ to an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended)
that has furnished to the Trustee a signed letter containing certain
representations and agreements (the form of which letter can be obtained
from the Trustee); or

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(4) __ outside the United states to a "foreign person" in compliance
with Rule 904 of Regulation S under the Securities Act of 1933, as amended;
or

(5) __ pursuant to the exemption from registration provided by Rule 144
under the Securities Act of 1933, as amended; or

(6) __ pursuant to an effective registration statement under the
Securities Act of 1933, as amended; or

(7) __ pursuant to another available exemption from the registration
requirements of the Securities Act of 1933, as amended.

and unless the box below is checked, the undersigned confirms that such Note is
not being transferred to an "affiliate" of the Company as defined in Rule 144
under the Securities Act of 1933, as amended (an "Affiliate"):

/ / The transferee is an Affiliate of the Company.

Unless one of the items is checked, the Trustee will refuse to
register any of the Notes evidenced by this certificate in the name of any
person other than the registered Holder thereof; PROVIDED, HOWEVER, that if item
(3), (4), (5) or (7) is checked, the Company or the Trustee may require, prior
to registering any such transfer of the Notes, in their sole discretion, such
written legal opinions, certifications (including an investment letter in the
case of box (3) or (4)) and other information as the Trustee or the Company has
reasonably requested to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933, as amended.

If none of the foregoing items are checked, the Trustee or Registrar
shall not be obligated to register this Note in the name of any person other
than the Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 2.17 of the Indenture shall have
been satisfied.

Dated: ____________________ Signed: ________________________
(Sign exactly as name appears on the
other side of this Note)

Signature Guarantee: __________________________________________

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TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED

The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, as amended and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.

Dated: ______________ _____________________________
NOTICE: To be executed by an executive officer

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[OPTION OF HOLDER TO ELECT PURCHASE]

If you want to elect to have this Note purchased by the Company
pursuant to Section 4.14 or Section 4.15 of the Indenture, check the appropriate
box:
Section 4.14 [ ]
Section 4.15 [ ]

If you want to elect to have only part of this Note purchased by the
Company pursuant to Section 4.14 or Section 4.15 of the Indenture, state the
amount you elect to have purchased:
$___________________

Dated: ________________ _____________________________________
NOTICE: The signature on this
assignment must correspond with the
name as it appears upon the face of
the within Note in every particular
without alteration or enlargement
or any change whatsoever and be
guaranteed.

Signature Guarantee: ________________________________________

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EXHIBIT B

CUSIP No.: [ ]

TOWN SPORTS INTERNATIONAL, INC.
9 3/4% SENIOR NOTE DUE 2004, SERIES B

No. [ ] $85,000,000

TOWN SPORTS INTERNATIONAL, INC., a New York corporation (the
"Company", which term includes any successor entities), for value received,
promises to pay to Cede & Co. or registered assigns the principal sum of
Eighty-Five Million ($85,000,000) Dollars on October 15, 2004.

Interest Payment Dates: April 15 and October 15, commencing April 15,
1998

Record Dates: April 1 and October 1

Reference is made to the further provisions of this Note contained
herein, which will for all purposes have the same effect as if set forth at this
place.

TOWN SPORTS INTERNATIONAL, INC.

By: ___________________________
Name:
Title:

By:___________________________
Name:
Title:

Dated:

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Certificate of Authentication

This is one of the 9 3/4% Senior Notes due 2004, Series B referred to
in the within-mentioned Indenture.

UNITED STATES TRUST COMPANY OF
NEW YORK, as Trustee

By: ___________________________
Authorized Signatory
Date of Authentication:

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(REVERSE OF SECURITY)

9 3/4% Senior Note due 2004, Series B

1. INTEREST. TOWN SPORTS INTERNATIONAL, INC., a New York
corporation (the "Company"), promises to pay interest on the principal amount of
this Note at the rate per annum shown above. Interest on the Notes will accrue
from the most recent date on which interest has been paid or, if no interest has
been paid, from October 16, 1997. The Company will pay interest semi-annually
in arrears on each Interest Payment Date, commencing April 15, 1998. Interest
will be computed on the basis of a 360-day year of twelve 30-day months and, in
the case of a partial month, the actual number of days elapsed.

2. METHOD OF PAYMENT. The Company shall pay interest on the Notes
(except defaulted interest) to the Persons who are the registered Holders at the
close of business on the Record Date immediately preceding the Interest Payment
Date even if the Notes are cancelled on registration of transfer or registration
of exchange after such Record Date. Holders must surrender Notes to a Paying
Agent to collect principal payments. The Company shall pay principal and
interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts ("U.S. Legal Tender"). However,
the Company may pay principal and interest by its check payable in such U.S.
Legal Tender. The Company may deliver any such interest payment to the Paying
Agent or to a Holder at the Holder's registered address.

3. PAYING AGENT AND REGISTRAR. Initially, (the "Trustee") will act
as Paying Agent and Registrar. The Company may change any Paying Agent,
Registrar or co-Registrar without notice to the Holders.

4. INDENTURE. The Company issued the Notes under an Indenture,
dated as of October 16, 1997 (the "Indenture"), between the Company and the
Trustee. This Note is one of a duly authorized issue of Exchange Notes of the
Company designated as its 9 3/4% Senior Notes due 2004, Series B (the "Exchange
Notes"). The Notes are limited in aggregate principal amount to $125,000,000.
The Notes include the 9 3/4% Notes due 2004 (the "Initial Notes") and the
Exchange Notes, issued in exchange for the Initial Notes pursuant to a
registration rights agreement. The Initial Notes and the Exchange Notes are

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treated as a single class of securities under the Indenture. Capitalized terms
herein are used as defined in th Indenture unless otherwise defined herein. The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code
Sections 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture.
Notwithstanding anything to the contrary herein, the Notes are subject to all
such terms, and Holders of Notes are referred to the Indenture and said Act for
a statement of them. The Notes are general unsecured obligations of the
Company.

Each Holder, by accepting a Note, agrees to be bound by all of the
terms and provisions of the Indenture, as the same may be amended from time to
time in accordance with its terms.

5. REDEMPTION. The Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and after October
15, 2001, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on October 15 of the years
set forth below, plus, in each case, accrued and unpaid interest, if any,
thereon to the date of redemption:

YEAR PERCENTAGE
---- ----------
2001. . . . . . . . . . . . . . . . . . . . 104.875%
2002. . . . . . . . . . . . . . . . . . . . 102.438%
2003 and thereafter . . . . . . . . . . . . 100.000%

At any time on or prior to October 15, 2002, the Notes may also be
redeemed as a whole but not in part at the option of the Company upon the
occurrence of a Change of Control,

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upon not fewer than 30 nor more than 60 days prior notice (but in no event more
than 90 days after the occurrence of such Change of Control) mailed by
first-class mail to each Holder's registered address, at a redemption price
equal to 100% of the principal amount thereof plus the Applicable Premium as of,
and accrued but unpaid interest, if any, to, the Redemption Date (subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant interest payment date).

7. PUT PROVISIONS. Upon a Change of Control, any Holder of Notes
will have the right, subject to certain conditions specified in the Indenture,
to cause the Company to repurchase all or any part of the Notes of such Holder
at a repurchase price equal to 101% of the principal amount of the Notes to be
repurchased plus accrued interest to the date of repurchase (subject to the
right of holders of record on the relevant record date to receive interest due
on the related interest payment date) as provided in, and subject to the terms
of, the Indenture.

9. DENOMINATIONS; TRANSFER; EXCHANGE. The Notes are in registered
form, without coupons, and in denominations of $1,000 and integral multiples of
$1,000. A Holder shall register the transfer of or exchange Notes in accordance
with the Indenture. The Registrar may require a Holder, among other things, to
furnish appropriate endorsements and transfer

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documents and to pay certain transfer taxes or similar governmental charges
payable in connection therewith as permitted by the Indenture. The Registrar
need not register the transfer of or exchange of any Notes or portions thereof
selected for redemption.

10. PERSONS DEEMED OWNERS. The registered Holder of a Note shall be
treated as the owner of it for all purposes.

11. UNCLAIMED MONEY. If money for the payment of principal or
interest remains unclaimed for one year, the Trustee and the Paying Agent will
pay the money back to the Company. After that, all liability of the Trustee and
such Paying Agent with respect to such money shall cease.

12. DISCHARGE PRIOR TO REDEMPTION OR MATURITY. If the Company at any
time deposits with the Trustee U.S. Legal Tender or U.S. Government Obligations
sufficient to pay the principal of and interest on the Notes to redemption and
complies with the other provisions of the Indenture relating thereto, the
Company will be discharged from certain provisions of the Indenture and the
Notes (including certain covenants, including, under certain circumstances, its
obligation to pay the principal of and interest on the Notes but without
affecting the rights of the Holders to receive such amounts from such deposit).

13. AMENDMENT; SUPPLEMENT; WAIVER. Subject to certain exceptions set
forth in the Indenture, the Indenture or the Notes may be amended or
supplemented with the written consent of the Holders of a majority in aggregate
principal amount of the Notes then outstanding, and any past Default or Event of
Default or noncompliance with any provision may be waived with the written
consent of the Holders of a majority in aggregate principal amount of the Notes
then outstanding. Without notice to or consent of any Holder, the parties
thereto may amend or supplement the Indenture or the Notes to, among other
things, cure any ambiguity, defect or inconsistency, provide for uncertificated
Notes in addition to or in place of certificated Notes, comply with any
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the TIA or comply with Article Five of the Indenture or
make any other change that does not adversely affect the rights of any Holder of
a Note.

14. RESTRICTIVE COVENANTS. The Indenture imposes certain limitations
on the ability of the Company and its Restricted Subsidiaries to, among other
things, incur additional Indebtedness, make payments in respect of their Capital
Stock or certain Indebtedness, make certain Investments, create or incur liens,
enter into transactions with Affiliates, create

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dividend or other payment restrictions affecting any Subsidiaries of the
Company, issue Preferred Stock of any Subsidiaries of the Company, and on the
ability of the Company to merge or consolidate with any other Person or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of the Company's or its Subsidiaries' assets or adopt a plan of liquidation.
Such limitations are subject to a number of important qualifications and
exceptions. Pursuant to Section 4.06 of the Indenture, the Company must
annually report to the Trustee on compliance with such limitations.

15. SUCCESSORS. When a successor assumes, in accordance with the
Indenture, all the obligations of its predecessor under the Notes and the
Indenture, the predecessor, subject to certain exceptions, will be released from
those obligations.

16. DEFAULTS AND REMEDIES. If an Event of Default occurs and is
continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of Notes then outstanding may declare all the Notes to be due
and payable in the manner, at the time and with the effect provided in the
Indenture. Holders of Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. The Trustee is not obligated to enforce the
Indenture or the Notes unless it has received indemnity reasonably satisfactory
to it. The Indenture permits, subject to certain limitations therein provided,
Holders of a majority in aggregate principal amount of the Notes then
outstanding to direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Holders of Notes notice of any continuing Default or
Event of Default (except a Default in payment of principal or interest when due,
for any reason or a Default in compliance with Article Five of the Indenture) if
it determines that withholding notice is in their interest.

17. TRUSTEE DEALINGS WITH THE COMPANY AND ITS SUBSIDIARIES. The
Trustee under the Indenture, in its individual or any other capacity, may become
the owner or pledgee of Notes and may otherwise deal with the Company, its
Subsidiaries or their respective Affiliates as if it were not the Trustee.

18. NO RECOURSE AGAINST OTHERS. No partner, director, officer,
employee or stockholder, as such, of the Company or any Guarantor, as such,
shall have any liability for any obligations of the Company or any Guarantor
under the Notes, the Indenture, the Guarantees or the Registration Rights
Agreement or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for the issuance of the Notes.

B-7
<PAGE>

19. GUARANTEES. This Note will be entitled to the benefits of
certain Guarantees, if any, made for the benefit of the Holders. Reference is
hereby made to the Indenture for a statement of the respective rights,
limitations of rights, duties and obligations thereunder of the Guarantors, the
Trustee and the Holders.

20. AUTHENTICATION. This Note shall not be valid until the Trustee
or Authenticating Agent manually signs the certificate of authentication on this
Note.

21. GOVERNING LAW. This Note and the Indenture shall be governed by
and construed in accordance with the laws of the State of New York, as applied
to contracts made and performed within the State of New York, without regard to
principles of conflict of laws. Each of the parties hereto agrees to submit to
the jurisdiction of the courts of the State of New York in any action or
proceeding arising out of or relating to this Note.

22. ABBREVIATIONS AND DEFINED TERMS. Customary abbreviations may be
used in the name of a Holder of a Note or an assignee, such as: TEN COM (=
tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint
tenants with right of survivorship and not as tenants in common), CUST (=
Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).

23. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes as a convenience to the Holders of the
Notes. No representation is made as to the accuracy of such numbers as printed
on the Notes and reliance may be placed only on the other identification numbers
printed hereon.

The Company will furnish to any Holder of a Note upon written request
and without charge a copy of the Indenture, which has the text of this Note.
Requests may be made to: Town Sports International, Inc., 888 Seventh Avenue,
New York, New York 10106.

B-8
<PAGE>

ASSIGNMENT FORM

If you the Holder want to assign this Note, fill in the form below and
have your signature guaranteed:

I or we assign and transfer this Note to:

____________________________________________________________________

____________________________________________________________________
(Print or type name, address and zip code and social security or tax ID number
of assignee)

and irrevocably appoint ____________________________________________, agent to
transfer this Note on the books of the Company. The agent may substitute
another to act for him.

Dated:__________________________ Signed:____________________________
(Sign exactly as name appears on the
other side of this Note)
Signature Guarantee: _________________________

B-9
<PAGE>

[OPTION OF HOLDER TO ELECT PURCHASE]

If you want to elect to have this Note purchased by the Company
pursuant to Section 4.14 or Section 4.15 of the Indenture, check the appropriate
box:

Section 4.14 [ ]

Section 4.15 [ ]

If you want to elect to have only part of this Note purchased by the
Company pursuant to Section 4.14 or Section 4.15 of the Indenture, state the
amount you elect to have purchased:

$___________________

Dated: _______________ ___________________________________
NOTICE: The signature on this assignment
must correspond with the name as it appears
upon the face of the within Note in every
particular without alteration or enlargement
or any change whatsoever and be guaranteed.

Signature Guarantee: _______________________________

B-10
<PAGE>

EXHIBIT C

Form of Certificate To Be
Delivered in Connection with
TRANSFERS TO NON-QIB ACCREDITED INVESTORS
[ ], [ ]

[ ]
[ ]
[ ]

Ladies and Gentlemen:

In connection with our proposed purchase of 9 3/4% Senior Notes due
2004 (the "Notes") of Town Sports International, Inc., a New York corporation
(the "Company"), we confirm that:

1. We have received a copy of the Offering Memorandum (the "Offering
Memorandum"), dated October 9, 1997, relating to the Notes and such other
information as we deem necessary in order to make our investment decision.
We acknowledge that we have read and agreed to the matters stated in the
section entitled "Transfer Restrictions" of such Offering Memorandum.

2. We understand that any subsequent transfer of the Notes is
subject to certain restrictions and conditions set forth in the Indenture
relating to the Notes (the "Indenture") as described in the Offering
Memorandum and the undersigned agrees to be bound by, and not to resell,
pledge or otherwise transfer the Notes except in compliance with, such
restrictions and conditions and the Securities Act of 1933, as amended (the
"Securities Act"), and all applicable State securities laws.

3. We understand that the offer and sale of the Notes have not been
registered under the Securities Act, and that the Notes may not be offered
or sold within the United States or to, or for the account or benefit of,
U.S. persons except as permitted in the following sentence. We agree, on
our own behalf and on behalf of any accounts for which we are acting as
hereinafter stated, that if we should sell any Notes, we will do so only
(i) to the Company or any subsidiary thereof, (ii) inside the United States
in accordance with Rule 144A under the Securities Act to a "qualified
institutional buyer" (as defined in Rule 144A promulgated under the
Securities Act), (iii) inside the United States to an institutional

C-1
<PAGE>

"accredited investor" (as defined below) that, prior to such transfer,
furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the
Trustee (as defined in the Indenture) a signed letter containing certain
representations and agreements relating to the restrictions on transfer of
the Notes (the form of which letter can be obtained from the Trustee), (iv)
outside the United States in accordance with Rule 904 of Regulation S
promulgated under the Securities Act to non-U.S. persons, (v) pursuant to
the exemption from registration provided by Rule 144 under the Securities
Act (if available), or (vi) pursuant to an effective registration statement
under the Securities Act, and we further agree to provide to any person
purchasing any of the Notes from us a notice advising such purchaser that
resales of the Notes are restricted as stated herein.

4. We understand that, on any proposed resale of any Notes, we will
be required to furnish to the Trustee and the Company such certification,
legal opinions and other information as the Trustee and the Company may
reasonably require to confirm that the proposed sale complies with the
foregoing restrictions. We further understand that the Notes purchased by
us will bear a legend to the foregoing effect.

5. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and
have such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risks of our investment in the
Notes, and we and any accounts for which we are acting are each able to
bear the economic risk of our or their investment, as the case may be.

6. We are acquiring the Notes purchased by us for our account or for
one or more accounts (each of which is an institutional "accredited
investor") as to each of which we exercise sole investment discretion.

C-2
<PAGE>

You, the Company, the Trustee and others are entitled to rely upon
this letter and are irrevocably authorized to produce this letter or a copy
hereof to any interested party in any administrative or legal proceeding or
official inquiry with respect to the matters covered hereby.

Very truly yours,

[Name of Transferee]

By: _________________________
Name:
Title:

C-3
<PAGE>

EXHIBIT D
Form of Certificate To Be Delivered
in Connection with Transfers
PURSUANT TO REGULATION S
[ ], [ ]

[ ]
[ ]
[ ]
[ ]

Re: Town Sports International, Inc.
(the "Company") 9 3/4% Senior Notes due
2004 (the "Notes")

Ladies and Gentlemen:

In connection with our proposed sale of aggregate
principal amount of the Notes, we confirm that such sale has been effected
pursuant to and in accordance with Regulation S under the U.S. Securities Act of
1933, as amended (the "Securities Act"), and, accordingly, we represent that:

(1) the offer of the Notes was not made to a person in the United
States;

(2) either (a) at the time the buy offer was originated, the
transferee was outside the United States or we and any person acting on our
behalf reasonably believed that the transferee was outside the United
States, or (b) the transaction was executed in, on or through the
facilities of a designated off-shore securities market and neither we nor
any person acting on our behalf knows that the transaction has been
pre-arranged with a buyer in the United States;

(3) no directed selling efforts have been made in the United States
in contravention of the requirements of Rule 903(b) or Rule 904(b) of
Regulation S, as applicable;

(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act; and

(5) we have advised the transferee of the transfer restrictions
applicable to the Notes.

You, the Company and counsel for the Company are entitled to rely upon
this letter and are irrevocably authorized

D-1
<PAGE>

to produce this letter or a copy hereof to any interested party in any
administrative or legal proceedings or official inquiry with respect to the
matters covered hereby. Terms used in this certificate have the meanings set
forth in Regulation S.

Very truly yours,

[Name of Transferor]

By: _________________________
Authorized Signature

D-2
<PAGE>

EXHIBIT E

FORM OF GUARANTEE

For value received, the undersigned hereby unconditionally guarantees,
as principal obligor and not only as a surety, to the Holder of this Note the
cash payments in United States dollars of principal of, premium, if any, and
interest on this Note (and including Additional Interest payable thereon) in the
amounts and at the times when due and interest on the overdue principal,
premium, if any, and interest, if any, of this Note, if lawful, and the payment
or performance of all other obligations of the Company under the Indenture (as
defined below) or the Notes, to the Holder of this Note and the Trustee, all in
accordance with and subject to the terms and limitations of this Note, Article
Eleven of the Indenture and this Guarantee. This Guarantee will become
effective in accordance with Article Eleven of the Indenture and its terms shall
be evidenced therein. The validity and enforceability of any Guarantee shall
not be affected by the fact that it is not affixed to any particular Note.
Capitalized terms used but not defined herein shall have the meanings ascribed
to them in the Indenture dated as of October 16, 1997, between Town Sports
International, Inc., a New York corporation, as Company (the "Company"), and
United States Trust Company of New York, as trustee (the "Trustee"), as amended
or supplemented (the "Indenture").

The obligations of the undersigned to the Holders of Notes and to the
Trustee pursuant to this Guarantee and the Indenture are expressly set forth in
Article Eleven of the Indenture and reference is hereby made to the Indenture
for the precise terms of the Guarantee and all of the other provisions of the
Indenture to which this Guarantee relates.

THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF
CONFLICTS OF LAW. Each Guarantor hereby agrees to submit to the jurisdiction of
the courts of the State of New York in any action or proceeding arising out of
or relating to this Guarantee.

This Guarantee is subject to release upon the terms set forth in the
Indenture.

E-1
<PAGE>

IN WITNESS WHEREOF, each Guarantor has caused its Guarantee to be duly
executed.

Date:____________________

[NAME OF GUARANTOR], as Guarantor

By:_________________________
Name:
Title:

E-2

<PAGE>

EXHIBIT 4.2

TOWN SPORTS INTERNATIONAL, INC.

$85,000,000
9 3/4% SENIOR NOTES DUE 2004

PURCHASE AGREEMENT
October 9, 1997

BT ALEX. BROWN
Bankers Trust Plaza
130 Liberty Street
New York, New York 10006

Ladies and Gentlemen:

Town Sports International, Inc., a New York corporation (the
"COMPANY"), hereby confirms its agreement with you (the "INITIAL PURCHASER"), as
set forth below.

1. THE SECURITIES. Subject to the terms and conditions herein
contained, the Company proposes to issue and sell to the Initial Purchaser
$85,000,000 aggregate principal amount of its 9 3/4% Senior Notes due 2004,
Series A (the "NOTES"). The Notes are to be issued under an indenture (the
"INDENTURE") to be dated as of October 16, 1997 between the Company and United
States Trust Company of New York, as Trustee (the "TRUSTEE").

The Notes will be offered and sold to the Initial Purchaser without
being registered under the Securities Act of 1933, as amended (the "ACT"), in
reliance on exemptions therefrom.

In connection with the sale of the Notes, the Company has prepared a
preliminary offering memorandum dated September 23, 1997 (the "PRELIMINARY
MEMORANDUM"), and a final offering memorandum dated October 9, 1997 (the "FINAL
MEMORANDUM;" the Preliminary Memorandum and the Final Memorandum each herein
being referred to as a "MEMORANDUM") setting forth or including a description
of the terms of the Notes, the terms of the offering of the Notes, a description
of the Company and any material developments relating to the Company occurring
after the date of the most recent historical financial statements included
therein.

<PAGE>

-2-

The Initial Purchaser and its direct and indirect transferees of the
Notes will be entitled to the benefits of the Registration Rights Agreement,
substantially in the form attached hereto as EXHIBIT A (the "REGISTRATION RIGHTS
AGREEMENT"), pursuant to which the Company has agreed, among other things, to
file a registration statement (the "REGISTRATION STATEMENT") with the Securities
and Exchange Commission (the "COMMISSION") registering the Notes or the Exchange
Notes (as defined in the Registration Rights Agreement) under the Act.

2. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to and agrees with the Initial Purchaser that:

(a) Neither the Preliminary Memorandum as of the date thereof nor the
Final Memorandum nor any amendment or supplement thereto as of the date thereof
and at all times subsequent thereto up to the Closing Date (as defined in
Section 3 below) contained or contains any untrue statement of a material fact
or omitted or omits to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in this
Section 2(a) do not apply to statements or omissions made in reliance upon and
in conformity with information relating to the Initial Purchaser furnished to
the Company in writing by the Initial Purchaser expressly for use in the
Preliminary Memorandum, the Final Memorandum or any amendment or supplement
thereto.

(b) The Company has the authorized, issued and outstanding
capitalization set forth in the Final Memorandum; all of the subsidiaries of the
Company are listed in SCHEDULE 2 attached hereto (each, a "SUBSIDIARY" and
collectively, the "SUBSIDIARIES"); all of the outstanding shares of capital
stock of the Company and the Subsidiaries have been, and as of the Closing Date
will be, duly authorized and validly issued, are fully paid and nonassessable
and were not issued in violation of any preemptive or similar rights; all of the
outstanding shares of capital stock of the Company and of each of the
Subsidiaries will be free and clear of all liens, encumbrances, equities and
claims or restrictions on transferability (other than those imposed by the Act
and the securities or "Blue Sky" laws of certain jurisdictions) or voting;
except as set forth in the Final Memorandum, there are no (i) options, warrants
or other rights to purchase, (ii) agreements or other obligations to issue or
(iii) other rights to convert any obligation into, or exchange any securities
for, shares of capital stock of or

<PAGE>

-3-

ownership interests in the Company or any of the Subsidiaries outstanding.

(c) Each of the Company and the Subsidiaries is duly incorporated,
validly existing and in good standing under the laws of its respective
jurisdiction of incorporation and has all requisite corporate power and
authority to own its properties and conduct its business as now conducted and as
described in the Final Memorandum; each of the Company and the Subsidiaries is
duly qualified to do business as a foreign corporation in good standing in all
other jurisdictions where the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where the failure to
be so qualified would not, individually or in the aggregate, have a material
adverse effect on the general affairs, management, business, condition
(financial or otherwise), prospects or results of operations of the Company and
the Subsidiaries, taken as a whole (any such event, a "MATERIAL ADVERSE
EFFECT").

(d) The Company has all requisite corporate power and authority to
execute, deliver and perform each of its obligations under the Notes, the
Exchange Notes and the Private Exchange Notes (as defined in the Registration
Rights Agreement). The Notes, when issued, will be in the form contemplated by
the Indenture. The Notes, the Exchange Notes and the Private Exchange Notes
have each been duly and validly authorized by the Company and, when executed by
the Company and authenticated by the Trustee in accordance with the provisions
of the Indenture and, in the case of the Notes, when delivered to and paid for
by the Initial Purchaser in accordance with the terms of this Agreement, will
constitute valid and legally binding obligations of the Company, entitled to the
benefits of the Indenture, and enforceable against the Company in accordance
with their terms, except that the enforcement thereof may be subject to
(i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now
or hereafter in effect relating to creditors' rights generally, and (ii) general
principles of equity and the discretion of the court before which any proceeding
therefor may be brought.

(e) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under the Indenture. The Indenture
meets the requirements for qualification under the Trust Indenture Act of 1939,
as amended (the "TIA"). The Indenture has been duly and validly authorized by
the Company and, when executed and delivered by the Company (assuming the due
authorization, execution and delivery by the Trustee), will constitute a valid
and legally binding

<PAGE>

-4-

agreement of the Company, enforceable against the Company in accordance with its
terms, except that the enforcement thereof may be subject to (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights generally and (ii) general principles of
equity and the discretion of the court before which any proceeding therefor may
be brought.

(f) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under the Registration Rights
Agreement. The Registration Rights Agreement has been duly and validly
authorized by the Company and, when executed and delivered by the Company, will
constitute a valid and legally binding agreement of the Company enforceable
against the Company in accordance with its terms, except that (A) the
enforcement thereof may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and (ii) general principles of equity
and the discretion of the court before which any proceeding therefor may be
brought and (B) any rights to indemnity or contribution thereunder may be
limited by federal and state securities laws and public policy considerations.

(g) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. This Agreement and the
consummation by the Company of the transactions contemplated hereby have been
duly and validly authorized by the Company. This Agreement has been duly
executed and delivered by the Company.

(h) No consent, approval, authorization or order of any court or
governmental agency or body, or third party is required for the issuance and
sale by the Company of the Notes to the Initial Purchaser or the consummation by
the Company of the other transactions contemplated hereby, except such as have
been obtained and such as may be required under state securities or "Blue Sky"
laws in connection with the purchase and resale of the Notes by the Initial
Purchaser. None of the Company or the Subsidiaries is (i) in violation of its
certificate of incorporation or bylaws (or similar organizational document),
(ii) in breach or violation of any statute, judgment, decree, order, rule or
regulation applicable to any of them or any of their respective properties or
assets, except for any such breach or violation which would not, individually or
in the aggregate, have a Material Adverse Effect, or (iii) in breach of or
default under (nor has any event occurred which,

<PAGE>

-5-

with notice or passage of time or both, would constitute a default under) or in
violation of any of the terms or provisions of any indenture, mortgage, deed of
trust, loan agreement, note, lease, license, franchise agreement, permit,
certificate, contract or other agreement or instrument to which any of them is a
party or to which any of them or their respective properties or assets is
subject (collectively, "Contracts"), except for any such breach, default,
violation or event which would not, individually or in the aggregate, have a
Material Adverse Effect.

(i) The execution, delivery and performance by the Company of this
Agreement, the Indenture and the Registration Rights Agreement and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance and sale of the Notes to the
Initial Purchaser) will not conflict with or constitute or result in a breach of
or a default under (or an event which with notice or passage of time or both
would constitute a default under) or violation of any of (i) the terms or
provisions of any Contract, except for any such conflict, breach, violation,
default or event which would not, individually or in the aggregate, have a
Material Adverse Effect, (ii) the certificate of incorporation or bylaws (or
similar organizational document) of the Company or any of the Subsidiaries or
(iii) (assuming compliance with all applicable state securities or "Blue Sky"
laws and assuming the accuracy of the representations and warranties of the
Initial Purchaser in Section 8 hereof) any statute, judgment, decree, order,
rule or regulation applicable to the Company or any of the Subsidiaries or any
of their respective properties or assets, except for any such conflict, breach
or violation which would not, individually or in the aggregate, have a Material
Adverse Effect.

(j) The audited consolidated financial statements of the Company and
the Subsidiaries included in the Final Memorandum present fairly in all material
respects the financial position, results of operations and cash flows of the
Company and the Subsidiaries at the dates and for the periods to which they
relate and have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis, except as otherwise stated therein.
The summary and selected financial and statistical data in the Final Memorandum
present fairly in all material respects the information shown therein and have
been prepared and compiled on a basis consistent with the audited financial
statements included therein, except as otherwise stated therein. Coopers &
Lybrand LLP (the "INDEPENDENT ACCOUNTANTS") is an independent public accounting

<PAGE>

-6-

firm within the meaning of the Act and the rules and regulations promulgated
thereunder.

(k) The pro forma financial information included in the Final
Memorandum (i) comply as to form in all material respects with the applicable
requirements of Regulation S-X promulgated under the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), (ii) have been prepared in accordance
with the Commission's rules and guidelines with respect to pro forma financial
information, and (iii) have been properly computed on the bases described
therein; the assumptions used in the preparation of the pro forma financial data
and other pro forma financial information included in the Final Memorandum are
reasonable and the adjustments used therein are appropriate to give effect to
the transactions or circumstances referred to therein.

(l) There is not pending or, to the knowledge of the Company,
threatened any action, suit, proceeding, inquiry or investigation to which the
Company or any of the Subsidiaries is a party, or to which the property or
assets of the Company or any of the Subsidiaries are subject, before or brought
by any court, arbitrator or governmental agency or body which, if determined
adversely to the Company or any of the Subsidiaries, would, individually or in
the aggregate, have a Material Adverse Effect or which seeks to restrain,
enjoin, prevent the consummation of or otherwise challenge the issuance or sale
of the Notes to be sold hereunder or the consummation of the other transactions
described in the Final Memorandum.

(m) Each of the Company and the Subsidiaries possesses all licenses,
permits, certificates, consents, orders, approvals and other authorizations
from, and has made all declarations and filings with, all federal, state, local
and other governmental authorities, all self-regulatory organizations and all
courts and other tribunals, presently required or necessary to own or lease, as
the case may be, and to operate its respective properties and to carry on its
respective businesses as now or proposed to be conducted as set forth in the
Final Memorandum ("PERMITS"), except where the failure to obtain such Permits
would not, individually or in the aggregate, have a Material Adverse Effect;
each of the Company and the Subsidiaries has fulfilled and performed all of its
obligations with respect to such Permits and no event has occurred which allows,
or after notice or lapse of time would allow, revocation or termination thereof
or results in any other material impairment of the rights of the holder of any
such Permit; and none of the Company or the Subsidiaries has received any notice
of any

<PAGE>

-7-

proceeding relating to revocation or modification of any such Permit, except as
described in the Final Memorandum and except where such revocation or
modification would not, individually or in the aggregate, have a Material
Adverse Effect.

(n) Since the date of the most recent financial statements appearing
in the Final Memorandum, except as described therein, (i) none of the Company or
the Subsidiaries has incurred any liabilities or obligations, direct or
contingent, or entered into or agreed to enter into any transactions or
contracts (written or oral) not in the ordinary course of business which
liabilities, obligations, transactions or contracts would, individually or in
the aggregate, be material to the general affairs, management, business,
condition (financial or otherwise), prospects or results of operations of the
Companies and its Subsidiaries, taken as a whole, (ii) none of the Company or
the Subsidiaries has purchased any of its outstanding capital stock, nor
declared, paid or otherwise made any dividend or distribution of any kind on its
capital stock (other than with respect to any of such Subsidiaries, the purchase
of, or dividend or distribution on, capital stock owned by the Company) and
(iii) there shall not have been any material change in the capital stock or
long-term indebtedness of the Company or the Subsidiaries.

(o) Each of the Company and the Subsidiaries has filed all necessary
federal, state and foreign income and franchise tax returns, except where the
failure to so file such returns would not, individually or in the aggregate,
have a Material Adverse Effect, and has paid all taxes shown as due thereon; and
other than tax deficiencies which the Company or any Subsidiary is contesting in
good faith and for which the Company or such Subsidiary has provided adequate
reserves, there is no tax deficiency that has been asserted against the Company
or any of the Subsidiaries that would have, individually or in the aggregate, a
Material Adverse Effect.

(p) The statistical and market-related data included in the Final
Memorandum are based on or derived from sources which the Company believes to be
reliable and accurate.

(q) Neither the Company nor any agent acting on its behalf has taken
or will take any action that might cause this Agreement or the sale of the Notes
to violate Regulation G, T, U or X of the Board of Governors of the Federal
Reserve System, in each case as in effect, or as the same may hereafter be in
effect, on the Closing Date.

<PAGE>

-8-

(r) Each of the Company and the Subsidiaries has good and marketable
title to all real property and good title to all personal property described in
the Final Memorandum as being owned by it and good and marketable title to a
leasehold estate in the real and personal property described in the Final
Memorandum as being leased by it free and clear of all liens, charges,
encumbrances or restrictions, except as described in the Final Memorandum or to
the extent the failure to have such title or the existence of such liens,
charges, encumbrances or restrictions would not, individually or in the
aggregate, have a Material Adverse Effect. All leases, contracts and agreements
to which the Company or any of the Subsidiaries is a party or by which any of
them is bound are valid and enforceable against the Company or such Subsidiary,
and are valid and enforceable against the other party or parties thereto and are
in full force and effect with only such exceptions as would not, individually or
in the aggregate, have a Material Adverse Effect. The Company and the
Subsidiaries own or possess adequate licenses or other rights to use all
patents, trademarks, service marks, trade names, copyrights and know-how
necessary to conduct the businesses now or proposed to be operated by them as
described in the Final Memorandum, and none of the Company or the Subsidiaries
has received any notice of infringement of or conflict with (or knows of any
such infringement of or conflict with) asserted rights of others with respect to
any patents, trademarks, service marks, trade names, copyrights or know-how
which, if such assertion of infringement or conflict were sustained, would have
a Material Adverse Effect.

(s) To the best knowledge of the Company, there are no legal or
governmental proceedings involving or affecting the Company or any Subsidiary or
any of their respective properties or assets which would be required to be
described in a prospectus pursuant to the Act that are not described in the
Final Memorandum, nor are there any material contracts or other documents which
would be required to be described in a prospectus pursuant to the Act that are
not described in the Final Memorandum.

(t) Except as would not, individually or in the aggregate, have a
Material Adverse Effect (A) each of the Company and the Subsidiaries is in
compliance with and not subject to liability under applicable Environmental Laws
(as defined below), (B) each of the Company and the Subsidiaries has made all
filings and provided all notices required under any applicable Environmental
Law, and has and is in compliance with all Permits required under any applicable
Environmental Laws and each of them is in full force and effect, (C) there is no
civil,

<PAGE>

-9-

criminal or administrative action, suit, demand, claim, hearing, notice of
violation, investigation, proceeding, notice or demand letter or request for
information pending or, to the knowledge of the Company or any of the
Subsidiaries, threatened against the Company or any of the Subsidiaries under
any Environmental Law, (D) no lien, charge, encumbrance or restriction has been
recorded under any Environmental Law with respect to any assets, facility or
property owned, operated, leased or controlled by the Company or any of the
Subsidiaries, (E) none of the Company or the Subsidiaries has received notice
that it has been identified as a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA") or any comparable state law, (F) no property or facility of
the Company or any of the Subsidiaries is (i) listed or proposed for listing on
the National Priorities List under CERCLA or is (ii) listed in the Comprehensive
Environmental Response, Compensation, Liability Information System List
promulgated pursuant to CERCLA, or on any comparable list maintained by any
state or local governmental authority.

For purposes of this Agreement, "Environmental Laws" means the common
law and all applicable federal, state and local laws or regulations, codes,
orders, decrees, judgments or injunctions issued, promulgated, approved or
entered thereunder, relating to pollution or protection of public or employee
health and safety or the environment, including, without limitation, laws
relating to (i) emissions, discharges, releases or threatened releases of
hazardous materials into the environment (including, without limitation, ambient
air, surface water, ground water, land surface or subsurface strata), (ii) the
manufacture, processing, distribution, use, generation, treatment, storage,
disposal, transport or handling of hazardous materials, and (iii) underground
and above ground storage tanks and related piping, and emissions, discharges,
releases or threatened releases therefrom.

(u) There is no strike, labor dispute, slowdown or work stoppage with
the employees of the Company or any of the Subsidiaries which is pending or, to
the knowledge of the Company or any of the Subsidiaries, threatened.

(v) Each of the Company and the Subsidiaries carries insurance in
such amounts and covering such risks as is adequate for the conduct of its
business and the value of its properties.

<PAGE>

-10-

(w) None of the Company or the Subsidiaries has any liability for any
prohibited transaction or funding deficiency or any complete or partial
withdrawal liability with respect to any pension, profit sharing or other plan
which is subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), to which the Company or any of the Subsidiaries makes or ever
has made a contribution and in which any employee of the Company or of any
Subsidiary is or has ever been a participant. With respect to such plans, the
Company and each Subsidiary is in compliance in all material respects with all
applicable provisions of ERISA.

(x) Each of the Company and the Subsidiaries (i) makes and keeps
accurate books and records and (ii) maintains internal accounting controls which
provide reasonable assurance that (A) transactions are executed in accordance
with management's authorization, (B) transactions are recorded as necessary to
permit preparation of its financial statements and to maintain accountability
for its assets, (C) access to its assets is permitted only in accordance with
management's authorization and (D) the reported accountability for its assets
is compared with existing assets at reasonable intervals.

(y) None of the Company or the Subsidiaries will be an "investment
company" or "promoter" or "principal underwriter" for an "investment company,"
as such terms are defined in the Investment Company Act of 1940, as amended, and
the rules and regulations thereunder.

(z) The Notes, the Indenture and the Registration Rights Agreement
will conform in all material respects to the descriptions thereof in the Final
Memorandum.

(aa) No holder of securities of the Company or any Subsidiary will be
entitled to have such securities registered under the registration statements
required to be filed by the Company pursuant to the Registration Rights
Agreement other than as expressly permitted thereby.

(bb) None of the Company or the Subsidiaries (each on a consolidated
basis) is, nor will any of the Company or the Subsidiaries (each on a
consolidated basis) be, after giving effect to the execution, delivery and
performance of this Agreement, and the consummation of the transactions
contemplated hereby, (a) left with unreasonably small capital with which to
carry on its business as it is proposed to be conducted, (b) unable to pay its
debts (contingent or otherwise) as they mature or (c) otherwise insolvent.

<PAGE>

-11-

(cc) None of the Company, the Subsidiaries or any of their respective
Affiliates (as defined in Rule 501(b) of Regulation D under the Act) has
directly, or through any agent, (i) sold, offered for sale, solicited offers to
buy or otherwise negotiated in respect of, any "security" (as defined in the
Act) which is or could be integrated with the sale of the Notes in a manner that
would require the registration under the Act of the Notes or (ii) engaged in any
form of general solicitation or general advertising (as those terms are used in
Regulation D under the Act) in connection with the offering of the Notes or in
any manner involving a public offering within the meaning of Section 4(2) of the
Act. Assuming the accuracy of the representations and warranties of the Initial
Purchaser in Section 8 hereof, it is not necessary in connection with the
offer, sale and delivery of the Notes to the Initial Purchaser in the manner
contemplated by this Agreement to register any of the Notes under the Act or to
qualify the Indenture under the TIA.

(dd) No securities of the Company or any Subsidiary are of the same
class (within the meaning of Rule 144A under the Act) as the Notes and listed on
a national securities exchange registered under Section 6 of the Exchange Act,
or quoted in a U.S. automated inter-dealer quotation system.

(ee) None of the Company or the Subsidiaries has taken, nor will any
of them take, directly or indirectly, any action designed to, or that might be
reasonably expected to, cause or result in stabilization or manipulation of the
price of the Notes.

Any certificate signed by any officer of the Company and delivered to
the Initial Purchaser or to counsel for the Initial Purchaser shall be deemed a
joint and several representation and warranty by the Company and each of the
Subsidiaries to the Initial Purchaser as to the matters covered thereby.

3. PURCHASE, SALE AND DELIVERY OF THE NOTES. On the basis of the
representations, warranties, agreements and covenants herein contained and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to the Initial Purchaser, and the Initial Purchaser agrees to
purchase from the Company the Notes at a purchase price of 97.0% of their
principal amount. One or more certificates in definitive form for the Notes
that the Initial Purchaser has agreed to purchase hereunder, and in such
denomination or denominations and registered in such name or names as the
Initial Purchaser requests upon notice to the Company at least 36 hours prior to

<PAGE>

-12-

the Closing Date, shall be delivered by or on behalf of the Company to the
Initial Purchaser, against payment by or on behalf of the Initial Purchaser of
the purchase price therefor by wire transfer (same day funds) to such account or
accounts as the Company shall specify prior to the Closing Date, or by such
means as the parties hereto shall agree prior to the Closing Date. Such
delivery of and payment for the Notes shall be made at the offices of Cahill
Gordon & Reindel, 80 Pine Street, New York, New York at 9:00 A.M., New York
time, on October 16, 1997, or at such other place, time or date as the Initial
Purchaser, on the one hand, and the Company, on the other hand, may agree upon,
such time and date of delivery against payment being herein referred to as the
"CLOSING DATE." The Company will make such certificate or certificates for the
Notes available for checking and packaging by the Initial Purchaser at the
offices of BT Alex. Brown in New York, New York, or at such other place as BT
Alex. Brown may designate, at least 24 hours prior to the Closing Date.

4. OFFERING BY THE INITIAL PURCHASER. The Initial Purchaser proposes
to make an offering of the Notes at the price and upon the terms set forth in
the Final Memorandum, as soon as practicable after this Agreement is entered
into and as in the judgment of the Initial Purchaser is advisable.

5. COVENANTS OF THE COMPANY. The Company covenants and agrees with
the Initial Purchaser that:

(a) The Company will not amend or supplement the Final Memorandum or
any amendment or supplement thereto of which the Initial Purchaser shall not
previously have been advised and furnished a copy for a reasonable period of
time prior to the proposed amendment or supplement and as to which the Initial
Purchaser shall not have given its consent. The Company will promptly, upon the
reasonable request of the Initial Purchaser or counsel for the Initial
Purchaser, make any amendments or supplements to the Preliminary Memorandum or
the Final Memorandum that may be necessary or advisable in connection with the
resale of the Notes by the Initial Purchaser.

(b) The Company will cooperate with the Initial Purchaser in
arranging for the qualification of the Notes for offering and sale under the
securities or "Blue Sky" laws of which jurisdictions as the Initial Purchaser
may designate and will continue such qualifications in effect for as long as
may be necessary to complete the resale of the Notes; PROVIDED, HOWEVER, that in
connection therewith, the Company shall not be required to qualify as a foreign
corporation or to execute a

<PAGE>

-13-

general consent to service of process in any jurisdiction or subject itself to
taxation in excess of a nominal dollar amount in any such jurisdiction where it
is not then so subject.

(c) If, at any time prior to the completion of the distribution by
the Initial Purchaser of the Notes or the Private Exchange Notes, any event
occurs or information becomes known as a result of which the Final Memorandum as
then amended or supplemented would include any untrue statement of a material
fact, or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading, or
if for any other reason it is necessary at any time to amend or supplement the
Final Memorandum to comply with applicable law, the Company will promptly notify
the Initial Purchaser thereof and will prepare, at the expense of the Company,
an amendment or supplement to the Final Memorandum that corrects such statement
or omission or effects such compliance.

(d) The Company will, without charge, provide to the Initial
Purchaser and to counsel for the Initial Purchaser as many copies of the
Preliminary Memorandum and the Final Memorandum or any amendment or supplement
thereto as the Initial Purchaser may reasonably request.

(e) The Company will apply the net proceeds from the sale of the
Notes as set forth under "Use of Proceeds" in the Final Memorandum.

(f) For so long as any of the Notes remain outstanding, the Company
will furnish to the Initial Purchaser copies of all reports and other
communications (financial or otherwise) furnished by the Company to the Trustee
or to the holders of the Notes and, as soon as available, copies of any reports
or financial statements furnished to or filed by the Company with the Commission
or any national securities exchange on which any class of securities of the
Company may be listed.

(g) Prior to the Closing Date, the Company will furnish to the
Initial Purchaser, as soon as they have been prepared, a copy of any unaudited
interim financial statements of the Company for any period subsequent to the
period covered by the most recent financial statements appearing in the Final
Memorandum.

(h) None of the Company or any of its Affiliates will sell, offer for
sale or solicit offers to buy or otherwise negotiate in respect of any
"security" (as defined in the Act)

<PAGE>

-14-

which could be integrated with the sale of the Notes in a manner which would
require the registration under the Act of the Notes.

(i) The Company will not, nor will the Company permit any of the
Subsidiaries to, engage in any form of general solicitation or general
advertising (as those terms are used in Regulation D under the Act) in
connection with the offering of the Notes or in any manner involving a public
offering within the meaning of Section 4(2) of the Act.

(j) For so long as any of the Notes remain outstanding, the Company
will make available at its expense, upon request, to any holder of such Notes
and any prospective purchasers thereof the information specified in
Rule 144A(d)(4) under the Act, unless the Company is then subject to Section 13
or 15(d) of the Exchange Act.

(k) The Company will use its best efforts to (i) permit the Notes to
be designated PORTAL securities in accordance with the rules and regulations
adopted by the NASD relating to trading in the Private Offerings, Resales and
Trading through Automated Linkages market (the "PORTAL MARKET") and (ii) permit
the Notes to be eligible for clearance and settlement through The Depository
Trust Company.

6. EXPENSES. The Company agrees to pay all costs and expenses
incident to the performance of its obligations under this Agreement, whether or
not the transactions contemplated herein are consummated or this Agreement is
terminated pursuant to Section 11 hereof, including all costs and expenses
incident to (i) the printing, word processing or other production of documents
with respect to the transactions contemplated hereby, including any costs of
printing the Preliminary Memorandum and the Final Memorandum and any amendment
or supplement thereto, and any "Blue Sky" memoranda, (ii) all arrangements
relating to the delivery to the Initial Purchaser of copies of the foregoing
documents, (iii) the fees and disbursements of the counsel, the accountants and
any other experts or advisors retained by the Company, (iv) preparation
(including printing), issuance and delivery to the Initial Purchaser of the
Notes, (v) the qualification of the Notes under state securities and "Blue Sky"
laws, including filing fees and fees and disbursements of counsel for the
Initial Purchaser relating thereto, (vi) expenses in connection with any
meetings with prospective investors in the Notes, (vii) fees and expenses of the
Trustee including fees and expenses of counsel, (viii) all expenses and listing
fees incurred in connection with the

<PAGE>

-15-

application for quotation of the Notes on the PORTAL Market and (ix) any fees
charged by investment rating agencies for the rating of the Notes. If the sale
of the Notes provided for herein is not consummated because any condition to the
obligations of the Initial Purchaser set forth in Section 7 hereof is not
satisfied, because this Agreement is terminated or because of any failure,
refusal or inability on the part of the Company to perform all obligations and
satisfy all conditions on their part to be performed or satisfied hereunder
(other than solely by reason of a default by the Initial Purchaser of its
obligations hereunder after all conditions hereunder have been satisfied in
accordance herewith), the Company agrees to promptly reimburse the Initial
Purchaser upon demand for all out-of-pocket expenses (including fees,
disbursements and charges of Cahill Gordon & Reindel, counsel for the Initial
Purchaser) that shall have been incurred by the Initial Purchaser in connection
with the proposed purchase and sale of the Notes.

7. CONDITIONS OF THE INITIAL PURCHASER'S OBLIGATIONS. The obligation
of the Initial Purchaser to purchase and pay for the Notes shall, in its sole
discretion, be subject to the satisfaction or waiver of the following conditions
on or prior to the Closing Date:

(a) The Initial Purchaser shall have received an opinion in form and
substance satisfactory to the Initial Purchaser, dated the Closing Date, of
Kirkland & Ellis, counsel for the Company, substantially in the form of Exhibit
A hereto. In rendering such opinion, Kirkland & Ellis shall have received and
may rely upon such certificates and other documents and information as they may
reasonably request to pass on such matters. In addition, in rendering their
opinion, Kirkland & Ellis may state that their opinion is limited to matters of
Illinois, New York, Delaware corporate and federal law. Such opinion of
Kirkland & Ellis shall be rendered to the Initial Purchaser at the request of
the Company and shall so state therein.

(b) On the Closing Date, the Initial Purchaser shall have received
the opinion, in form and substance satisfactory to the Initial Purchaser, dated
as of the Closing Date and addressed to the Initial Purchaser, of Cahill Gordon
& Reindel, counsel for the Initial Purchaser, with respect to certain legal
matters relating to this Agreement and such other related matters as the Initial
Purchaser may reasonably require. In rendering such opinion, Cahill Gordon &
Reindel shall have received and may rely upon such certificates and other
documents

<PAGE>

-16-

and information as it may reasonably request to pass upon such matters.

(c) The Initial Purchaser shall have received from the Independent
Accountants a comfort letter or letters dated the date hereof and the Closing
Date, in form and substance satisfactory to counsel for the Initial Purchaser.

(d) The representations and warranties of the Company contained in
this Agreement shall be true and correct on and as of the date hereof and on and
as of the Closing Date as if made on and as of the Closing Date; the statements
of the Company's officers made pursuant to any certificate delivered in
accordance with the provisions hereof shall be true and correct on and as of the
date made and on and as of the Closing Date; the Company shall have performed
all covenants and agreements and satisfied all conditions on their part to be
performed or satisfied hereunder at or prior to the Closing Date; and, except as
described in the Final Memorandum (exclusive of any amendment or supplement
thereto after the date hereof), subsequent to the date of the most recent
financial statements in such Final Memorandum, there shall have been no event or
development, and no information shall have become known, that, individually or
in the aggregate, has or would be reasonably likely to have a Material Adverse
Effect.

(e) The sale of the Notes hereunder shall not be enjoined
(temporarily or permanently) on the Closing Date.

(f) Other than as disclosed in the Final Memorandum, subsequent to
the date of the most recent financial statements in the Final Memorandum
(exclusive of any amendment or supplement thereto after the date hereof), none
of the Company or any of the Subsidiaries shall have sustained any loss or
interference with respect to its business or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance, or
from any strike, labor dispute, slow down or work stoppage or from any legal or
governmental proceeding, order or decree, which loss or interference,
individually or in the aggregate, has or would be reasonably likely to have a
Material Adverse Effect.

(g) The Initial Purchaser shall have received a certificate of the
Company, dated the Closing Date, signed on behalf of the Company by its Chairman
of the Board, President or any Executive Vice President and the Chief Financial
Officer, to the effect that:

<PAGE>

-17-

(i) The representations and warranties of the Company contained in
this Agreement are true and correct on and as of the date hereof and on and
as of the Closing Date, and the Company has performed all covenants and
agreements and satisfied all conditions on its part to be performed or
satisfied hereunder at or prior to the Closing Date;

(ii) At the Closing Date, since the date hereof or since the date
of the most recent financial statements in the Final Memorandum (exclusive
of any amendment or supplement thereto after the date hereof), no event or
development has occurred, and no information has become known, that,
individually or in the aggregate, has or would be reasonably likely to have
a Material Adverse Effect; and

(iii) The sale of the Notes hereunder has not been enjoined
(temporarily or permanently).

(h) The New Credit Facility (as defined in the Offering Memorandum)
shall have been executed and delivered by the parties thereto, shall be in full
force and effect and in form and substance satisfactory to the Initial
Purchaser.

(i) On the Closing Date, the Initial Purchaser shall have received
the Registration Rights Agreement executed by the Company and such agreement
shall be in full force and effect at all times from and after the Closing Date.

On or before the Closing Date, the Initial Purchaser and counsel for
the Initial Purchaser shall have received such further documents, opinions,
certificates, letters and schedules or instruments relating to the business,
corporate, legal and financial affairs of the Company and the Subsidiaries as
they shall have heretofore reasonably requested from the Company.

All such documents, opinions, certificates, letters, schedules or
instruments delivered pursuant to this Agreement will comply with the provisions
hereof only if they are reasonably satisfactory in all material respects to the
Initial Purchaser and counsel for the Initial Purchaser. The Company shall
furnish to the Initial Purchaser such conformed copies of such documents,
opinions, certificates, letters, schedules and instruments in such quantities as
the Initial Purchaser shall reasonably request.

<PAGE>

-18-

8. OFFERING OF NOTES; RESTRICTIONS ON TRANSFER. The Initial
Purchaser represents and warrants that it is a QIB. The Initial Purchaser
agrees with the Company that (i) it has not and will not solicit offers for, or
offer or sell, the Notes by any form of general solicitation or general
advertising (as those terms are used in Regulation D under the Act) or in any
manner involving a public offering within the meaning of Section 4(2) of the
Act; and (ii) it has and will solicit offers for the Notes only from, and will
offer the Notes only to (A) in the case of offers inside the United States,
(x) persons whom the Initial Purchaser reasonably believes to be QIBs or, if any
such person is buying for one or more institutional accounts for which such
person is acting as fiduciary or agent, only when such person has represented to
the Initial Purchaser that each such account is a QIB, to whom notice has been
given that such sale or delivery is being made in reliance on Rule 144A, and, in
each case, in transactions under Rule 144A or (y) a limited number of other
institutional investors reasonably believed by the Initial Purchaser to be
Accredited Investors that, prior to their purchase of the Notes, deliver to the
Initial Purchaser a letter containing the representations and agreements set
forth in Annex A to the Final Memorandum and (B) in the case of offers outside
the United States, to persons other than U.S. persons ("foreign purchasers,"
which term shall include dealers or other professional fiduciaries in the United
States acting on a discretionary basis for foreign beneficial owners (other than
an estate or trust)); PROVIDED, HOWEVER, that, in the case of this clause (B),
in purchasing such Notes such persons are deemed to have represented and agreed
as provided under the caption "Transfer Restrictions" contained in the Final
Memorandum (or, if the Final Memorandum is not in existence, in the most recent
Memorandum).

9. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless the Initial Purchaser, and each person, if any, who
controls the Initial Purchaser within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, against any losses, claims, damages or
liabilities to which the Initial Purchaser or such controlling person may become
subject under the Act, the Exchange Act or otherwise, insofar as any such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon:

(i) any untrue statement or alleged untrue statement of any material
fact contained in any Memorandum or any amendment or supplement thereto or
any application or other document, or any amendment or supplement thereto,

<PAGE>

-19-

executed by the Company or based upon written information furnished by or
on behalf of the Company filed in any jurisdiction in order to qualify the
Notes under the securities or "Blue Sky" laws thereof or filed with any
securities association or securities exchange (each an "Application"); or

(ii) the omission or alleged omission to state, in any Memorandum or
any amendment or supplement thereto or any Application, a material fact
required to be stated therein or necessary to make the statements therein
not misleading,

and will reimburse, as incurred, the Initial Purchaser and each such controlling
person for any legal or other expenses incurred by the Initial Purchaser or
such controlling person in connection with investigating, defending against or
appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; PROVIDED, HOWEVER, the Company will not be liable
in any such case to the extent that any such loss, claim, damage, or liability
arises out of or is based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in any Memorandum or any amendment or
supplement thereto or any Application in reliance upon and in conformity with
written information concerning the Initial Purchaser furnished to the Company by
the Initial Purchaser specifically for use therein. This indemnity agreement
will be in addition to any liability that the Company may otherwise have to the
indemnified parties. The Company shall not be liable under this Section 9 for
any settlement of any claim or action effected without its prior written
consent, which shall not be unreasonably withheld.

(b) The Initial Purchaser agrees to indemnify and hold harmless the
Company, their directors, their officers and each person, if any, who controls
the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any losses, claims, damages or liabilities to which the
Company or any such director, officer or controlling person may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon (i) any untrue statement or alleged untrue statement of any material fact
contained in any Memorandum or any amendment or supplement thereto or any
Application, or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in any Memorandum or any amendment or
supplement thereto or any Application, or necessary to make the statements

<PAGE>

-20-

therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
concerning such Initial Purchaser, furnished to the Company by the Initial
Purchaser specifically for use therein; and subject to the limitation set forth
immediately preceding this clause, will reimburse, as incurred, any legal or
other expenses incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending against or
appearing as a third party witness in connection with any such loss, claim,
damage, liability or action in respect thereof. This indemnity agreement will
be in addition to any liability that the Initial Purchaser may otherwise have to
the indemnified parties. The Initial Purchaser shall not be liable under this
Section 9 for any settlement of any claim or action effected without its
consent, which shall not be unreasonably withheld. The Company shall not,
without the prior written consent of the Initial Purchaser, effect any
settlement or compromise of any pending or threatened proceeding in respect of
which the Initial Purchaser is or could have been a party, or indemnity could
have been sought hereunder by the Initial Purchaser, unless such settlement
(A) includes an unconditional written release of the Initial Purchaser, in form
and substance reasonably satisfactory to the Initial Purchaser, from all
liability on claims that are the subject matter of such proceeding and (B) does
not include any statement as to an admission of fault, culpability or failure to
act by or on behalf of the Initial Purchaser.

(c) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action for which such indemnified
party is entitled to indemnification under this Section 9, such indemnified
party will, if a claim in respect thereof is to be made against the indemnifying
party under this Section 9, notify the indemnifying party of the commencement
thereof in writing; but the omission to so notify the indemnifying party
(i) will not relieve it from any liability under paragraph (a) or (b) above
unless and to the extent such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) will not, in any
event, relieve the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided in paragraphs (a) and
(b) above. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other

<PAGE>

-21-

indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER,
that if (i) the use of counsel chosen by the indemnifying party to represent the
indemnified party would present such counsel with a conflict of interest,
(ii) the defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall have been advised by
counsel that there may be one or more legal defenses available to it and/or
other indemnified parties that are different from or additional to those
available to the indemnifying party, or (iii) the indemnifying party shall not
have employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after receipt by the
indemnifying party of notice of the institution of such action, then, in each
such case, the indemnifying party shall not have the right to direct the defense
of such action on behalf of such indemnified party or parties and such
indemnified party or parties shall have the right to select separate counsel to
defend such action on behalf of such indemnified party or parties. After notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof and approval by such indemnified party of counsel
appointed to defend such action, the indemnifying party will not be liable to
such indemnified party under this Section 9 for any legal or other expenses,
other than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the immediately preceding sentence (it being understood, however,
that in connection with such action the indemnifying party shall not be liable
for the expenses of more than one separate counsel (in addition to local
counsel) in any one action or separate but substantially similar actions in the
same jurisdiction arising out of the same general allegations or circumstances,
designated by the Initial Purchaser in the case of paragraph (a) of this Section
9 or the Company in the case of paragraph (b) of this Section 9, representing
the indemnified parties under such paragraph (a) or paragraph (b), as the case
may be, who are parties to such action or actions) or (ii) the indemnifying
party has authorized in writing the employment of counsel for the indemnified
party at the expense of the indemnifying party. After such notice from the
indemnifying party to such indemnified party, the indemnifying party will not be
liable for the costs and expenses of any settlement of such action effected by
such indemnified party without the prior written consent of the indemnifying
party (which consent shall not be unreasonably withheld), unless such
indemnified party waived in writing its

<PAGE>

-22-

rights under this Section 9, in which case the indemnified party may effect such
a settlement without such consent.

(d) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 9 is unavailable to, or insufficient to
hold harmless, an indemnified party in respect of any losses, claims, damages or
liabilities (or actions in respect thereof), each indemnifying party, in order
to provide for just and equitable contribution, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect (i) the relative benefits received by the indemnifying
party or parties on the one hand and the indemnified party on the other from the
offering of the Notes or (ii) if the allocation provided by the foregoing clause
(i) is not permitted by applicable law, not only such relative benefits but also
the relative fault of the indemnifying party or parties on the one hand and the
indemnified party on the other in connection with the statements or omissions or
alleged statements or omissions that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof). The relative benefits received by
the Company on the one hand and the Initial Purchaser on the other shall be
deemed to be in the same proportion as the total proceeds from the offering
(before deducting expenses) received by the Company bear to the total discounts
and commissions received by such Initial Purchaser. The relative fault of the
parties shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on the one hand, or such Initial Purchaser on the other, the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission or alleged statement or omission, and any other
equitable considerations appropriate in the circumstances. The Company and the
Initial Purchaser agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d).
Notwithstanding any other provision of this paragraph (d), the Initial Purchaser
shall not be obligated to make contributions hereunder that in the aggregate
exceed the total discounts, commissions and other compensation received by such
Initial Purchaser under this Agreement, less the aggregate amount of any damages
that such Initial Purchaser has otherwise been required to pay by reason of the
untrue or

<PAGE>

-23-

alleged untrue statements or the omissions or alleged omissions to state a
material fact, and no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this paragraph (d), each person, if any, who controls the Initial Purchaser
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
shall have the same rights to contribution as the Initial Purchaser, and each
director of the Company, each officer of the Company and each person, if any,
who controls the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, shall have the same rights to contribution as
the Company.

10. SURVIVAL CLAUSE. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers and the Initial Purchaser set forth in this Agreement or made by or on
behalf of them pursuant to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of the Company, any of
its officers or directors, the Initial Purchaser or any controlling person
referred to in Section 9 hereof and (ii) delivery of and payment for the Notes.
The respective agreements, covenants, indemnities and other statements set forth
in Sections 6, 9 and 15 hereof shall remain in full force and effect, regardless
of any termination or cancellation of this Agreement.

11. TERMINATION. (a) This Agreement may be terminated in the sole
discretion of the Initial Purchaser by notice to the Company given prior to the
Closing Date in the event that the Company shall have failed, refused or been
unable to perform all obligations and satisfy all conditions on its part to be
performed or satisfied hereunder at or prior thereto or, if at or prior to the
Closing Date:

(i) any of the Company or the Subsidiaries shall have sustained
any loss or interference with respect to its businesses or properties from
fire, flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any strike, labor dispute, slow down or work stoppage
or any legal or governmental proceeding, which loss or interference, in the
sole judgment of the Initial Purchaser, has had or has a Material Adverse
Effect, or there shall have been, in the sole judgment of the Initial
Purchaser, any event or development that, individually or in the aggregate,
has or could be reasonably likely to have a Material Adverse Effect
(including

<PAGE>

-24-

without limitation a change in control of the Company or the Subsidiaries),
except in each case as described in the Final Memorandum (exclusive of any
amendment or supplement thereto);

(ii) trading in securities generally on the New York Stock
Exchange, American Stock Exchange or the NASDAQ National Market shall have
been suspended or minimum or maximum prices shall have been established on
any such exchange or market;

(iii) a banking moratorium shall have been declared by New York or
United States authorities;

(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, or (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or any other national or international calamity
or emergency, or (C) any material change in the financial markets of the
United States which, in the case of (A), (B) or (C) above and in the sole
judgment of the Initial Purchaser, makes it impracticable or inadvisable to
proceed with the offering or the delivery of the Notes as contemplated by
the Final Memorandum; or

(v) any securities of the Company shall have been downgraded or
placed on any "watch list" for possible downgrading by any nationally
recognized statistical rating organization.

(b) Termination of this Agreement pursuant to this Section 11 shall
be without liability of any party to any other party except as provided in
Section 10 hereof.

12. INFORMATION SUPPLIED BY THE INITIAL PURCHASER. The statements
set forth in the last paragraph on the front cover page and in the second and
third sentences of the third paragraph under the heading "Private Placement" in
the Final Memorandum (to the extent such statements relate to the Initial
Purchaser) constitute the only information furnished by the Initial Purchaser to
the Company for the purposes of Sections 2(a) and 9 hereof.

13. NOTICES. All communications hereunder shall be in writing and,
if sent to the Initial Purchaser, shall be mailed or delivered to BT Alex.
Brown, 130 Liberty Street, New York, New York 10006, Attention: Corporate
Finance Department;

<PAGE>

-25-

if sent to the Company, shall be mailed or delivered to the Company at 888
Seventh Avenue, New York, New York, Attention: President; with a copy to
Kirkland & Ellis, 153 East 53rd Street, New York, NY 10022, Attention: Joshua
N. Korff.

All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; and one business
day after being timely delivered to a next-day air courier.

14. SUCCESSORS. This Agreement shall inure to the benefit of and be
binding upon the Initial Purchaser, the Company and their respective successors
and legal representatives, and nothing expressed or mentioned in this Agreement
is intended or shall be construed to give any other person any legal or
equitable right, remedy or claim under or in respect of this Agreement, or any
provisions herein contained; this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of such
persons and for the benefit of no other person except that (i) the indemnities
of the Company contained in Section 9 of this Agreement shall also be for the
benefit of any person or persons who control the Initial Purchaser within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the
indemnities of the Initial Purchaser contained in Section 9 of this Agreement
shall also be for the benefit of the directors of the Company, its officers and
any person or persons who control the Company within the meaning of Section 15
of the Act or Section 20 of the Exchange Act. No purchaser of Notes from the
Initial Purchaser will be deemed a successor because of such purchase.

15. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS
AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND TO BE PERFORMED WHOLLY THEREIN, WITHOUT GIVING EFFECT TO ANY
PROVISIONS THEREOF RELATING TO CONFLICTS OF LAW.

16. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

<PAGE>

-26-

If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement between the Company
and the Initial Purchaser.

Very truly yours,

Town Sports International, Inc.

By:____________________________
Name:
Title:

The foregoing Agreement is
hereby confirmed and accepted
as of the date first above written.

BT ALEX. BROWN INCORPORATED

By:______________________
Name:
Title:

<PAGE>

SCHEDULE 1

SUBSIDIARIES OF THE COMPANY

Jurisdiction of
Name Incorporation

<PAGE>

EXHIBIT A

[KIRKLAND & ELLIS FORM OF OPINION]

(i) The Company is a corporation existing and in good standing
under the Business Corporation Law of the State of New York. The Company
is qualified as a foreign corporation in good standing in each of the
jurisdictions set forth on a Schedule to such counsel's opinion.

(ii) The Company has the corporate power to enter into and perform
its obligations under the Indenture, the Registration Rights Agreement, the
Purchase Agreement (collectively, the "Operative Documents"), including
without limitation the corporate power to issue, sell and deliver the Notes
as contemplated by the Purchase Agreement.

(iii) The Company's Board of Directors has adopted by requisite vote
the resolutions necessary to authorize the Company's execution, delivery
and performance of the Operative Agreements to which it is a party and the
Pricing Committee appointed by the Company's Board of Directors has
approved by requisite vote the price and interest rate set forth therein.

(iv) The Company has duly executed and delivered this Agreement,
the Indenture and the Registration Rights Agreement.

(v) Each of this Agreement, the Indenture and the Registration
Rights Agreement is a valid and binding obligation of the Company and
(assuming the due authorization, execution and delivery thereof by the
other parties thereto) is enforceable against the Company in accordance
with its terms.

(vi) The Notes have been duly executed and delivered by the Company
and, when paid for by the Initial Purchaser in accordance with the terms of
this Agreement (assuming the due authorization, execution and delivery of
the Indenture by the Trustee and due authentication and delivery of the
Notes by the Trustee in accordance with the Indenture), will constitute the
valid and binding obligations of the Company, entitled to the benefits of
the Indenture, and enforceable against the Company in accordance with their
terms.

<PAGE>

-2-

(vii) When the Exchange Notes have been duly executed and delivered
by the Company in accordance with the terms of the Registration Rights
Agreement and Indenture (assuming the due authorization, execution and
delivery of the Indenture by the Trustee and due authentication and
delivery of the Exchange Notes by the Trustee in accordance with the
Indenture), the Exchange Notes will constitute the valid and binding
obligations of the Company, entitled to the benefits of the Indenture, and
enforceable against the Company in accordance with their terms.

(viii) The statements in the Memorandum under the headings
"Description of Notes" and "Exchange Offer; Registration Rights," insofar
as such statements purport to summarize certain provisions of the
Indenture, the Notes and the Registration Rights Agreement and subject to
the limitations contained in such statements, provide a fair and accurate
summary in all material respects of such provisions of such agreements.

(ix) The Company's execution and delivery of this Agreement, the
Registration Rights Agreement and the Indenture, and the performance of its
agreements thereunder (including, without limitation, the issuance and sale
of the Notes to the Initial Purchaser) do not and will not (i) violate the
certificate of incorporation or bylaws of the Company, (ii) constitute a
material violation of any statute or governmental rule or regulation which,
in the experience of such counsel, is normally applicable both to general
business corporations that are not engaged in regulated business activities
and to transactions of the type contemplated by the Memorandum (but without
such counsel having made any special investigation as to other laws and
provided that such counsel need express no opinion with respect to (a) any
laws, rules or regulations to which the Company may be subject as a result
of any of the Initial Purchaser's legal or regulatory status or the
involvement of any of the Initial Purchaser in such transactions or (b) any
laws, rules or regulations relating to disclosure, misrepresentations or
fraud), (iii) constitute or result in a breach or default under (or an
event which with notice or the passage of time or both would constitute a
default under) the terms or provisions of any contract set forth on a
Schedule to such counsel's opinion attached hereto, except (in the case of
clauses (ii) and (iii) above) for any such conflict, breach, violation,
default or event which would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse

<PAGE>

-3-

Effect. Such counsel's opinion in this paragraph need not address any
impact the Company's actions may have under any financial maintenance
covenants or tests in contracts specified in clause (ii) above, any
consequences a default by the Company under this Agreement, the
Registration Rights Agreement or the Indenture may have under any contract
specified in clause (ii) above or any cross default provisions in the
contracts specified in clause (ii) above.

(x) To the actual knowledge of such counsel, no consent, waiver,
approval, authorization or order of any court or governmental authority is
required for the issuance and sale by the Company of the Notes to the
Initial Purchaser or the consummation by the Company of the other
transactions contemplated by the Operative Agreements, except such as may
be required under the Act, the Exchange Act, the TIA and the security or
Blue Sky laws of the various states (and the rules and regulations
thereunder), as to which such counsel need express no opinion in this
paragraph.

(xi) To the actual knowledge of such counsel, no legal or
governmental proceedings are pending to which the Company is a party or to
which the property or assets of the Company is subject which seek to
restrain, enjoin or prevent the consummation of or otherwise challenge the
issuance or sale of the Notes to be sold to the Initial Purchaser or the
performance of its agreements contemplated by the Operative Documents.

(xii) The Company is not, and immediately after the sale of the
Notes to the Initial Purchaser and application of the net proceeds
therefrom as described in the Memorandum under the caption "Use of
Proceeds" will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.

(xiii) No registration under the Act of the Notes is required in
connection with the sale of the Notes to the Initial Purchaser in the
manner contemplated by this Agreement and the Memorandum or in connection
with the initial resale of the Notes by the Initial Purchaser in accordance
with Section 8 hereof, and prior to the commencement of the Exchange Offer
or the effectiveness of the Shelf Registration Statement, the Indenture is
not required to be qualified under the TIA, in each case assuming (i) that
the purchasers who buy such Notes in the

<PAGE>

-4-

initial resale thereof are qualified institutional buyers as defined in
Rule 144A promulgated under the Act or accredited investors as defined in
Rule 501(a)(1), (2), (3) or (7) promulgated under the Act, (ii) the
accuracy and completeness of the Initial Purchaser's representations in
Section 8 hereof and those of the Company contained in the Purchase
Agreement regarding the absence of a general solicitation in connection
with the sale of such Notes to the Initial Purchaser and the initial resale
thereof, (iii) the due performance by the Initial Purchaser of the
agreements set forth in Section 8 hereof and (iv) the accuracy of the
representations made by each Accredited Investor who purchased Notes in the
initial resale as set forth in the Memorandum.

(xiv) AS of the date hereof, none of the Notes are of the same class
(within the meaning of Rule 144A under the Act) as securities of the
Company that are listed on a national securities exchange registered under
Section 6 of the Exchange Act or that are quoted in a United States
automated inter-dealer quotation system.

(xv) Neither the sale, issuance, execution or delivery of the Notes
nor the application of the net proceeds therefrom as described in the
Memorandum under the caption "Use of Proceeds" will contravene Regulation G
(12 C.F.R. Part 207), Regulation T (12 C.F.R. Part 220), Regulation U (12
C.F.R. Part 221) or Regulation X (12 C.F.R. Part 224) of the Board of
Governors of the Federal Reserve System.

At the time the foregoing opinion is delivered, Kirkland & Ellis shall
additionally state that it has participated in conferences with officers and
other representatives of the Company, representatives of the independent public
accountants for the Company, representatives of the Initial Purchaser and
counsel for the Initial Purchaser, at which conferences the contents of the
Memorandum and related matters were discussed, and, although it has not
independently verified and is not passing upon and assumes no responsibility for
the accuracy, completeness or fairness of the statements contained in the
Memorandum (except to the extent specified in subsection (x), no facts have come
to its attention which lead it to believe that the Memorandum, on the date
thereof or on the Closing Date, contained an untrue statement of a material fact
or omitted to state a material fact necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such firm need express no opinion with
respect to the financial

<PAGE>

-5-

statements and related notes thereto and the other financial, statistical and
accounting data included in the Memorandum).

<PAGE>

EXHIBIT 4.3

-------------------------------------------------------------------------
-------------------------------------------------------------------------

REGISTRATION RIGHTS AGREEMENT

Dated as of October 16, 1997

Between

TOWN SPORTS INTERNATIONAL, INC.
as Issuer

and

BT ALEX. BROWN
as Initial Purchaser

-------------------------------------------------------------------------
-------------------------------------------------------------------------

$85,000,000

9 3/4% SENIOR NOTES DUE 2004

<PAGE>

TABLE OF CONTENTS
PAGE

1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Exchange Offer. . . . . . . . . . . . . . . . . . . . . . . . . 5

3. Shelf Registration. . . . . . . . . . . . . . . . . . . . . . .

4. Additional Interest . . . . . . . . . . . . . . . . . . . . . . 9

5. Registration Procedures . . . . . . . . . . . . . . . . . . . . 11

6. Registration Expenses . . . . . . . . . . . . . . . . . . . . . 22

7. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 23

8. Rule 144 and 144A . . . . . . . . . . . . . . . . . . . . . . . 27

9. Underwritten Registrations. . . . . . . . . . . . . . . . . . . 28

10. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 28
(a) No Inconsistent Agreements . . . . . . . . . . . . . . . . 28
(b) Adjustments Affecting Registrable Notes. . . . . . . . . . 29
(c) Amendments and Waivers . . . . . . . . . . . . . . . . . . 29
(d) Notices. . . . . . . . . . . . . . . . . . . . . . . . . . 29
(e) Successors and Assigns . . . . . . . . . . . . . . . . . . 30
(f) Counterparts . . . . . . . . . . . . . . . . . . . . . . . 30
(g) Headings . . . . . . . . . . . . . . . . . . . . . . . . . 31
(h) Governing Law. . . . . . . . . . . . . . . . . . . . . . . 31
(i) Severability . . . . . . . . . . . . . . . . . . . . . . . 31
(j) Securities Held by the Company or Its Affiliates . . . . . 31
(k) Third Party Beneficiaries. . . . . . . . . . . . . . . . . 31
(l) Entire Agreement . . . . . . . . . . . . . . . . . . . . . 31

-i-
<PAGE>

REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (the "AGREEMENT") is dated as of
October 16, 1997 between Town Sports International, Inc., a New York corporation
(the "COMPANY") and BT Alex. Brown (the "INITIAL PURCHASER").

This Agreement is entered into in connection with the Purchase
Agreement, dated as of October 9, 1997, between the Company and the Initial
Purchaser (the "PURCHASE AGREEMENT") that provides for the sale by the Company
to the Initial Purchaser of $85,000,000 aggregate principal amount of the
Company's 9 3/4% Senior Notes due 2004 (the "NOTES"). In order to induce the
Initial Purchaser to enter into the Purchase Agreement, the Company has agreed
to provide the registration rights set forth in this Agreement for the benefit
of the Initial Purchaser and its direct and indirect transferees and assigns.
The execution and delivery of this Agreement is a condition to the Initial
Purchaser's obligation to purchase the Notes under the Purchase Agreement.

The parties hereby agree as follows:

1. DEFINITIONS

As used in this Agreement, the following terms shall have the
following meanings:

ADDITIONAL INTEREST: See Section 4(a) hereof.

ADVICE: See the last paragraph of Section 5 hereof.

AGREEMENT: See the first introductory paragraph hereto.

APPLICABLE PERIOD: See Section 2(b) hereof.

CLOSING DATE: The Closing Date as defined in the Purchase Agreement.

COMPANY: See the first introductory paragraph hereto.

EFFECTIVENESS DATE: The date that is 150 days after the Issue Date.

EFFECTIVENESS PERIOD: See Section 3(a) hereof.

<PAGE>

-2-

EVENT DATE: See Section 4(b) hereof.

EXCHANGE ACT: The Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC promulgated thereunder.

EXCHANGE NOTES: See Section 2(a) hereof.

EXCHANGE OFFER: See Section 2(a) hereof.

EXCHANGE REGISTRATION STATEMENT: See Section 2(a) hereof.

FILING DATE: Within 45 days after the Issue Date.

HOLDER: Any holder of a Registrable Note or Registrable Notes.

INDEMNIFIED PERSON: See Section 7(c) hereof.

INDEMNIFYING PERSON: See Section 7(c) hereof.

INDENTURE: The Indenture, dated as of October 16, 1997 between the
Company and United States Trust Company of New York, as Trustee, pursuant to
which the Notes are being issued, as amended or supplemented from time to time
in accordance with the terms thereof.

INITIAL PURCHASER: See the first introductory paragraph hereto.

INSPECTORS: See Section 5(o) hereof.

ISSUE DATE: The date on which the original Notes were sold to the
Initial Purchaser pursuant to the Purchase Agreement.

NASD: See Section 5(t) hereof.

NOTES: See the second introductory paragraph hereto.

PARTICIPANT: See Section 7(a) hereof.

PARTICIPATING BROKER-DEALER: See Section 2(b) hereof.

PERSON: An individual, trustee, corporation, partnership, limited
liability company, joint stock company, trust,

<PAGE>

-3-

unincorporated association, union, business association, firm or other legal
entity.

PRIVATE EXCHANGE: See Section 2(b) hereof.

PRIVATE EXCHANGE NOTES: See Section 2(b) hereof.

PROSPECTUS: The prospectus included in any Registration Statement
(including, without limitation, any prospectus subject to completion and a
prospectus that includes any information previously omitted from a prospectus
filed as part of an effective registration statement in reliance upon Rule 430A
promulgated under the Securities Act), as amended or supplemented by any
prospectus supplement, and all other amendments and supplements to the
Prospectus, with respect to the terms of the offering of any portion of the
Registrable Notes covered by such Registration Statement including
post-effective amendments, and all material incorporated by reference or deemed
to be incorporated by reference in such Prospectus.

PURCHASE AGREEMENT: See the second introductory paragraph hereto.

RECORDS: See Section 5(o) hereof.

REGISTRABLE NOTES: Each Note upon original issuance of the Notes and
at all times subsequent thereto, each Exchange Note as to which Section 2(c)(v)
hereof is applicable upon original issuance and at all times subsequent thereto
and each Private Exchange Note upon original issuance thereof and at all times
subsequent thereto, until in the case of any such Note, Exchange Note or Private
Exchange Note, as the case may be, the earliest to occur of (i) a Registration
Statement (other than, with respect to any Exchange Note as to which Section
2(c)(v) hereof is applicable, the Exchange Registration Statement) covering such
Note, Exchange Note or Private Exchange Note, as the case may be, has been
declared effective by the SEC and such Note, Exchange Note or Private Exchange
Note, as the case may be, has been disposed of in accordance with such effective
Registration Statement, (ii) such Note, Exchange Note or Private Exchange Note,
as the case may be, is sold in compliance with Rule 144, (iii) such Note has
been exchanged for an Exchange Note or Exchange Notes pursuant to an Exchange
Offer and is entitled to be resold without complying with the prospectus
delivery requirements of the Securities Act or (iv) such Note, Exchange Note or
Private Exchange Note, as the case may be, ceases to be outstanding for purposes
of the Indenture.

<PAGE>

-4-

REGISTRATION STATEMENT: Any registration statement of the Company,
including, but not limited to, the Exchange Registration Statement and any
registration statement filed in connection with a Shelf Registration, filed with
the SEC pursuant to the provisions of this Agreement, including the Prospectus,
amendments and supplements to such registration statement, including
post-effective amendments, all exhibits and all material incorporated by
reference or deemed to be incorporated by reference in such registration
statement.

RULE 144: Rule 144 promulgated under the Securities Act, as such Rule
may be amended from time to time, or any similar rule (other than Rule 144A) or
regulation hereafter adopted by the SEC providing for offers and sales of
securities made in compliance therewith resulting in offers and sales by
subsequent holders that are not affiliates of an issuer of such securities being
free of the registration and prospectus delivery requirements of the Securities
Act.

RULE 144A: Rule 144A promulgated under the Securities Act, as such
Rule may be amended from time to time, or any similar rule (other than Rule 144)
or regulation hereafter adopted by the SEC.

RULE 415: Rule 415 promulgated under the Securities Act, as such Rule
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the SEC.

SEC: The Securities and Exchange Commission.

SECURITIES ACT: The Securities Act of 1933, as amended, and the rules
and regulations of the SEC promulgated thereunder.

SHELF NOTICE: See Section 2(c) hereof.

SHELF REGISTRATION: See Section 3(a) hereof.

TIA: The Trust Indenture Act of 1939, as amended.

TRUSTEE: The trustee under the Indenture and, if existent, the
trustee under any indenture governing the Exchange Notes and Private Exchange
Notes (if any).

UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING: A registration in
which securities of the Company are sold to an underwriter for reoffering to the
public.

<PAGE>

-5-

EXCHANGE OFFER

(a) The Company shall file with the SEC no later than the Filing Date
an offer to exchange (the "EXCHANGE OFFER") any and all of the Registrable Notes
(other than the Private Exchange Notes, if any) for a like aggregate principal
amount of debt securities of the Company that are identical in all material
respects to the Notes (the "EXCHANGE NOTES") (and that are entitled to the
benefits of the Indenture or a trust indenture that is identical in all material
respects to the Indenture (other than such changes to the Indenture or any such
identical trust indenture as are necessary to comply with any requirements of
the SEC to effect or maintain the qualification thereof under the TIA) and that,
in either case, has been qualified under the TIA), except that the Exchange
Notes (other than Private Exchange Notes, if any) shall have been registered
pursuant to an effective Registration Statement under the Securities Act and
shall contain no restrictive legend thereon. The Exchange Offer shall be
registered under the Securities Act on the appropriate form (the "EXCHANGE
REGISTRATION STATEMENT") and shall comply with all applicable tender offer rules
and regulations under the Exchange Act. The Company agrees to use its best
efforts to (x) cause the Exchange Registration Statement to be declared
effective under the Securities Act on or before the Effectiveness Date; (y) keep
the Exchange Offer open for at least 20 business days (or longer if required by
applicable law) after the date that notice of the Exchange Offer is mailed to
Holders; and (z) consummate the Exchange Offer on or prior to the 190th day
following the Issue Date. If after such Exchange Registration Statement is
declared effective by the SEC, the Exchange Offer or the issuance of the
Exchange Notes thereunder is interfered with by any stop order, injunction or
other order or requirement of the SEC or any other governmental agency or court,
such Exchange Registration Statement shall be deemed not to have become
effective for purposes of this Agreement. Each Holder who participates in the
Exchange Offer will be required to represent that any Exchange Notes received by
it will be acquired in the ordinary course of its business, that at the time of
the consummation of the Exchange Offer such Holder will have no arrangement or
understanding with any Person to participate in the distribution of the Exchange
Notes in violation of the provisions of the Securities Act and that such Holder
is not an affiliate of the Company within the meaning of the Securities Act and
is not acting on behalf of any persons or entities who could not truthfully make
the foregoing representations. Upon consummation of the Exchange Offer in
accordance with this Section 2, the provisions of this Agreement shall continue
to apply, MUTATIS MUTANDIS, solely with respect

<PAGE>

-6-

to Registrable Notes that are Private Exchange Notes and Exchange Notes held by
Participating Broker-Dealers, and the Company shall have no further obligation
to register Registrable Notes (other than Private Exchange Notes and other than
in respect of any Exchange Notes as to which clause 2(c)(v) hereof applies)
pursuant to Section 3 hereof. No securities other than the Exchange Notes shall
be included in the Exchange Registration Statement.

(b) The Company shall include within the Prospectus contained in the
Exchange Registration Statement a section entitled "Plan of Distribution,"
reasonably acceptable to the Initial Purchaser, that shall contain a summary
statement of the positions taken or policies made by the Staff of the SEC with
respect to the potential "underwriter" status of any broker-dealer that is the
beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange
Notes received by such broker-dealer in the Exchange Offer (a "PARTICIPATING
BROKER-DEALER"), whether such positions or policies have been publicly
disseminated by the staff of the SEC or such positions or policies, in the
judgment of the Initial Purchaser, represent the prevailing views of the Staff
of the SEC. Such "Plan of Distribution" section shall also expressly permit the
use of the Prospectus by all Persons subject to the prospectus delivery
requirements of the Securities Act, including all Participating Broker-Dealers,
and include a statement describing the means by which Participating
Broker-Dealers may resell the Exchange Notes.

The Company shall use its best efforts to keep the Exchange
Registration Statement effective and to amend and supplement the Prospectus
contained therein in order to permit such Prospectus to be lawfully delivered by
all Persons subject to the prospectus delivery requirements of the Securities
Act for such period of time as is necessary to comply with applicable law in
connection with any resale of the Exchange Notes; PROVIDED, HOWEVER, that such
period shall not exceed 190 days after the consummation of the Exchange Offer
(or such longer period if extended pursuant to the last paragraph of Section 5
hereof) (the "APPLICABLE PERIOD").

If, prior to consummation of the Exchange Offer, the Initial Purchaser
holds any Notes acquired by it and having, or that are reasonably likely to be
determined to have, the status of an unsold allotment in the initial
distribution, the Company, upon the request of the Initial Purchaser
simultaneously with the delivery of the Exchange Notes in the Exchange Offer,
shall issue and deliver to the Initial Purchaser in exchange

<PAGE>

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(the "PRIVATE EXCHANGE") for such Notes held by the Initial Purchaser a like
principal amount of debt securities of the Company that are identical in all
material respects to the Exchange Notes (the "PRIVATE EXCHANGE NOTES") (and that
are issued pursuant to the same indenture as the Exchange Notes), except for the
placement of a restrictive legend on such Private Exchange Notes. The Private
Exchange Notes shall bear the same CUSIP number as the Exchange Notes.

Interest on the Exchange Notes and the Private Exchange Notes will
accrue from the last interest payment date on which interest was paid on the
Notes surrendered in exchange therefor or, if no interest has been paid on the
Notes, from the Issue Date.

In connection with the Exchange Offer, the Company shall:

(1) mail to each Holder a copy of the Prospectus forming part of the
Exchange Registration Statement, together with an appropriate letter of
transmittal and related documents;

(2) utilize the services of a depositary for the Exchange Offer with
an address in the Borough of Manhattan, The City of New York;

(3) permit Holders to withdraw tendered Notes at any time prior to
the close of business, New York time, on the last business day on which the
Exchange Offer shall remain open; and

(4) otherwise comply in all material respects with all applicable
laws, rules and regulations.

As soon as practicable after the close of the Exchange Offer or the
Private Exchange, as the case may be, the Company shall:

(1) accept for exchange all Notes properly tendered and not validly
withdrawn pursuant to the Exchange Offer or the Private Exchange;

(2) deliver to the Trustee for cancellation all Notes so accepted for
exchange; and

(3) cause the Trustee to authenticate and deliver promptly to each
Holder of Notes, Exchange Notes or

<PAGE>

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Private Exchange Notes, as the case may be, equal in principal amount to
the Notes of such Holder so accepted for exchange.

The Exchange Notes and the Private Exchange Notes may be issued under
(i) the Indenture or (ii) an indenture identical in all material respects to the
Indenture, which in either event shall provide that (1) the Exchange Notes shall
not be subject to the transfer restrictions set forth in the Indenture and
(2) the Private Exchange Notes shall be subject to the transfer restrictions set
forth in the Indenture. The Indenture or such indenture shall provide that the
Exchange Notes, the Private Exchange Notes and the Notes shall vote and consent
together on all matters as one class and that neither the Exchange Notes, the
Private Exchange Notes or the Notes will have the right to vote or consent as a
separate class on any matter.

(c) If, (i) because of any change in law or in currently prevailing
interpretations of the Staff of the SEC, the Company is not permitted to effect
an Exchange Offer, (ii) the Exchange Offer is not consummated within 190 days of
the Issue Date, (iii) the holder of Private Exchange Notes so requests at any
time after the consummation of the Private Exchange, (iv) the Holders of not
less than a majority in aggregate principal amount of the Registrable Notes
determine that the interests of the Holders would be materially adversely
affected by consummation of the Exchange Offer or (v) in the case of any Holder
that participates in the Exchange Offer, such Holder does not receive Exchange
Notes on the date of the exchange that may be sold without restriction under
state and federal securities laws (other than due solely to the status of such
Holder as an affiliate of the Company within the meaning of the Securities Act),
then the Company shall promptly deliver written notice thereof (the "SHELF
NOTICE") to the Trustee and in the case of clauses (i), (ii) and (iv), all
Holders, in the case of clause (iii), the Holders of the Private Exchange Notes
and in the case of clause (v), the affected Holder, and shall file a Shelf
Registration pursuant to Section 3 hereof.

3. SHELF REGISTRATION

If a Shelf Notice is delivered as contemplated by Section 2(c) hereof,
then:

(a) SHELF REGISTRATION. The Company shall as promptly as reasonably
practicable file with the SEC a Registration Statement for an offering to be
made on a continuous basis pursuant to Rule 415 covering all of the Registrable

<PAGE>

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Notes (the "SHELF REGISTRATION"). If the Company shall not have yet filed an
Exchange Registration Statement, the Company shall use its best efforts to file
with the SEC the Shelf Registration on or prior to the Filing Date. The Shelf
Registration shall be on Form S-1 or another appropriate form permitting
registration of such Registrable Notes for resale by Holders in the manner or
manners designated by them (including, without limitation, one or more
underwritten offerings). The Company shall not permit any securities other than
the Registrable Notes to be included in the Shelf Registration.

The Company shall use its best efforts to cause the Shelf Registration
to be declared effective under the Securities Act on or prior to the
Effectiveness Date and to keep the Shelf Registration continuously effective
under the Securities Act until the date that is three years from the Issue Date
(the "EFFECTIVENESS PERIOD"), or such shorter period ending when all Registrable
Notes covered by the Shelf Registration have been sold in the manner set forth
and as contemplated in the Shelf Registration.

(b) WITHDRAWAL OF STOP ORDERS. If the Shelf Registration ceases to
be effective for any reason at any time during the Effectiveness Period (other
than because of the sale of all of the securities registered thereunder), the
Company shall use its best efforts to obtain the prompt withdrawal of any order
suspending the effectiveness thereof.

(c) SUPPLEMENTS AND AMENDMENTS. The Company shall promptly
supplement and amend the Shelf Registration if required by the rules,
regulations or instructions applicable to the registration form used for such
Shelf Registration, if required by the Securities Act, or if reasonably
requested by the Holders of a majority in aggregate principal amount of the
Registrable Notes covered by such Registration Statement or by any underwriter
of such Registrable Notes.

4. ADDITIONAL INTEREST

(a) The Company and the Initial Purchaser agree that the Holders of
Registrable Notes will suffer damages if the Company fails to fulfill its
obligations under Section 2 or Section 3 hereof and that it would not be
feasible to ascertain the extent of such damages with precision. Accordingly,
the Company agrees to pay, as liquidated damages, additional interest on the
Notes ("ADDITIONAL INTEREST") under the circumstances and to the extent set
forth below (without duplication):

<PAGE>

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(i) if neither the Exchange Registration Statement nor the Shelf
Registration has been filed on or prior to the Filing Date, Additional
Interest shall accrue on the Notes over and above the stated interest at a
rate of 0.50% per annum for the first 90 days immediately following the
Filing Date, such Additional Interest rate increasing by an additional
0.50% per annum at the beginning of each subsequent 90-day period;

(ii) if neither the Exchange Registration Statement nor the Initial
Shelf Registration is declared effective by the SEC on or prior to the
Effectiveness Date, then, commencing on the day after the Effectiveness
Date, Additional Interest shall be accrued on the Notes included or that
should have been included in such Registration Statement over and above the
stated interest at a rate of 0.50% per annum for the first 90 days
immediately following the Effectiveness Date, such Additional Interest rate
increasing by an additional 0.50% per annum at the beginning of each
subsequent 90-day period; and

(iii) if either (A) the Company has not exchanged Exchange Notes for all
Notes validly tendered in accordance with the terms of the Exchange Offer
on or prior to the 190th day after the Issue Date or (B) the Exchange
Registration Statement ceases to be effective at any time prior to the time
that the Exchange Offer is consummated or (C) if applicable, the Shelf
Registration has been declared effective and such Shelf Registration ceases
to be effective at any time during the Effectiveness Period, then
Additional Interest shall be accrued on the Notes (over and above any
interest otherwise payable on the Notes) at a rate of 0.50% per annum on
(x) the 191st day after the Issue Date, in the case of (A) above, or
(y) the day the Exchange Registration Statement ceases to be effective
without being declared effective within five business days in the case of
(B) above, or (z) the day such Shelf Registration ceases to be effective,
in the case of (C) above, such Additional Interest rate increasing by an
additional 0.50% per annum at the beginning of each such subsequent 90-day
period (it being understood and agreed that, notwithstanding any provision
to the contrary, so long as any Note that is the subject of a Shelf Notice
is then covered by an effective Shelf Registration Statement, no Additional
Interest shall accrue on such Note);

PROVIDED, HOWEVER, that the Additional Interest rate on any affected Note may
not exceed at any one time in the aggregate

<PAGE>

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2.0% per annum; and PROVIDED, FURTHER, that (1) upon the filing of the Exchange
Registration Statement or a Shelf Registration (in the case of clause (i) of
this Section 4(a)), (2) upon the effectiveness of the Exchange Registration
Statement or the Shelf Registration (in the case of clause (ii) of this
Section 4(a)), or (3) upon the exchange of Exchange Notes for all Notes tendered
(in the case of clause (iii)(A) of this Section 4(a)), or upon the effectiveness
of the Exchange Registration Statement that had ceased to remain effective (in
the case of (iii)(B) of this Section 4(a)) or upon the effectiveness of the
Shelf Registration that had ceased to remain effective (in the case of (iii)(C)
of this Section 4(a)), Additional Interest on the affected Notes as a result of
such clause (or the relevant subclause thereof), as the case may be, shall cease
to accrue.

(b) The Company shall notify the Trustee within one business day
after each and every date on which an event occurs in respect of which
Additional Interest is required to be paid (an "EVENT DATE"). Any amounts of
Additional Interest due pursuant to (a)(i), (a)(ii) or (a)(iii) of this
Section 4 will be payable in cash semi-annually on each April 15 and October 15
(to the holders of record on the April 1 and October 1 immediately preceding
such dates), commencing with the first such date occurring after any such
Additional Interest commences to accrue. The amount of Additional Interest will
be determined by multiplying the applicable Additional Interest rate by the
principal amount of the Registrable Notes, multiplied by a fraction, the
numerator of which is the number of days such Additional Interest rate was
applicable during such period (determined on the basis of a 360-day year
consisting of twelve 30-day months and, in the case of a partial month, the
actual number of days elapsed) and the denominator of which is 360.

5. REGISTRATION PROCEDURES

In connection with the filing of any Registration Statement pursuant
to Sections 2 or 3 hereof, the Company shall effect such registrations to permit
the sale of the securities covered thereby in accordance with the intended
method or methods of disposition thereof, and pursuant thereto and in connection
with any Registration Statement filed by the Company hereunder, the Company
shall:

(a) Prepare and file with the SEC on or prior to the Filing Date, a
Registration Statement or Registration Statements as prescribed by Sections
2 or 3 hereof, and use its best efforts to cause each such Registration

<PAGE>

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Statement to become effective and remain effective as provided herein;
PROVIDED, HOWEVER, that, if (1) such filing is pursuant to Section 3 hereof
or (2) a Prospectus contained in an Exchange Registration Statement filed
pursuant to Section 2 hereof is required to be delivered under the
Securities Act by any Participating Broker-Dealer who seeks to sell
Exchange Notes during the Applicable Period, before filing any Registration
Statement or Prospectus or any amendments or supplements thereto, the
Company shall furnish to and afford the Holders of the Registrable Notes
covered by such Registration Statement or each such Participating
Broker-Dealer, as the case may be, their counsel and the managing
underwriters, if any, a reasonable opportunity to review copies of all such
documents (including copies of any documents to be incorporated by
reference therein and all exhibits thereto) proposed to be filed (in each
case at least five business days prior to such filing). The Company shall
not file any Registration Statement or Prospectus or any amendments or
supplements thereto if the Holders of a majority in aggregate principal
amount of the Registrable Notes covered by such Registration Statement, or
any such Participating Broker-Dealer, as the case may be, or their counsel,
or the managing underwriters, if any, shall reasonably object.

(b) Prepare and file with the SEC such amendments and post-effective
amendments to each Shelf Registration or Exchange Registration Statement,
as the case may be, as may be necessary to keep such Registration Statement
continuously effective for the Effectiveness Period or the Applicable
Period, as the case may be; cause the related Prospectus to be supplemented
by any prospectus supplement required by applicable law, and as so
supplemented to be filed pursuant to Rule 424 (or any similar provisions
then in force) promulgated under the Securities Act; and comply with the
provisions of the Securities Act and the Exchange Act applicable to it with
respect to the disposition of all securities covered by such Registration
Statement as so amended or in such Prospectus as so supplemented and with
respect to the subsequent resale of any securities being sold by a
Participating Broker-Dealer covered by any such Prospectus; the Company
shall be deemed not to have used their respective best efforts to keep a
Registration Statement effective during the Applicable Period if the
Company voluntarily takes any action that would result in selling Holders
of the Registrable Notes covered thereby or Participating Broker-Dealers
seeking to sell Exchange Notes not being able to sell such Registrable
Notes or

<PAGE>

-13-

such Exchange Notes during that period, unless such action is required by
applicable law or unless the Company complies with this Agreement,
including without limitation, the provisions of paragraph 5(k) hereof and
the last paragraph of this Section 5.

(c) If (1) a Shelf Registration is filed pursuant to Section 3 hereof
or (2) a Prospectus contained in an Exchange Registration Statement filed
pursuant to Section 2 hereof is required to be delivered under the
Securities Act by any Participating Broker-Dealer who seeks to sell
Exchange Notes during the Applicable Period, notify the selling Holders of
Registrable Notes, or each such Participating Broker-Dealer, as the case
may be, their counsel and the managing underwriters, if any, promptly (but
in any event within two business days) and confirm such notice in writing,
(i) when a Prospectus or any Prospectus supplement or post-effective
amendment has been filed, and, with respect to a Registration Statement or
any post-effective amendment, when the same has become effective under the
Securities Act (including in such notice a written statement that any
Holder may, upon request, obtain, at the sole expense of the Company, one
conformed copy of such Registration Statement or post-effective amendment
including financial statements and schedules, documents incorporated or
deemed to be incorporated by reference and exhibits), (ii) of the issuance
by the SEC of any stop order suspending the effectiveness of a Registration
Statement or of any order preventing or suspending the use of any
preliminary prospectus or the initiation of any proceedings for that
purpose, (iii) if at any time when a prospectus is required by the
Securities Act to be delivered in connection with sales of the Registrable
Notes or resales of Exchange Notes by Participating Broker-Dealers the
representations and warranties of the Company contained in any agreement
(including any underwriting agreement), contemplated by Section 5(n) hereof
cease to be true and correct, (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification or
exemption from qualification of a Registration Statement or any of the
Registrable Notes or the Exchange Notes to be sold by any Participating
Broker-Dealer for offer or sale in any jurisdiction, or the initiation or
written threat of any proceeding for such purpose, (v) of the happening of
any event, the existence of any condition or any information becoming known
that makes any statement made in such Registration Statement or related
Prospectus or any document incorporated or deemed

<PAGE>

-14-

to be incorporated therein by reference untrue in any material respects or
that requires the making of any changes in or amendments or supplements to
such Registration Statement, Prospectus or documents so that, in the case
of the Registration Statement, it will not contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
that in the case of the Prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading and (vi) of
the Company's determination that a post-effective amendment to a
Registration Statement would be appropriate.

(d) Use its reasonable best efforts to prevent the issuance of any
order suspending the effectiveness of a Registration Statement or of any
order preventing or suspending the use of a Prospectus or suspending the
qualification (or exemption from qualification) of any of the Registrable
Notes or the Exchange Notes for sale in any jurisdiction and, if any such
order is issued, to use their best efforts to obtain the withdrawal of any
such order at the earliest possible moment.

(e) If a Shelf Registration is filed pursuant to Section 3 and if
requested by the managing underwriter or underwriters, if any, or the
Holders of a majority in aggregate principal amount of the Registrable
Notes being sold in connection with an underwritten offering, (i) promptly
incorporate in a prospectus supplement or post-effective amendment such
information as the managing underwriter or underwriters, if any, such
Holders or counsel for any of them determine is reasonably necessary to be
included therein, (ii) make all required filings of such prospectus
supplement or such post-effective amendment as soon as practicable after
the Company has received notification of the matters to be incorporated in
such prospectus supplement or post-effective amendment and (iii) supplement
or make amendments to such Registration Statement.

(f) If (1) a Shelf Registration is filed pursuant to Section 3 hereof
or (2) a Prospectus contained in an Exchange Registration Statement filed
pursuant to Section 2 hereof is required to be delivered under the
Securities Act by any Participating Broker-Dealer who seeks to sell

<PAGE>

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Exchange Notes during the Applicable Period, furnish to each selling Holder
of Registrable Notes and to each such Participating Broker-Dealer who so
requests and to their respective counsel and each managing underwriter, if
any, at the sole expense of the Company, one conformed copy of the
Registration Statement or Registration Statements and each post-effective
amendment thereto, including financial statements and schedules and, if
requested, all documents incorporated or deemed to be incorporated therein
by reference and all exhibits.

(g) If (1) a Shelf Registration is filed pursuant to Section 3 hereof
or (2) a Prospectus contained in an Exchange Registration Statement filed
pursuant to Section 2 hereof is required to be delivered under the
Securities Act by any Participating Broker-Dealer who seeks to sell
Exchange Notes during the Applicable Period, deliver to each selling Holder
of Registrable Notes, or each such Participating Broker-Dealer, as the case
may be, their respective counsel and the underwriters, if any, at the sole
expense of the Company, as many copies of the Prospectus or Prospectuses
(including each form of preliminary prospectus) and each amendment or
supplement thereto and any documents incorporated by reference therein as
such Persons may reasonably request; and, subject to the last paragraph of
this Section 5, the Company hereby consents to the use of such Prospectus
and each amendment or supplement thereto by each of the selling Holders of
Registrable Notes or each such Participating Broker-Dealer, as the case may
be, and the underwriters or agents, if any, and dealers, if any, in
connection with the offering and sale of the Registrable Notes covered by,
or the sale by Participating Broker-Dealers of the Exchange Notes pursuant
to, such Prospectus and any amendment or supplement thereto.

(h) Prior to any public offering of Registrable Notes or Exchange
Notes or any delivery of a Prospectus contained in the Exchange
Registration Statement by any Participating Broker-Dealer who seeks to sell
Exchange Notes during the Applicable Period, to use their best efforts to
register or qualify and to cooperate with the selling Holders of
Registrable Notes or each such Participating Broker-Dealer, as the case may
be, the managing underwriter or underwriters, if any, and their respective
counsel in connection with the registration or qualification (or exemption
from such registration or qualification) of such Registrable Notes for
offer and sale under

<PAGE>

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the securities or Blue Sky laws of such jurisdictions within the United
States as any selling Holder, Participating Broker-Dealer or the managing
underwriter or underwriters reasonably request in writing; PROVIDED,
HOWEVER, that where Exchange Notes held by Participating Broker-Dealers or
Registrable Notes are offered other than through an underwritten offering,
the Company agrees to cause its counsel to perform Blue Sky investigations
and file registrations and qualifications required to be filed pursuant to
this Section 5(h); keep each such registration or qualification (or
exemption therefrom) effective during the period such Registration
Statement is required to be kept effective and do any and all other acts or
things reasonably necessary or advisable to enable the disposition in such
jurisdictions of the Exchange Notes held by Participating Broker-Dealers or
the Registrable Notes covered by the applicable Registration Statement;
PROVIDED, HOWEVER, that the Company shall not be required to (A) qualify
generally to do business in any jurisdiction where it is not then so
qualified, (B) take any action that would subject it to general service of
process in any such jurisdiction where it is not then so subject or (C)
subject itself to taxation in any such jurisdiction where it is not then so
subject.

(i) If a Shelf Registration is filed pursuant to Section 3 hereof,
cooperate with the selling Holders of Registrable Notes and the managing
underwriter or underwriters, if any, to facilitate the timely preparation
and delivery of certificates representing Registrable Notes to be sold,
which certificates shall not bear any restrictive legends and shall be in a
form eligible for deposit with The Depository Trust Company; and enable
such Registrable Notes to be in such denominations and registered in such
names as the managing underwriter or underwriters, if any, or Holders may
reasonably request.

(j) Use its best efforts to cause the Registrable Notes covered by
the Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the
Holders thereof or the underwriter or underwriters, if any, to consummate
the disposition of such Registrable Notes, except as may be required solely
as a consequence of the nature of such selling Holder's business, in which
case the Company will cooperate in all reasonable respects with the filing
of such Registration Statement and the granting of such approvals.

<PAGE>

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If (1) a Shelf Registration is filed pursuant to Section 3 hereof or
(2) a Prospectus contained in an Exchange Registration Statement filed
pursuant to Section 2 hereof is required to be delivered under the
Securities Act by any Participating Broker-Dealer who seeks to sell
Exchange Notes during the Applicable Period, upon the occurrence of any
event contemplated by paragraph 5(c)(v) or 5(c)(vi), hereof, as promptly as
practicable prepare and (subject to Section 5(a) hereof) file with the SEC,
at the Company's sole expense, a supplement or post-effective amendment to
the Registration Statement or a supplement to the related Prospectus or any
document incorporated or deemed to be incorporated therein by reference, or
file any other required document so that, as thereafter delivered to the
purchasers of the Registrable Notes being sold thereunder or to the
purchasers of the Exchange Notes to whom such Prospectus will be delivered
by a Participating Broker-Dealer, any such Prospectus will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.

(l) Use its best efforts to cause the Registrable Notes covered by a
Registration Statement or the Exchange Notes, as the case may be, to be
rated with the appropriate rating agencies, if so requested by the Holders
of a majority in aggregate principal amount of Registrable Notes covered by
such Registration Statement or the Exchange Notes, as the case may be, or
the managing underwriter or underwriters, if any.

(m) Prior to the effective date of the first Registration Statement
relating to the Registrable Notes, (i) provide the Trustee with
certificates for the Registrable Notes or Exchange Notes, as the case may
be, in a form eligible for deposit with The Depository Trust Company and
(ii) provide a CUSIP number for the Registrable Notes or Exchange Notes, as
the case may be.

(n) In connection with any underwritten offering of Registrable Notes
pursuant to a Shelf Registration, enter into an underwriting agreement as
is customary in underwritten offerings of debt securities similar to the
Notes and take all such other actions as are reasonably requested by the
managing underwriter or underwriters in order to expedite or facilitate the
registration or the disposition of such Registrable Notes and, in such

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connection, (i) make such representations and warranties to, and covenants
with, the underwriters with respect to the business of the Company and its
subsidiaries (including any acquired business, properties or entity, if
applicable) and the Registration Statement, Prospectus and documents, if
any, incorporated or deemed to be incorporated by reference therein, in
each case, as are customarily made by issuers to underwriters in
underwritten offerings of debt securities similar to the Notes, and confirm
the same in writing if and when requested; (ii) obtain the written opinion
of counsel to the Company and written updates thereof in form, scope and
substance reasonably satisfactory to the managing underwriter or
underwriters, addressed to the underwriters covering the matters
customarily covered in opinions requested in underwritten offerings of debt
similar to the Notes and such other matters as may be reasonably requested
by the managing underwriter or underwriters; (iii) obtain "cold comfort"
letters and updates thereof in form, scope and substance reasonably
satisfactory to the managing underwriter or underwriters from the
independent certified public accountants of the Company (and, if necessary,
any other independent certified public accountants of any subsidiary of the
Company or of any business acquired by the Company for which financial
statements and financial data are, or are required to be, included or
incorporated by reference in the Registration Statement), addressed to each
of the underwriters, such letters to be in customary form and covering
matters of the type customarily covered in "cold comfort" letters in
connection with underwritten offerings of debt securities similar to the
Notes and such other matters as reasonably requested by the managing
underwriter or underwriters; and (iv) if an underwriting agreement is
entered into, the same shall contain indemnification provisions and
procedures no less favorable than those set forth in Section 7 hereof (or
such other provisions and procedures acceptable to Holders of a majority in
aggregate principal amount of Registrable Notes covered by such
Registration Statement and the managing underwriter or underwriters or
agents) with respect to all parties to be indemnified pursuant to said
Section. The above shall be done at each closing under such underwriting
agreement, or as and to the extent required thereunder.

(o) If (1) a Shelf Registration is filed pursuant to Section 3 hereof
or (2) a Prospectus contained in an Exchange Registration Statement filed
pursuant to Section 2 hereof is required to be delivered under the
Securities

<PAGE>

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Act by any Participating Broker-Dealer who seeks to sell Exchange Notes
during the Applicable Period, make available for inspection by any selling
Holder of such Registrable Notes being sold, or each such Participating
Broker-Dealer, as the case may be, any underwriter participating in any
such disposition of Registrable Notes, if any, and any attorney, accountant
or other agent retained by any such selling Holder or each such
Participating Broker-Dealer, as the case may be, or underwriter
(collectively, the "INSPECTORS"), at the offices where normally kept,
during reasonable business hours, all financial and other records,
pertinent corporate documents and instruments of the Company and its
subsidiaries (collectively, the "RECORDS") as shall be reasonably necessary
to enable them to exercise any applicable due diligence responsibilities,
and cause the respective officers, directors and employees of the Company
and its subsidiaries to supply all information reasonably requested by any
such Inspector in connection with such Registration Statement. Records
that the Company determines, in good faith, to be confidential and any
Records that it notifies the Inspectors are confidential shall not be
disclosed by the Inspectors unless (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in such
Registration Statement, (ii) the release of such Records is ordered
pursuant to a subpoena or other order from a court of competent
jurisdiction, (iii) disclosure of such information is, in the opinion of
counsel for any Inspector, necessary or advisable in connection with any
action, claim, suit or proceeding, directly or indirectly, involving or
potentially involving such Inspector and arising out of, based upon,
relating to or involving this Agreement or any transactions contemplated
hereby or arising hereunder or (iv) the information in such Records has
been made generally available to the public. Each selling Holder of such
Registrable Securities and each such Participating Broker-Dealer will be
required to agree that information obtained by it as a result of such
inspections shall be deemed confidential and shall not be used by it as the
basis for any market transactions in the securities of the Company unless
and until such information is generally available to the public. Each
selling Holder of such Registrable Notes and each such Participating
Broker-Dealer will be required to further agree that it will, upon learning
that disclosure of such Records is sought in a court of competent
jurisdiction, give notice to the Company and allow the Company to undertake
appropriate action

<PAGE>

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to prevent disclosure of the Records deemed confidential at the Company's
sole expense.

(p) Provide an indenture trustee for the Registrable Notes or the
Exchange Notes, as the case may be, and cause the Indenture or the trust
indenture provided for in Section 2(a) hereof, as the case may be, to be
qualified under the TIA not later than the effective date of the Exchange
Offer or the first Registration Statement relating to the Registrable
Notes; and in connection therewith, cooperate with the trustee under any
such indenture and the Holders of the Registrable Notes, to effect such
changes to such indenture as may be required for such indenture to be so
qualified in accordance with the terms of the TIA; and execute, and use its
reasonable best efforts to cause such trustee to execute, all documents as
may be required to effect such changes and all other forms and documents
required to be filed with the SEC to enable such indenture to be so
qualified in a timely manner.

(q) Comply with all applicable rules and regulations of the SEC and
make generally available to its securityholders earning statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule
158 thereunder (or any similar rule promulgated under the Securities Act)
no later than 45 days after the end of any fiscal quarter (or 90 days after
the end of any fiscal year) (i) commencing at the end of any fiscal quarter
in which Registrable Notes are sold to underwriters in a firm commitment or
best efforts underwritten offering and (ii) if not sold to underwriters in
such an offering, commencing on the first day of the first fiscal quarter
of the Company after the effective date of a Registration Statement, which
statements shall cover said fiscal periods.

(r) Upon consummation of an Exchange Offer or a Private Exchange,
obtain an opinion of counsel to the Company, who may, at the Company's
election, be internal counsel to the Company, in a form customary for
underwritten transactions, addressed to the Trustee for the benefit of all
Holders of Registrable Notes participating in the Exchange Offer or the
Private Exchange, as the case may be, that the Exchange Notes or Private
Exchange Notes, as the case may be, and the related indenture constitute
legal, valid and binding obligations of the Company, enforceable against
the Company in accordance with its respective terms, subject to customary
exceptions and qualifications.

<PAGE>

-21-

(s) If an Exchange Offer or a Private Exchange is to be consummated,
upon delivery of the Registrable Notes by Holders to the Company (or to
such other Person as directed by the Company) in exchange for the Exchange
Notes or the Private Exchange Notes, as the case may be, the Company shall
mark, or cause to be marked, on such Registrable Notes that such
Registrable Notes are being cancelled in exchange for the Exchange Notes or
the Private Exchange Notes, as the case may be; in no event shall such
Registrable Notes be marked as paid or otherwise satisfied.

(t) Cooperate with each seller of Registrable Notes covered by any
Registration Statement and each underwriter, if any, participating in the
disposition of such Registrable Notes and their respective counsel in
connection with any filings required to be made with the National
Association of Securities Dealers, Inc. (the "NASD").

(u) Use its best efforts to take all other steps necessary or
advisable to effect the registration of the Registrable Notes covered by a
Registration Statement contemplated hereby.

The Company may require each seller of Registrable Notes as to which
any registration is being effected to furnish to the Company such information
regarding such seller and the distribution of such Registrable Notes as the
Company may, from time to time, reasonably request. The Company may exclude
from such registration the Registrable Notes of any seller who unreasonably
fails to furnish such information within a reasonable time after receiving such
request and in such event shall have no further obligation under this Agreement
(including, without limitation, obligations under Section 4 hereof) with respect
to such seller or any subsequent holder of such Registrable Notes. Each seller
as to which any Shelf Registration is being effected agrees to furnish promptly
to the Company all information required to be disclosed in order to make the
information previously furnished to the Company by such seller not materially
misleading.

Each Holder of Registrable Notes and each Participating Broker-Dealer
agrees by acquisition of such Registrable Notes or Exchange Notes to be sold by
such Participating Broker-Dealer, as the case may be, that, upon actual receipt
of any notice from the Company of the happening of any event of the kind
described in Sections 5(c)(ii), 5(c)(iv), 5(c)(v) or

<PAGE>

-22-

5(c)(vi) hereof, such Holder will forthwith discontinue disposition of such
Registrable Notes covered by such Registration Statement or Prospectus or
Exchange Notes to be sold by such Holder or Participating Broker-Dealer, as the
case may be, until such Holder's or Participating Broker-Dealer's receipt of
the copies of the supplemented or amended Prospectus contemplated by Section
5(k) hereof, or until it is advised in writing (the "ADVICE") by the Company
that the use of the applicable Prospectus may be resumed, and has received
copies of any amendments or supplements thereto. In the event that the Company
shall give any such notice, each of the Effectiveness Period and the Applicable
Period shall be extended by the number of days during such periods from and
including the date of the giving of such notice to and including the date when
each seller of Registrable Notes covered by such Registration Statement or
Exchange Notes to be sold by such Participating Broker-Dealer, as the case may
be, shall have received (x) the copies of the supplemented or amended Prospectus
contemplated by Section 5(k) hereof or (y) the Advice.

6. REGISTRATION EXPENSES

(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall be borne by the Company
whether or not the Exchange Offer or a Shelf Registration is filed or becomes
effective, including, without limitation, (i) all registration and filing fees
(including, without limitation, (A) fees with respect to filings required to be
made with the NASD in connection with an underwritten offering and (B) fees and
expenses of compliance with state securities or Blue Sky laws (including,
without limitation, reasonable fees and disbursements of counsel in connection
with Blue Sky qualifications of the Registrable Notes or Exchange Notes and
determination of the eligibility of the Registrable Notes or Exchange Notes for
investment under the laws of such jurisdictions (x) where the holders of
Registrable Notes are located, in the case of the Exchange Notes, or (y) as
provided in Section 5(h) hereof, in the case of Registrable Notes or Exchange
Notes to be sold by a Participating Broker-Dealer during the Applicable
Period)), (ii) printing expenses, including, without limitation, expenses of
printing certificates for Registrable Notes or Exchange Notes in a form eligible
for deposit with The Depository Trust Company and of printing prospectuses if
the printing of prospectuses is requested by the managing underwriter or
underwriters, if any, by the Holders of a majority in aggregate principal amount
of the Registrable Notes included in any Registration Statement or sold by any
Participating Broker-Dealer, as the case may be,

<PAGE>

-23-

(iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company and fees and disbursements of special counsel for the
sellers of Registrable Notes (subject to the provisions of Section 6(b) hereof),
(v) fees and disbursements of all independent certified public accountants
referred to in Section 5(n)(iii) hereof (including, without limitation, the
expenses of any special audit and "cold comfort" letters required by or incident
to such performance), (vi) rating agency fees, if any, and any fees associated
with making the Registrable Notes or Exchange Notes eligible for trading through
the Depository Trust Company, (vii) Securities Act liability insurance, if the
Company desires such insurance, (viii) fees and expenses of all other Persons
retained by the Company, (ix) internal expenses of the Company (including,
without limitation, all salaries and expenses of officers and employees of the
Company performing legal or accounting duties), (x) the expense of any annual
audit, (xi) the fees and expenses incurred in connection with the listing of the
securities to be registered on any securities exchange, if applicable, and
(xii) the expenses relating to printing, word processing and distributing of all
Registration Statements, underwriting agreements, securities sales agreements,
indentures and any other documents necessary to comply with this Agreement.

(b) The Company shall (i) reimburse the Holders of the Registrable
Notes being registered in a Shelf Registration for the reasonable fees and
disbursements of not more than one counsel chosen by the Holders of a majority
in aggregate principal amount of the Registrable Notes to be included in such
Registration Statement. All other out-of-pocket costs incurred by such Holders
shall be the responsibility of such Holders.

7. INDEMNIFICATION

(a) The Company agrees to indemnify and hold harmless each Holder of
Registrable Notes offered pursuant to a Shelf Registration Statement and each
Participating Broker-Dealer selling Exchange Notes during the Applicable Period,
the officers and directors of each such Person or its affiliates, and each other
Person, if any, who controls any such Person or its affiliates within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act (each, a "PARTICIPANT"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, the reasonable legal
fees and other expenses actually incurred in connection with any suit, action or
proceeding or any claim asserted) caused by, arising out of or based upon any
untrue statement or alleged untrue statement of a material fact

<PAGE>

-24-

contained in any Registration Statement pursuant to which the offering of such
Registrable Notes or Exchange Notes, as the case may be, is registered (or any
amendment thereto) or related Prospectus (or any amendments or supplements
thereto) or any related preliminary prospectus, or caused by, arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
PROVIDED, HOWEVER, that the Company will not be required to indemnify a
Participant if (i) such losses, claims, damages or liabilities are caused by any
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with information relating to any Participant
furnished to the Company in writing by or on behalf of such Participant
expressly for use therein or (ii) if such Participant sold to the person
asserting the claim the Registrable Notes or Exchange Notes that are the subject
of such claim and such untrue statement or omission or alleged untrue statement
or omission was contained or made in any preliminary prospectus and corrected in
the Prospectus or any amendment or supplement thereto and the Prospectus does
not contain any other untrue statement or omission or alleged untrue statement
or omission of a material fact that was the subject matter of the related
proceeding and it is established by the Company in the related proceeding that
such Participant failed to deliver or provide a copy of the Prospectus (as
amended or supplemented) to such Person with or prior to the confirmation of the
sale of such Registrable Notes or Exchange Notes sold to such Person if required
by applicable law, unless such failure to deliver or provide a copy of the
Prospectus (as amended or supplemented) was a result of noncompliance by the
Company with Section 5 of this Agreement.

(b) Each Participant agrees, severally and not jointly, to indemnify
and hold harmless the Company, the Company's directors and officers and each
Person who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to each Participant, but only (i) with
reference to information relating to such Participant furnished to the Company
in writing by or on behalf of such Participant expressly for use in any
Registration Statement or Prospectus, any amendment or supplement thereto or any
preliminary prospectus or (ii) with respect to any untrue statement or
representation made by such Participant in writing to the Company. The
liability of any Participant under this paragraph shall in no event exceed the
proceeds received by

<PAGE>

-25-

such Participant from sales of Registrable Notes or Exchange Notes giving rise
to such obligations.

(c) If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted against
any Person in respect of which indemnity may be sought pursuant to either of the
two preceding paragraphs, such Person (the "INDEMNIFIED PERSON") shall promptly
notify the Person against whom such indemnity may be sought (the "INDEMNIFYING
PERSON") in writing, and the Indemnifying Person, upon request of the
Indemnified Person, shall retain counsel reasonably satisfactory to the
Indemnified Person to represent the Indemnified Person and any others the
Indemnifying Person may reasonably designate in such proceeding and shall pay
the reasonable fees and expenses actually incurred by such counsel related to
such proceeding; PROVIDED, HOWEVER, that the failure to so notify the
Indemnifying Person shall not relieve it of any obligation or liability that it
may have hereunder or otherwise (unless and only to the extent that such failure
directly results in the loss or compromise of any material rights or defenses by
the Indemnifying Person and the Indemnifying Person was not otherwise aware of
such action or claim). In any such proceeding, any Indemnified Person shall
have the right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such Indemnified Person unless (i) the
Indemnifying Person and the Indemnified Person shall have mutually agreed in
writing to the contrary, (ii) the Indemnifying Person shall have failed within a
reasonable period of time to retain counsel reasonably satisfactory to the
Indemnified Person or (iii) the named parties in any such proceeding (including
any impleaded parties) include both the Indemnifying Person and the Indemnified
Person and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. It
is understood that, unless there exists a conflict among Indemnified Persons,
the Indemnifying Person shall not, in connection with any one such proceeding or
separate but substantially similar related proceeding in the same jurisdiction
arising out of the same general allegations, be liable for the fees and expenses
of more than one separate firm (in addition to any local counsel) for all
Indemnified Persons, and that all such fees and expenses shall be reimbursed
promptly as they are incurred. Any such separate firm for the Participants and
such control Persons of Participants shall be designated in writing by
Participants who sold a majority in interest of Registrable Notes and Exchange
Notes sold by all such Participants and any such separate firm for the Company,
its directors, its officers and such control Persons of the Company shall be

<PAGE>

-26-

designated in writing by the Company. The Indemnifying Person shall not be
liable for any settlement of any proceeding effected without its prior written
consent, but if settled with such consent or if there be a final non-appealable
judgment for the plaintiff for which the Indemnified Person is entitled to
indemnification pursuant to this Agreement, the Indemnifying Person agrees to
indemnify and hold harmless each Indemnified Person from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an Indemnified Person shall have requested an
Indemnifying Person to reimburse the Indemnified Person for reasonable fees and
expenses actually incurred by counsel as contemplated by the third sentence of
this paragraph, the Indemnifying Person agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such Indemnifying
Person of the aforesaid request and (ii) such Indemnifying Person shall not have
reimbursed the Indemnified Person in accordance with such request prior to the
date of such settlement; PROVIDED, HOWEVER, that the Indemnifying Person shall
not be liable for any settlement effected without its consent pursuant to this
sentence if the Indemnifying Person is contesting, in good faith, the request
for reimbursement. No Indemnifying Person shall, without the prior written
consent of the Indemnified Person, effect any settlement or compromise of any
pending or threatened proceeding in respect of which any Indemnified Person is
or could have been a party, and indemnity could have been sought hereunder by
such Indemnified Person, unless such settlement (A) includes an unconditional
written release of such Indemnified Person, in form and substance reasonably
satisfactory to such Indemnified Person, from all liability on claims that are
the subject matter of such proceeding and (B) does not include any statement as
to an admission of fault, culpability or failure to act by or on behalf of any
Indemnified Person.

(d) If the indemnification provided for in the first and second
paragraphs of this Section 7 is for any reason unavailable to, or insufficient
to hold harmless, an Indemnified Person in respect of any losses, claims,
damages or liabilities referred to therein, then each Indemnifying Person under
such paragraphs, in lieu of indemnifying such Indemnified Person thereunder and
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such Indemnified Person as a result of such losses,
claims, damages or liabilities in such proportion as is appropriate to reflect
the relative fault of the Indemnifying Person or Persons on the one hand and the
Indemnified Person or Persons on

<PAGE>

-27-

the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof). The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or such Participant or such other Indemnified Person, as the case may be, on the
other, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission, and any other
equitable considerations appropriate in the circumstances.

(e) The parties agree that it would not be just and equitable if
contribution pursuant to this Section 7 were determined by PRO RATA allocation
(even if the Participants were treated as one entity for such purpose) or by any
other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an Indemnified Person as a result of the losses, claims,
damages and liabilities referred to in the immediately preceding paragraph shall
be deemed to include, subject to the limitations set forth above, any reasonable
legal or other expenses actually incurred by such Indemnified Person in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, in no event shall a
Participant be required to contribute any amount in excess of the amount by
which proceeds received by such Participant from sales of Registrable Notes or
Exchange Notes, as the case may be, exceeds the amount of any damages that such
Participant has otherwise been required to pay or has paid by reason of such
untrue or alleged untrue statement or omission or alleged omission. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.

(f) The indemnity and contribution agreements contained in this
Section 7 will be in addition to any liability that the Indemnifying Persons may
otherwise have to the Indemnified Persons referred to above.

8. RULE 144 AND 144A

The Company covenants that it will file the reports required to be
filed by it under the Securities Act and the

<PAGE>

-28-

Exchange Act and the rules and regulations adopted by the SEC thereunder in a
timely manner in accordance with the requirements of the Securities Act and the
Exchange Act and, if at any time the Company is not required to file such
reports, it will, upon the request of any Holder of Registrable Notes, make
publicly available annual reports and such information, documents and other
reports of the type specified in Sections 13 and 15(d) of the Exchange Act. The
Company further covenants for so long as any Registrable Notes remain
outstanding, to make available to any Holder or beneficial owner of Registrable
Notes in connection with any sale thereof and any prospective purchaser of such
Registrable Notes from such Holder or beneficial owner the information required
by Rule 144A(d)(4) under the Securities Act in order to permit resales of such
Registrable Notes pursuant to Rule 144A.

9. UNDERWRITTEN REGISTRATIONS

If any of the Registrable Notes covered by any Shelf Registration are
to be sold in an underwritten offering, the investment banker or investment
bankers and manager or managers that will manage the offering will be selected
by the Holders of a majority in aggregate principal amount of such Registrable
Notes included in such offering and reasonably acceptable to the Company.

No Holder of Registrable Notes may participate in any underwritten
registration hereunder unless such Holder (a) agrees to sell such Holder's
Registrable Notes on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and
(b) completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements.

10. MISCELLANEOUS

(a) NO INCONSISTENT AGREEMENTS. The Company has not, as of the date
hereof, and shall not, after the date of this Agreement, enter into any
agreement with respect to any of the Company's securities that is inconsistent
with the rights granted to the Holders of Registrable Notes in this Agreement or
otherwise conflicts with the provisions hereof. The Company has not entered and
will not enter into any agreement with respect to any of its securities that
will grant to any Person piggy-back registration rights with respect to a
Registration Statement.

<PAGE>

-29-

(b) ADJUSTMENTS AFFECTING REGISTRABLE NOTES. The Company shall not,
directly or indirectly, take any action with respect to the Registrable Notes as
a class that would adversely affect the ability of the Holders of Registrable
Notes to include such Registrable Notes in a registration undertaken pursuant to
this Agreement.

(c) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not
be amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, otherwise than with the prior written
consent of the Holders of not less than a majority in aggregate principal amount
of the then outstanding Registrable Notes. Notwithstanding the foregoing, a
waiver or consent to depart from the provisions hereof with respect to a matter
that relates exclusively to the rights of Holders of Registrable Notes whose
securities are being sold pursuant to a Registration Statement and that does not
directly or indirectly affect, impair, limit or compromise the rights of other
Holders of Registrable Notes may be given by Holders of at least a majority in
aggregate principal amount of the Registrable Notes being sold by such Holders
pursuant to such Registration Statement; PROVIDED, HOWEVER, that the provisions
of this sentence may not be amended, modified or supplemented except in
accordance with the provisions of the immediately preceding sentence.

(d) NOTICES. All notices and other communications (including without
limitation any notices or other communications to the Trustee) provided for or
permitted hereunder shall be made in writing by hand-delivery, registered first-
class mail, next-day air courier or facsimile:

1. if to a Holder of the Registrable Notes or any Participating
Broker-Dealer, at the most current address of such Holder or Participating
Broker-Dealer, as the case may be, set forth on the records of the
registrar under the Indenture, with a copy in like manner to the Initial
Purchaser as follows:

BT ALEX. BROWN INCORPORATED
130 Liberty Street
New York, New York 10006
Facsimile No.: (212) 250-7200
Attention: Corporate Finance Department

<PAGE>

-30-

with a copy to:

Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Facsimile No.: (212) 269-5420
Attention: William M. Hartnett, Esq.

2. if to the Initial Purchaser, at the addresses specified in
Section 10(d)(1);

3. if to the Company, at the address as follows:

TOWN SPORTS INTERNATIONAL, INC.
888 Seventh Avenue
New York, NY 10106
Facsimile No.: (212) 246-8422
Attention: General Counsel

with a copy to:

Kirkland & Ellis
153 East 53rd Street, 39th Floor
New York, NY 10022
Facsimile No.: (212) 446-4900
Attention: Joshua N. Korff, Esq.

All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; one business day
after being timely delivered to a next-day air courier; and when receipt is
acknowledged by the addressee, if sent by facsimile.

Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address and in the manner specified in such Indenture.

(e) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the parties
hereto; PROVIDED, HOWEVER, that this Agreement shall not inure to the benefit of
or be binding upon a successor or assign of a Holder unless and to the extent
such successor or assign holds Registrable Notes.

(f) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in

<PAGE>

-31-

separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.

(g) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.

(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS
MADE AND PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO
THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.

(i) SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.

(j) SECURITIES HELD BY THE COMPANY OR ITS AFFILIATES. Whenever the
consent or approval of Holders of a specified percentage of Registrable Notes is
required hereunder, Registrable Notes held by the Company or its affiliates (as
such term is defined in Rule 405 under the Securities Act) shall not be counted
in determining whether such consent or approval was given by the Holders of such
required percentage.

(k) THIRD PARTY BENEFICIARIES. Holders of Registrable Notes and
Participating Broker-Dealers are intended third party beneficiaries of this
Agreement and this Agreement may be enforced by such Persons.

(l) ENTIRE AGREEMENT. This Agreement, together with the Purchase
Agreement and the Indenture, is intended by the parties as a final and exclusive
statement of the agreement and

<PAGE>

-32-

understanding of the parties hereto in respect of the subject matter contained
herein and therein and any and all prior oral or written agreements,
representations, or warranties, contracts, understandings, correspondence,
conversations and memoranda between the Initial Purchaser on the one hand and
the Company on the other, or between or among any agents, representatives,
parents, subsidiaries, affiliates, predecessors in interest or successors in
interest with respect to the subject matter hereof and thereof are merged herein
and replaced hereby.

<PAGE>

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
TOWN SPORTS INTERNATIONAL, INC.

By:___________________________
Name:
Title:

BT ALEX. BROWN INCORPORATED

By:___________________________
Name:
Title:

<PAGE>

Exhibit 5.1

[Letterhead of Kirkland & Ellis]

To Call Writer Direct:
212 446-4800

November 24, 1997

Town Sports International, Inc
888 Seventh Ave.
New York, NY 10106

Re: Series B 9 3/4% Senior Notes due 2004

Ladies and Gentlemen:

We are acting as special counsel to Town Sports International, Inc., a
New York corporation (the "Company"), in connection with the proposed
registration by the Company of up to $85,000,000 in aggregate principal amount
of the Company's Series B 9 3/4% Senior Notes due 2004 (the "Exchange Notes"),
pursuant to a Registration Statement on Form S-4 filed with the Securities and
Exchange Commission (the "Commission") on November 24, 1997 under the Securities
Act of 1933, as amended (the "Securities Act") (such Registration Statement, as
amended or supplemented, is hereinafter referred to as the "Registration
Statement"), for the purpose of effecting an exchange offer (the "Exchange
Offer") for the Company's 9 3/4% Senior Notes due 2004 (the "Old
Notes"). The Exchange Notes are to be issued pursuant to the Indenture (the
"Indenture"), dated as of October 16, 1997, between the Company and United
States Trust Company of New York, as Trustee, in exchange for and in replacement
of the Company's outstanding Old Notes, of which $85,000,000 in aggregate
principal amount is outstanding.

In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments as we have deemed necessary for the purposes of this
opinion, including (i) the corporate and organizational documents of the
Company, (ii) minutes and records of the corporate proceedings of the Company
with respect to the issuance of the Exchange Notes, (iii) the Registration
Statement and exhibits thereto and (iv) the Registration Rights Agreement, dated
as of October 16, 1997, among the Company and BT Alex. Brown, Incorporated.

For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the

<PAGE>

Town Sports International, Inc.
November __, 1997
Page 2

genuineness of the signatures of persons signing all documents in connection
with which this opinion is rendered, the authority of such persons signing on
behalf of the parties thereto other than the Company, and the due authorization,
execution and delivery of all documents by the parties thereto other than the
Company. As to any facts material to the opinions expressed herein which we
have not independently established or verified, we have relied upon statements
and representations of officers and other representatives of the Company and
others.

Based upon and subject to the foregoing qualifications, assumptions
and limitations and the further limitations set forth below, we are of the
opinion that:

(1) The Company is a corporation existing and in good standing under
the General Corporation Law of the State of New York.

(2) The sale and issuance of the Exchange Notes has been validly
authorized by the Company.

(3) When, as and if (i) the Registration Statement shall have become
effective pursuant to the provisions of the Securities Act, (ii) the Indenture
shall have been qualified pursuant to the provisions of the Trust Indenture Act
of 1939, as amended, (iii) the Old Notes shall have been validly tendered to the
Company and (iv) the Exchange Notes shall have been issued in the form and
containing the terms described in the Registration Statement, the Indenture, the
resolutions of the Company's Board of Directors (or authorized committee
thereof) authorizing the foregoing and any legally required consents, approvals,
authorizations and other order of the Commission and any other regulatory
authorities to be obtained, the Exchange Notes when issued pursuant to the
Exchange Offer will be legally issued, fully paid and nonassessable and will
constitute valid and binding obligations of the Company.

Our opinions expressed above are subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally, (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), (iii)
public policy considerations which may limit the rights of parties to obtain
certain remedies and (iv) any laws except the laws of

<PAGE>

Town Sports International, Inc.
November __, 1997
Page 3

the State of New York. We advise you that issues addressed by this letter may
be governed in whole or in part by other laws, but we express no opinion as to
whether any relevant difference exists between the laws upon which our opinions
are based and any other laws which may actually govern. For purposes of the
opinion in paragraph 1, we have relied exclusively upon recent certificates
issued by the New York Secretary of State and such opinion is not intended to
provide any conclusion or assurance beyond that conveyed by such certificates.
We have assumed without investigation that there has been no relevant change or
development between the respective dates of such certificates and the date of
this letter.

We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement. We also consent to the reference to our firm under the
heading "Legal Matters" in the Registration Statement. In giving this consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of the rules and regulations of
the Commission.

We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance of the Exchange Notes.

This opinion is limited to the specific issues addressed herein, and
no opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the State of New York be changed by legislative action, judicial
decision or otherwise.

This opinion is furnished to you in connection with the filing of the
Registration Statement, and is not to be used, circulated, quoted or otherwise
relied upon for any other purposes.

Yours very truly,

KIRKLAND & ELLIS

<PAGE>

Exhibit 10.1

- -----------------------------------------------------------------------------

AMENDED AND RESTATED CREDIT AGREEMENT

among

TOWN SPORTS INTERNATIONAL, INC.,

VARIOUS LENDING INSTITUTIONS,

and

BANKERS TRUST COMPANY,

AS ADMINISTRATIVE AGENT

____________________________________

Dated as of October 16, 1997

____________________________________

$15,000,000

- -----------------------------------------------------------------------------

<PAGE>

TABLE OF CONTENTS

Page

SECTION 1. Amount and Terms of Credit.................................... 1
1.01 Commitments..................................................... 1
1.02 Minimum Borrowing Amounts, etc.................................. 3
1.03 Notice of Borrowing............................................. 3
1.04 Disbursement of Funds........................................... 4
1.05 Notes........................................................... 5
1.06 Conversions..................................................... 6
1.07 Pro Rata Borrowings............................................. 6
1.08 Interest........................................................ 6
1.09 Interest Periods................................................ 7
1.10 Increased Costs, Illegality, etc................................ 8
1.11 Compensation; Breakage.......................................... 10
1.12 Change of Lending Office........................................ 11
1.13 Replacement of Banks............................................ 11

SECTION 2. Letters of Credit............................................. 12
2.01 Letters of Credit............................................... 12
2.02 Minimum Stated Amount........................................... 13
2.03 Letter of Credit Requests; Notices of Issuance; Reports......... 13
2.04 Agreement to Repay Letter of Credit Drawings.................... 14
2.05 Letter of Credit Participations................................. 15
2.06 Increased Costs................................................. 17

SECTION 3. Fees; Commitments............................................. 18
3.01 Fees............................................................ 18
3.02 Voluntary Reduction of Commitments.............................. 19
3.03 Mandatory Adjustments of Commitments, etc....................... 20

SECTION 4. Payments...................................................... 21
4.01 Voluntary Prepayments........................................... 21
4.02 Mandatory Prepayments........................................... 22
4.03 Method and Place of Payment..................................... 24
4.04 Net Payments.................................................... 24

(i)

<PAGE>

Page

SECTION 5. Conditions Precedent.......................................... 26
5.01 Execution of Agreement.......................................... 26
5.02 No Default; Representations and Warranties...................... 27
5.03 Officer's Certificate........................................... 27
5.04 Opinions of Counsel............................................. 27
5.05 Corporate Proceedings........................................... 27
5.06 Plans; Existing Indebtedness Agreements; Shareholders'
Agreements; Management Agreements; Employment Agreements...... 27
5.07 Adverse Change, etc............................................. 28
5.08 Litigation...................................................... 29
5.09 Approvals....................................................... 29
5.10 Senior Notes.................................................... 29
5.11 Repayment of Loans Under the Original Credit Agreement.......... 29
5.12 Security Documents Acknowledgments; Pledge Agreement; Security
Agreement; Mortgages.......................................... 30
5.13 Subsidiary Guaranty Acknowledgement............................. 31
5.14 Pro Forma Balance Sheets........................................ 31
5.15 Projections..................................................... 31
5.16 Existing Indebtedness; Preferred Stock.......................... 31
5.17 Payment of Fees................................................. 32
5.18 Notice of Borrowing; Letter of Credit Request................... 32

SECTION 6. Representations, Warranties and Agreements.................... 32
6.01 Corporate Status................................................ 32
6.02 Corporate Power and Authority................................... 33
6.03 No Violation.................................................... 33
6.04 Litigation...................................................... 33
6.05 Use of Proceeds; Margin Regulations............................. 33
6.06 Governmental Approvals.......................................... 34
6.07 Investment Company Act.......................................... 34
6.08 Public Utility Holding Company Act.............................. 34
6.09 True and Complete Disclosure.................................... 34
6.10 Financial Condition; Financial Statements....................... 34
6.11 Security Interests.............................................. 36
6.12 Representations and Warranties in Senior Note Documents......... 36
6.13 Consummation of Transaction..................................... 36
6.14 Tax Returns and Payments........................................ 36
6.15 Compliance with ERISA........................................... 37
6.16 Subsidiaries; Subsidiary Restrictions........................... 38
6.17 Patents, etc.................................................... 38
6.18 Pollution and Other Regulations................................. 38
6.19 Properties...................................................... 39

(ii)

<PAGE>

Page

6.20 Labor Relations................................................. 39
6.21 Existing Indebtedness........................................... 40
6.22 Capitalization.................................................. 40

SECTION 7. Affirmative Covenants......................................... 40
7.01 Information Covenants........................................... 41
7.02 Books, Records and Inspections; Bank Meetings................... 42
7.03 Maintenance of Property; Insurance.............................. 43
7.04 Payment of Taxes................................................ 43
7.05 Corporate Franchises............................................ 44
7.06 Compliance with Statutes, etc................................... 44
7.07 ERISA........................................................... 44
7.08 Good Repair..................................................... 45
7.09 End of Fiscal Years; Fiscal Quarters............................ 45
7.10 Use of Proceeds................................................. 45
7.11 Further Assurances.............................................. 45

SECTION 8. Negative Covenants............................................ 46
8.01 Changes in Business............................................. 46
8.02 Consolidation, Merger, Sale of Assets, etc...................... 46
8.03 Liens........................................................... 48
8.04 Indebtedness.................................................... 50
8.05 Advances, Investments and Loans................................. 51
8.06 Prepayments of Indebtedness, etc................................ 52
8.07 Dividends, etc.................................................. 52
8.08 Transactions with Affiliates.................................... 54
8.09 Net Interest Coverage Ratio..................................... 54
8.10 Net Leverage Ratio.............................................. 55
8.11 Issuance of Stock............................................... 55
8.12 Limitation on Creation of Subsidiaries.......................... 55

SECTION 9. Events of Default............................................. 56
9.01 Payments........................................................ 56
9.02 Representations, etc............................................ 56
9.03 Covenants....................................................... 56
9.04 Default Under Other Agreements.................................. 56
9.05 Bankruptcy, etc................................................. 57
9.06 ERISA........................................................... 57
9.07 Security Documents.............................................. 58
9.08 Subsidiary Guaranty............................................. 58
9.09 Judgments....................................................... 58
9.10 Change of Control............................................... 58

(iii)

<PAGE>

Page

SECTION 10. Definitions.................................................. 59

SECTION 11. The Administrative Agent..................................... 80
11.01 Appointment.................................................... 80
11.02 Nature of Duties............................................... 80
11.03 Lack of Reliance on the Administrative Agent................... 81
11.04 Certain Rights of the Administrative Agent..................... 81
11.05 Reliance....................................................... 82
11.06 Indemnification................................................ 82
11.07 The Administrative Agent in Its Individual Capacity............ 82
11.08 Holders........................................................ 82
11.09 Resignation by the Administrative Agent........................ 83

SECTION 12. Miscellaneous................................................ 83
12.01 Payment of Expenses, etc....................................... 83
12.02 Right of Setoff................................................ 84
12.03 Notices........................................................ 85
12.04 Assignments; Participations; Etc............................... 85
12.05 No Waiver; Remedies Cumulative................................. 87
12.06 Payments Pro Rata.............................................. 88
12.07 Calculations; Computations..................................... 88
12.08 Governing Law; Submission to Jurisdiction; Venue; Waiver of
Jury Trial................................................... 89
12.09 Counterparts................................................... 90
12.10 Effectiveness.................................................. 90
12.11 Headings Descriptive........................................... 90
12.12 Amendment or Waiver............................................ 90
12.13 Survival....................................................... 92
12.14 Domicile of Loans.............................................. 92
12.15 Confidentiality................................................ 92
12.16 Register....................................................... 92

ANNEX I -- Commitments
ANNEX II -- Bank Addresses
ANNEX III -- Subsidiaries
ANNEX IV -- Real Property
ANNEX V -- Existing Indebtedness
ANNEX VI -- Insurance
ANNEX VII -- Existing Liens
ANNEX VIII -- Existing Ventures
ANNEX IX -- Refinanced Agreements
ANNEX X -- Optionholders

(iv)

<PAGE>

Page

EXHIBIT A-1 -- Form of Notice of Borrowing
EXHIBIT A-2 -- Form of Letter of Credit Request
EXHIBIT B-1 -- Form of Revolving Note
EXHIBIT B-2 -- Form of Swingline Note
EXHIBIT C -- Form of 4.04(b)(ii) Certificate
EXHIBIT D -- Form of Opinion of Kirkland & Ellis
EXHIBIT E -- Form of Officers' Certificate
EXHIBIT F -- Form of Security Documents Acknowledgment
EXHIBIT G -- Form of Subsidiary Guaranty Acknowledgement
EXHIBIT H -- Form of Assignment and Assumption Agreement

(v)

<PAGE>

AMENDED AND RESTATED CREDIT AGREEMENT, dated as of February 19, 1997
and amended and restated as of October 16, 1997, among TOWN SPORTS
INTERNATIONAL, a New York corporation (the "Borrower"), the lenders listed on
Annex I (each, a "Bank" and, collectively, the "Banks"), and BANKERS TRUST
COMPANY, as Administrative Agent (in such capacity, the "Administrative
Agent"). Unless otherwise defined herein, all capitalized terms used herein
and defined in Section 10 are used herein as so defined.

W I T N E S S E T H :

WHEREAS, the Borrower, the Agent and the Original Banks are parties
to a Credit Agreement, dated as of December 10, 1996 (as the same has been
amended, modified and supplemented to but excluding the Restatement Effective
Date, the "Original Credit Agreement");

WHEREAS, the Term Facility as defined in the Original Credit
Agreement has been repaid consistent with the terms of such original Credit
Agreement;

WHEREAS, subject to and upon the terms and conditions set forth
herein, the parties hereto wish to amend and restate the Original Credit
Agreement in the form of this Agreement;

WHEREAS, upon the occurrence of the Restatement Effective Date, the
Original Credit Agreement shall be amended and restated in its entirety and
shall be superseded hereby; and

NOW, THEREFORE, IT IS AGREED:

SECTION 1. Amount and Terms of Credit.

1.01 Commitments. Subject to and upon the terms and conditions set
forth herein, each Bank severally agrees to make a loan or loans (each a
"Loan" and, collectively, the "Loans") to the Borrower under the Revolving
Facility as set forth below:

(a) Subject to and upon the terms and conditions herein set forth,
each Bank severally agrees to make a revolving loan or loans (each, a
"Revolving Loan" and, collectively, the "Revolving Loans") to the Borrower,
which Revolving Loans (i) shall be made at any time and from time to time on
and after the Restatement Effective Date and prior to

<PAGE>

the Maturity Date, (ii) except as hereinafter provided, may, at the option of
the Borrower, be incurred and maintained as and/or converted into Base Rate
Loans or Eurodollar Loans, provided, that all Revolving Loans made as part of
the same Borrowing shall, unless otherwise specifically provided herein,
consist of Revolving Loans of the same Type, (iii) may be repaid and
reborrowed in accordance with the provisions hereof and (iv) shall not exceed
for any Bank at any time outstanding that aggregate principal amount which,
when combined with the aggregate outstanding principal amount of all other
Revolving Loans of such Bank and with such Bank's Adjusted Percentage, if
any, of the sum of (I) the Letter of Credit Outstandings (exclusive of Unpaid
Drawings which are repaid with the proceeds of, and simultaneously with the
incurrence of, the respective incurrence of Revolving Loans) at such time and
(II) the outstanding principal amount of Swingline Loans (exclusive of
Swingline Loans which are repaid with the proceeds of, and simultaneously
with the incurrence of, the respective incurrence of Revolving Loans) at such
time, equals (1) if such Bank is a Non-Defaulting Bank, the Adjusted
Commitment, if any, of such Bank at such time and (2) if such Bank is a
Defaulting Bank, the Commitment, if any, of such Bank at such time.

(b) Subject to and upon the terms and conditions set forth herein,
BTCo in its individual capacity agrees to make at any time and from time to
time on and after the Restatement Effective Date and prior to the Swingline
Expiry Date, a Loan or Loans to the Borrower (each a "Swingline Loan," and,
collectively, the "Swingline Loans"), which Swingline Loans (i) shall be made
and maintained as Base Rate Loans, (ii) may be repaid and reborrowed in
accordance with the provisions hereof, (iii) shall not exceed in aggregate
principal amount at any time outstanding, when combined with the aggregate
principal amount of all Revolving Loans made by Non-Defaulting Banks then
outstanding and the Letter of Credit Outstandings (exclusive of Unpaid
Drawings which are repaid with the proceeds of, and simultaneously with the
incurrence of, the respective incurrence of Swingline Loans) at such time, an
amount equal to the Adjusted Total Commitment then in effect (after giving
effect to any reductions to the Adjusted Total Commitment on such date) and
(iv) shall not exceed in aggregate principal amount at any time outstanding
the Maximum Swingline Amount. BTCo will not make a Swingline Loan after it
has received written notice from the Required Banks that one or more of the
applicable conditions to Credit Events specified in Section 5 are not then
satisfied.

(c) On any Business Day, BTCo may, in its sole discretion, give
notice to the Banks that its outstanding Swingline Loans shall be funded with
a Borrowing of Revolving Loans (provided that each such notice shall be
deemed to have been automatically given upon the occurrence of an Event of
Default under Section 9.05 or upon the exercise of any of the remedies
provided in the last paragraph of Section 9), in which case a Borrowing of
Revolving Loans constituting Base Rate Loans (each such Borrowing, a
"Mandatory Borrowing") shall be made on the immediately succeeding Business
Day by all Banks pro rata based on each Bank's Adjusted Percentage, and the
proceeds thereof shall be applied

-2-

<PAGE>

directly to repay BTCo for such outstanding Swingline Loans. Each Bank
hereby irrevocably agrees to make Base Rate Loans upon one Business Day's
notice pursuant to each Mandatory Borrowing in the amount and in the manner
specified in the preceding sentence and on the date specified in writing by
BTCo, notwithstanding (i) that the amount of the Mandatory Borrowing may not
comply with the Minimum Borrowing Amount otherwise required hereunder, (ii)
whether any conditions specified in Section 5 are then satisfied, (iii)
whether an Event of Default has occurred and is continuing, (iv) the date of
such Mandatory Borrowing and (v) any reduction in the Total Commitment or the
Adjusted Total Commitment after any such Swingline Loans were made. In the
event that any Mandatory Borrowing cannot for any reason be made on the date
otherwise required above (including, without limitation, as a result of the
commencement of a proceeding under the Bankruptcy Code in respect of the
Borrower), each Bank (other than BTCo) hereby agrees that it shall forthwith
purchase from BTCo (without recourse or warranty) such assignment of the
outstanding Swingline Loans as shall be necessary to cause the Banks to share
in such Swingline Loans ratably based upon their respective Adjusted
Percentages, provided that all interest payable on the Swingline Loans shall
be for the account of BTCo until the date the respective assignment is
purchased and, to the extent attributable to the purchased assignment, shall
be payable to the Bank purchasing same from and after such date of purchase.

1.02 Minimum Borrowing Amounts, etc. The aggregate principal
amount of each Borrowing of Loans shall not be less than the Minimum
Borrowing Amount applicable to such Loans; provided that the aggregate
principal amount of each Borrowing of Swingline Loans shall not be less than
$100,000, and, if greater, shall be in an integral multiple of $50,000. More
than one Borrowing may be incurred on any day, provided, that at no time
shall there be outstanding more than eight Borrowings of Eurodollar Loans.

1.03 Notice of Borrowing. (a) Whenever the Borrower desires to
incur Revolving Loans (excluding Borrowings of Revolving Loans pursuant to a
Mandatory Borrowing), the Borrower shall give the Administrative Agent at its
Notice Office, prior to 11:00 A.M. (New York time), at least three Business
Days' prior written notice (or telephonic notice promptly confirmed in
writing) of each Borrowing of Eurodollar Loans and at least one Business
Day's prior written notice (or telephonic notice promptly confirmed in
writing) of each Borrowing of Base Rate Loans to be made hereunder. Each
such notice (each, a "Notice of Borrowing") shall be irrevocable, and, in the
case of each written notice and each confirmation of telephonic notice, shall
be in the form of Exhibit A-1, appropriately completed to specify (i) the
aggregate principal amount of the Loans to be made pursuant to such
Borrowing, (ii) the date of such Borrowing (which shall be a Business Day)
and (iii) whether the respective Borrowing shall consist of Base Rate Loans
or, to the extent permitted hereunder, Eurodollar Loans and, if Eurodollar
Loans, the Interest Period to be initially applicable thereto. The
Administrative Agent shall promptly give each Bank written notice (or
telephonic notice promptly on that day confirmed in writing) of each proposed
Bor-

-3-

<PAGE>

rowing, of such Bank's proportionate share thereof, if any, and of the other
matters covered by the Notice of Borrowing.

(b) (i) Whenever the Borrower desires to incur a Borrowing of
Swingline Loans hereunder, the Borrower shall give BTCo prior to 1:00 P.M.
(New York time) on the day such Swingline Loan is to be made, written notice
(or telephonic notice promptly confirmed in writing) of each Swingline Loan
to be made hereunder. Each such notice shall be irrevocable and shall
specify in each case (x) the date of such Borrowing (which shall be a
Business Day) and (y) the aggregate principal amount of the Swingline Loan to
be made pursuant to such Borrowing.

(ii) Mandatory Borrowings shall be made upon the notice specified
in Section 1.01(c), with the Borrower irrevocably agreeing, by its incurrence
of any Swingline Loan, to the making of Mandatory Borrowings as set forth in
such Section 1.01(c).

(c) Without in any way limiting the obligation of the Borrower to
confirm in writing any telephonic notice permitted to be given hereunder, the
Agent or BTCo (in the case of a Borrowing of Swingline Loans) or the
respective Letter of Credit Issuer (in the case of Letters of Credit), as the
case may be, may prior to receipt of written confirmation act without
liability upon the basis of such telephonic notice, believed by the Agent,
BTCo, or such Letter of Credit Issuer, as the case may be, in good faith to
be from an Authorized Officer of the Borrower. In each such case, the
Borrower hereby waives the right to dispute the Agent's, BTCo's or such
Letter of Credit Issuer's record of the terms of such telephonic notice.

1.04 Disbursement of Funds. (a) No later than 1:00 P.M. (New York
time) on the date specified in each Notice of Borrowing, each Bank will make
available its pro rata share of each Borrowing requested to be made on such
date in the manner provided below, provided that all Swingline Loans shall be
made available by BTCo no later than 3:00 P.M. (New York time) on the date so
requested. All such amounts shall be made available to the Administrative
Agent in U.S. Dollars and immediately available funds at the Payment Office
and the Administrative Agent promptly will make available to the Borrower by
depositing to its account at the Payment Office the aggregate of the amounts
so made available in the type of funds received. Unless the Administrative
Agent shall have been notified by any Bank prior to the date of Borrowing
that such Bank does not intend to make available to the Administrative Agent
its portion of the Borrowing or Borrowings to be made on such date, the
Administrative Agent may assume that such Bank has made such amount available
to the Administrative Agent on such date of Borrowing, and the Administrative
Agent, in reliance upon such assumption, may (in its sole discretion and
without any obligation to do so) make available to the Borrower a
corresponding amount. If such corresponding amount is not in fact made
available to the Administrative Agent by such Bank and the Administrative
Agent has made available same to the Borrower, the Administrative Agent shall
be entitled to

-4-

<PAGE>

recover such corresponding amount from such Bank. If such Bank does not pay
such corresponding amount forthwith upon the Administrative Agent's demand
therefor, the Administrative Agent shall promptly notify the Borrower, and
the Borrower shall immediately pay such corresponding amount to the
Administrative Agent. The Administrative Agent shall also be entitled to
recover on demand from such Bank or the Borrower, as the case may be,
interest on such corresponding amount in respect of each day from the date
such corresponding amount was made available by the Administrative Agent to
the Borrower to the date such corresponding amount is recovered by the
Administrative Agent, at a rate per annum equal to (x) if paid by such Bank,
the overnight Federal Funds Effective Rate or (y) if paid by the Borrower,
the then applicable rate of interest, calculated in accordance with Section
1.08, for the respective Loans.

(b) Nothing herein shall be deemed to relieve any Bank from its
obligation to fulfill its commitments hereunder or to prejudice any rights
which the Borrower may have against any Bank as a result of any default by
such Bank hereunder.

1.05 Notes. (a) The Borrower's obligation to pay the principal of,
and interest on, all the Loans made to it by each Bank shall be evidenced (i)
if Revolving Loans, by a promissory note substantially in the form of Exhibit
B-1 with blanks appropriately completed in conformity herewith (each, a
"Revolving Note" and, collectively, the "Revolving Notes") and (ii) if
Swingline Loans, by a promissory note substantially in the form of Exhibit
B-2 with blanks appropriately completed in conformity herewith (the
"Swingline Note").

(b) The Revolving Note issued to each Bank shall (i) be executed by
the Borrower, (ii) be payable to the order of such Bank or its registered
assigns and be dated the Restatement Effective Date, (iii) be in a stated
principal amount equal to the Revolving Loan Commitment of such Bank and be
payable in the principal amount of the Revolving Loans evidenced thereby,
(iv) mature on the Revolving Loan Maturity Date, (v) bear interest as
provided in the appropriate clause of Section 1.08 in respect of the Base
Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby, (vi)
be subject to voluntary prepayment as provided in Section 4.01, and mandatory
repayment as provided in Section 4.02 and (vii) be entitled to the benefits
of this Agreement and the other Credit Documents.

(c) The Swingline Note issued to BTCo shall (i) be executed by the
Borrower, (ii) be payable to the order of BTCo or its registered assigns and
be dated the Restatement Effective Date, (iii) be in a stated principal
amount equal to the Maximum Swingline Amount and be payable in the principal
amount of the Swingline Loans evidenced thereby, (iv) mature on the Swingline
Expiry Date, (v) bear interest as provided in Section 1.08 in respect of the
Base Rate Loans evidenced thereby, (vi) be subject to voluntary prepayment as
provided in Section 4.01, and mandatory repayment as provided in Section 4.02
and (vii) be entitled to the benefits of this Agreement and the other Credit
Documents.

-5-

<PAGE>

(d) Each Bank will note on its internal records the amount of each
Loan made by it and each payment in respect thereof and will prior to any
transfer of any of its Notes endorse on the reverse side thereof the
outstanding principal amount of Loans evidenced thereby. Failure to make any
such notation or any error in such notation shall not affect the Borrower's
obligations in respect of such Loans.

1.06 Conversions. The Borrower shall have the option to convert on
any Business Day occurring on or after the Restatement Effective Date, all or
a portion at least equal to the applicable Minimum Borrowing Amount of the
outstanding principal amount of the Revolving Loans owing by the Borrower
into a Borrowing or Borrowings of another Type of Loan (other than Swingline
Loans, which at all times shall be maintained as Base Rate Loans); provided,
that (i) except as otherwise provided in Section 1.10(b), Eurodollar Loans
may be converted into Base Rate Loans only on the last day of an Interest
Period applicable thereto and no partial conversion of a Borrowing of
Eurodollar Loans shall reduce the outstanding principal amount of the
Eurodollar Loans made pursuant to such Borrowing to less than the Minimum
Borrowing Amount applicable thereto, (ii) Base Rate Loans may not be
converted into Eurodollar Loans if a violation of Sections 9.01 or 9.05 or an
Event of Default is in existence on the date of the conversion and the
Administrative Agent or the Required Banks have determined that such
conversion at such time would be disadvantageous to the Banks and (iii)
Borrowings of Eurodollar Loans resulting from this Section 1.06 shall be
limited in number as provided in Section 1.02. Each such conversion shall be
effected by the Borrower giving the Administrative Agent at its Notice
Office, prior to 11:00 A.M. (New York time), at least three Business Days'
(or two Business Days', in the case of a conversion into Base Rate Loans)
prior written notice (or telephonic notice promptly confirmed in writing)
(each a "Notice of Conversion") specifying the Loans to be so converted, the
Type of Loans to be converted into and, if to be converted into a Borrowing
of Eurodollar Loans, the Interest Period to be initially applicable thereto.
The Administrative Agent shall give each Bank prompt notice of any such
proposed conversion affecting any of its Loans.

1.07 Pro Rata Borrowings. All Loans under this Agreement (other
than Swingline Loans) shall be made by the Banks pro rata on the basis of
their Commitments, provided that Revolving Loans made pursuant to a Mandatory
Borrowing shall be made by the Banks pro rata on the basis of their Adjusted
Commitments. It is understood that no Bank shall be responsible for any
default by any other Bank of its obligation to make Loans hereunder and that
each Bank shall be obligated to make the Loans provided to be made by it
hereunder, regardless of the failure of any other Bank to fulfill its
commitments hereunder.

1.08 Interest. (a) The unpaid principal amount of each Base Rate
Loan shall bear interest from the date of the Borrowing thereof until
maturity (whether by acceleration or otherwise) at a rate per annum which
shall at all times be the Applicable Base Rate Margin plus the Base Rate in
effect from time to time.

-6-

<PAGE>

(b) The unpaid principal amount of each Eurodollar Loan shall bear
interest from the date of the Borrowing thereof until maturity (whether by
acceleration or otherwise) at a rate per annum which shall at all times be
the Applicable Eurodollar Margin plus the relevant Eurodollar Rate.

(c) All overdue principal and, to the extent permitted by law,
overdue interest in respect of each Loan and any other overdue amount payable
hereunder shall bear interest at a rate per annum equal to the Base Rate in
effect from time to time plus the sum of (i) 2% and (ii) the Applicable Base
Rate Margin, provided that no Loan shall bear interest after maturity
(whether by acceleration or otherwise) at a rate per annum less than 2% plus
the rate of interest applicable thereto at maturity.

(d) Interest shall accrue from and including the date of any
Borrowing to but excluding the date of any repayment thereof and shall be
payable (i) in respect of each Base Rate Loan, quarterly in arrears on the
last Business Day of each August, November, February and May, (ii) in respect
of each Eurodollar Loan, on the last day of each Interest Period applicable
thereto and, in the case of an Interest Period of six months, on the date
occurring three months after the first day of such Interest Period and (iii)
in respect of each Loan, on any prepayment or conversion (other than the
prepayment and conversion of Revolving Loans that are maintained as Base Rate
Loans) (on the amount prepaid or converted), at maturity (whether by
acceleration or otherwise) and, after such maturity, on demand.

(e) All computations of interest hereunder shall be made in
accordance with Section 12.07(b).

(f) The Administrative Agent, upon determining the interest rate
for any Borrowing of Eurodollar Loans for any Interest Period, shall promptly
notify the Borrower and the Banks thereof.

1.09 Interest Periods. (a) At the time the Borrower gives a
Notice of Borrowing or Notice of Conversion in respect of the making of, or
conversion into, a Borrowing of Eurodollar Loans (in the case of the initial
Interest Period applicable thereto) or prior to 11:00 A.M. (New York time) on
the third Business Day prior to the expiration of an Interest Period
applicable to a Borrowing of Eurodollar Loans, the Borrower shall have the
right to elect by giving the Administrative Agent written notice (or
telephonic notice promptly confirmed in writing) of the Interest Period
applicable to such Borrowing, which Interest Period shall, at the option of
the Borrower (but otherwise subject to the provisions of Sections 1.01(a)(ii)
and 1.01(b)(ii)), be a one, two, three or six month period. Notwithstanding
anything to the contrary contained above:

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(i) the initial Interest Period for any Borrowing of Eurodollar
Loans shall commence on the date of such Borrowing (including the date of
any conversion from a Borrowing of Base Rate Loans) and each Interest
Period occurring thereafter in respect of such Borrowing shall commence
on the day on which the next preceding Interest Period expires;

(ii) if any Interest Period begins on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period, such Interest Period shall end on the last Business Day
of such calendar month;

(iii) if any Interest Period would otherwise expire on a day which
is not a Business Day, such Interest Period shall expire on the next
succeeding Business Day, provided that if any Interest Period would
otherwise expire on a day which is not a Business Day but is a day of the
month after which no further Business Day occurs in such month, such
Interest Period shall expire on the next preceding Business Day;

(iv) no Interest Period for a Borrowing may be elected if it would
extend beyond the Maturity Date; and

(v) no Interest Period may be elected at any time when an Event of
Default is then in existence or when a violation of Sections 9.01 or 9.05
is then in existence and the Administrative Agent or the Required Banks
have determined that such an election at such time would be
disadvantageous to the Banks.

(b) If upon the expiration of any Interest Period, the Borrower has
failed to, or been unable to, elect a new Interest Period to be applicable to
the respective Borrowing of Eurodollar Loans as provided above, the Borrower
shall be deemed to have elected to convert such Borrowing into a Borrowing of
Base Rate Loans effective as of the expiration date of such current Interest
Period.

1.10 Increased Costs, Illegality, etc. (a) In the event that (x)
in the case of clause (i) below, the Administrative Agent or (y) in the case
of clauses (ii) and (iii) below, any Bank, shall have determined (which
determination shall, absent manifest error, be final and conclusive and
binding upon all parties hereto):

(i) on any date for determining the Eurodollar Rate for any
Interest Period, that, by reason of any changes arising after the date of
this Agreement affecting the interbank Eurodollar market, adequate and
fair means do not exist for ascertaining the applicable interest rate on
the basis provided for in the definition of Eurodollar Rate; or

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(ii) at any time, that such Bank shall incur increased costs or
reductions in the amounts received or receivable hereunder with respect
to any Eurodollar Loans (other than any increased cost or reduction in
the amount received or receivable resulting from the imposition of or a
change in the rate of Taxes) because of (x) any change since the
Restatement Effective Date in any applicable law, governmental rule,
regulation, guideline, order or request (whether or not having the force
of law), or in the interpretation or administration thereof and including
the introduction of any new law or governmental rule, regulation,
guideline, order or request (such as, for example, but not limited to a
change in official reserve requirements, but, in all events, excluding
reserves required under Regulation D to the extent included in the
computation of the Eurodollar Rate) and/or (y) other circumstances
occurring after the Restatement Effective Date affecting such Bank, the
interbank Eurodollar market or the position of such Bank in such market;
or

(iii) at any time since the Restatement Effective Date, that the
making or continuance of any Eurodollar Loan has become unlawful by
compliance by such Bank in good faith with any law, governmental rule,
regulation, guideline or order (or would conflict with any such
governmental rule, regulation, guideline or order not having the force of
law but with which such Bank customarily complies even though the failure
to comply therewith would not be unlawful);

then, and in any such event, such Bank (or the Administrative Agent in the
case of clause (i) above) shall (x) on such date and (y) as promptly as
practicable (and in any event within ten Business Days) after the date on
which such event no longer exists give notice (by telephone confirmed in
writing) to the Borrower and to the Administrative Agent of such
determination (which notice the Administrative Agent shall promptly transmit
to each of the other Banks). Thereafter, (x) in the case of clause (i) above,
Eurodollar Loans shall no longer be available until such time as the
Administrative Agent notifies the Borrower and the Banks that the
circumstances giving rise to such notice by the Administrative Agent no
longer exist, and any Notice of Borrowing or Notice of Conversion given by
the Borrower with respect to Eurodollar Loans which have not yet been
incurred shall be deemed rescinded by the Borrower, (y) in the case of clause
(ii) above, the Borrower shall pay to such Bank, upon written demand
therefor, such additional amounts (in the form of an increased rate of, or a
different method of calculating, interest or otherwise as such Bank in its
sole discretion shall determine) as shall be required to compensate such Bank
for such increased costs or reductions in amounts receivable hereunder (a
written notice as to the additional amounts owed to such Bank, showing the
basis for the calculation thereof, submitted to the Borrower by such Bank
shall, absent manifest error, be final and conclusive and binding upon all
parties hereto) and (z) in the case of clause (iii) above, the Borrower shall
take one of the actions specified in Section 1.10(b) as promptly as possible
and, in any event, within the time period required by law.

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(b) At any time that any Eurodollar Loan is affected by the
circumstances described in Section 1.10(a)(ii) or (iii), the Borrower may
(and in the case of a Eurodollar Loan affected pursuant to Section
1.10(a)(iii) the Borrower shall) either (i) if the affected Eurodollar Loan
is then being made pursuant to a Borrowing, cancel said Borrowing by giving
the Administrative Agent telephonic notice (confirmed promptly in writing)
thereof on the same date that the Borrower was notified by a Bank pursuant to
Section 1.10(a)(ii) or (iii), or (ii) if the affected Eurodollar Loan is then
outstanding, upon at least three Business Days' notice to the Administrative
Agent, require the affected Bank to convert each such Eurodollar Loan into a
Base Rate Loan; provided, that if more than one Bank is affected at any time,
then all affected Banks must be treated the same pursuant to this Section
1.10(b).

(c) If any Bank shall have determined that after the Effective
Date, the adoption or effectiveness of any applicable law, rule or regulation
regarding capital adequacy, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by such Bank (or any corporation
controlling such Bank) with any request or directive regarding capital
adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing
the rate of return on such Bank's (or such controlling corporation's) capital
or assets as a consequence of its commitments or obligations hereunder to a
level below that which such Bank (or such controlling corporation) could have
achieved but for such adoption, effectiveness, change or compliance (taking
into consideration such Bank's (or such controlling corporation's) policies
with respect to capital adequacy), then from time to time, within 15 days
after written demand by such Bank (with a copy to the Administrative Agent
and accompanied by the notice described in the last sentence of this Section
1.10(c)), the Borrower shall pay to such Bank such additional amount or
amounts as will compensate such Bank (or such controlling corporation) for
such reduction. Each Bank, upon determining in good faith that any
additional amounts will be payable pursuant to this Section 1.10(c), will
give prompt written notice thereof to the Borrower, which notice shall set
forth the basis of the calculation of such additional amounts, although the
failure to give any such notice shall not release or diminish any of the
Borrower's obligations to pay additional amounts pursuant to this Section
1.10(c) upon the subsequent receipt of such notice.

1.11 Compensation; Breakage. The Borrower shall compensate each
Bank, upon its written request (which request shall set forth the basis for
requesting such compensation), for all reasonable losses, expenses and
liabilities (including, without limitation, any loss, expense or liability
incurred by reason of the liquidation or reemployment of deposits or other
funds required by such Bank to fund its Eurodollar Loans but excluding in any
event the loss of anticipated profits) which such Bank may sustain: (i) if
for any reason (other than a default by such Bank or the Administrative
Agent) a Borrowing of Eurodollar Loans does not occur on a date specified
therefor in a Notice of Borrowing or Notice of Conversion (whether or not
withdrawn by the Borrower or deemed

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withdrawn pursuant to Section 1.10(a)); (ii) if any prepayment, repayment or
conversion of any of its Eurodollar Loans occurs on a date which is not the
last day of an Interest Period applicable thereto; (iii) if any prepayment of
any of its Eurodollar Loans is not made on any date specified in a notice of
prepayment given by the Borrower; or (iv) as a consequence of (x) any other
default by the Borrower to repay its Eurodollar Loans when required by the
terms of this Agreement or (y) an election made pursuant to Section 1.10(b).

1.12 Change of Lending Office. Each Bank agrees that, upon the
occurrence of any event giving rise to the operation of Section 1.10(a)(ii)
or (iii), 1.10(c), 2.06 or 4.04 with respect to such Bank, it will, if
requested by the Borrower, use reasonable efforts (subject to overall policy
considerations of such Bank) to designate another lending office for any
Loans or Letters of Credit, as the case may be, affected by such event,
provided that such designation is made on such terms that such Bank and its
lending office suffer no economic, legal or regulatory disadvantage, with the
object of avoiding the consequence of the event giving rise to the operation
of any such Section. Nothing in this Section 1.12 shall affect or postpone
any of the obligations of the Borrower or the right of any Bank provided in
Section 1.10, 2.06 or 4.04.

1.13 Replacement of Banks. (x) Upon the occurrence of any event
giving rise to the operation of Section 1.10(a)(ii) or (iii), Section
1.10(c), Section 2.06 or Section 4.04 with respect to any Bank which results
in such Bank charging to the Borrower increased costs in excess of those
being generally charged by the other Banks or becoming incapable of making
Eurodollar Loans, (y) if a Bank becomes a Defaulting Bank and/or (z) in the
case of a refusal by a Bank to consent to a proposed change, waiver,
discharge or termination with respect to this Agreement which has been
approved by the Required Banks as provided in Section 12.12(b), the Borrower
shall have the right, if no Default or Event of Default then exists, to
replace such Bank (the "Replaced Bank") with one or more other Eligible
Transferee or Transferees reasonably acceptable to the Administrative Agent,
none of whom shall constitute a Defaulting Bank at the time of such
replacement (collectively, the "Replacement Bank"), provided that (i) at the
time of any replacement pursuant to this Section 1.13, the Replacement Bank
shall enter into one or more Assignment and Assumption Agreements pursuant to
Section 12.04(b) (and with all fees payable pursuant to said Section 12.04(b)
to be paid by the Replacement Bank) pursuant to which the Replacement Bank
shall acquire all of the Commitments and outstanding Loans of, and
participations in Letters of Credit by, the Replaced Bank and, in connection
therewith, shall pay to (x) the Replaced Bank in respect thereof an amount
equal to the sum of (I) an amount equal to the principal of, and all accrued
interest on, all outstanding Loans of the Replaced Bank, (II) an amount equal
to all Unpaid Drawings that have been funded by (and not reimbursed to) such
Replaced Bank, together with all then unpaid interest with respect thereto at
such time and (III) an amount equal to all accrued, but theretofore unpaid,
Fees owing to the Replaced Bank pursuant to Section 3.01, (y) the respective
Letter of Credit Issuer an amount equal to such Replaced Bank's Adjusted
Percentage (for this purpose, determined as if the adjustment

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described in clause (ii) of the succeeding sentence had been made with
respect to such Replaced Bank) of any Unpaid Drawing (which at such time
remains an Unpaid Drawing) to the extent such amount was not theretofore
funded by such Replaced Bank and (z) BTCo an amount equal to such Replaced
Bank's Adjusted Percentage (for this purpose, determined as if the adjustment
described in clause (ii) of the succeeding sentence had been made with
respect to such Replaced Bank) of any Mandatory Borrowing to the extent such
amount was not theretofore funded by such Replaced Bank, and (ii) all
obligations of the Borrower owing to the Replaced Bank (other than those
specifically described in clause (i) above in respect of which the assignment
purchase price has been, or is concurrently being, paid) shall be paid in
full to such Replaced Bank concurrently with such replacement. Upon the
execution of the respective Assignment and Assumption Agreements, the payment
of amounts referred to in clauses (i) and (ii) above and, if so requested by
the Replacement Bank, delivery to the Replacement Bank of the appropriate
Note or Notes executed by the Borrower, (A) the Replacement Bank shall become
a Bank hereunder and the Replaced Bank shall cease to constitute a Bank
hereunder, except with respect to indemnification provisions applicable to
the Replaced Bank under this Agreement, which shall survive as to such
Replaced Bank and (B) in the case of a replacement of a Defaulting Bank, the
Adjusted Percentage of the Banks shall be automatically adjusted at such time
to give effect to such replacement (and to give effect to the replacement of
a Defaulting Bank with one or more Non-Defaulting Banks).

SECTION 2. Letters of Credit.

2.01 Letters of Credit. (a) Subject to and upon the terms and
conditions set forth herein, the Borrower may request a Letter of Credit
Issuer at any time and from time to time on or after the Restatement
Effective Date and prior to the Maturity Date to issue a letter of credit for
the account of the Borrower and in support of (x) trade obligations of the
Borrower and/or its Subsidiaries, which shall be payable at sight (each such
letter of credit, a "Trade Letter of Credit" and, collectively, the "Trade
Letters of Credit") and/or (y) on a standby basis, L/C Supportable
Obligations (each such letter of credit, a "Standby Letter of Credit" and,
collectively, the "Standby Letters of Credit," and together with the Trade
Letters of Credit, the "Letters of Credit"), and subject to and upon the
terms and conditions set forth herein such Letter of Credit Issuer agrees to
issue from time to time, irrevocable Letters of Credit in such form as may be
approved by such Letter of Credit Issuer and the Administrative Agent.
Notwithstanding the foregoing, no Letter of Credit Issuer shall be under any
obligation to issue any Letter of Credit if at the time of such issuance:

(i) any order, judgment or decree of any governmental authority or
arbitrator shall purport by its terms to enjoin or restrain such Letter
of Credit Issuer from issuing such Letter of Credit or any requirement of
law applicable to such Letter of Credit Issuer or any request or
directive (whether or not having the force of law) from any governmental
authority with jurisdiction over such Letter of Credit Issuer shall
prohibit, or request that such Letter of Credit Issuer refrain from, the

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issuance of letters of credit generally or such Letter of Credit in
particular or shall impose upon such Letter of Credit Issuer with respect
to such Letter of Credit any restriction or reserve or capital
requirement (for which such Letter of Credit Issuer is not otherwise
compensated) not in effect on the date hereof, or any unreimbursed loss,
cost or expense which was not applicable, in effect or known to such
Letter of Credit Issuer as of the date hereof and which such Letter of
Credit Issuer in good faith deems material to it; or

(ii) such Letter of Credit Issuer shall have received notice from
the Borrower or the Required Banks prior to the issuance of such Letter
of Credit of the type described in clause (iv) of Section 2.01(b).

(b) Notwithstanding the foregoing, (i) no Letter of Credit shall be
issued, the Stated Amount of which, when added to the Letter of Credit
Outstandings (exclusive of Unpaid Drawings which are repaid on the date of,
and prior to the issuance of, the respective Letter of Credit) at such time,
would exceed either (x) $10,000,000 or (y) when added to the aggregate
principal amount of all Revolving Loans made by Non-Defaulting Banks and
Swingline Loans then outstanding, the Adjusted Total Commitment at such time;
(ii) (x) each Standby Letter of Credit shall have an expiry date occurring
not later than one year after such Letter of Credit's date of issuance
(although any Letter of Credit may be extendable (whether automatically or
otherwise) for successive periods of up to 12 months, but not beyond the
Business Day next preceding the Maturity Date), on terms acceptable to the
respective Letter of Credit Issuer and in no event shall any Standby Letter
of Credit have an expiry date occurring later than the Business Day next
preceding the Maturity Date and (y) each Trade Letter of Credit shall have an
expiry date occurring no later than the earlier of (a) 180 days after the
issuance thereof or (b) 30 days prior to the Maturity Date; (iii) each Letter
of Credit shall be denominated in U.S. dollars and will be issued on a sight
basis only; and (iv) no Letter of Credit Issuer shall issue any Letter of
Credit after it has received written notice from the Borrower that a Default
or an Event of Default exists until such time as the Letter of Credit Issuers
shall have received written notice of (x) recession of such notice from the
party or parties originally delivering the same or (y) waiver of such Default
or Event of Default by the Required Banks. On the Restatement Effective
Date, all letters of credit issued and outstanding under the Original
Agreement, as listed in Annex XI, shall be deemed issued hereunder and shall
automatically become "Letters of Credit" under this Agreement without the
delivery of a Letter of Credit Request.

2.02 Minimum Stated Amount. The initial Stated Amount of each
Letter of Credit shall be not less than $20,000 or such lesser amount
acceptable to the respective Letter of Credit Issuer.

2.03 Letter of Credit Requests; Notices of Issuance; Reports. (a)
Whenever the Borrower desires that a Letter of Credit be issued, the Borrower
shall give the

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Administrative Agent and the respective Letter of Credit Issuer a written
request (including by way of telecopier) in the form of Exhibit A-2 prior to
1:00 P.M. (New York time) at least three Business Days (or such shorter
period as may be acceptable to such Letter of Credit Issuer) prior to the
proposed date (which shall be a Business Day) of issuance (each a "Letter of
Credit Request"), which Letter of Credit Request shall include any other
documents that such Letter of Credit Issuer customarily requires in
connection therewith.

(b) The respective Letter of Credit Issuer shall, promptly after
each issuance of a Standby Letter of Credit by it, give the Administrative
Agent, each Bank and the Borrower written notice of the issuance of such
Standby Letter of Credit, accompanied by a copy of the Standby Letter of
Credit or Standby Letters of Credit issued by it.

(c) Each Letter of Credit Issuer (other than BTCo) shall, by 11:00
A.M. on the first Business Day of each week, forward to the Administrative
Agent (by way of telecopier) a report listing the aggregate daily outstanding
balances for the previous week of the Trade Letters of Credit issued by such
Letter of Credit Issuer. Each month the Administrative Agent shall forward
to each Bank a report listing the daily aggregate amount available to be
drawn under all Trade Letters of Credit outstanding during the previous month.

2.04 Agreement to Repay Letter of Credit Drawings. (a) The
Borrower hereby agrees to reimburse the respective Letter of Credit Issuer,
by making payment to the Administrative Agent at the Payment Office (which
funds the Administrative Agent shall promptly forward to such Letter of
Credit Issuer), for any payment or disbursement made by such Letter of Credit
Issuer under any Letter of Credit issued by it (each such amount so paid or
disbursed until reimbursed, an "Unpaid Drawing") immediately after, and in
any event on the date on which, the Borrower is notified by such Letter of
Credit Issuer of such payment or disbursement with interest on the amount so
paid or disbursed by such Letter of Credit Issuer, to the extent not
reimbursed prior to 1:00 P.M. (New York time) on the date of such payment or
disbursement, from and including the date paid or disbursed to but not
including the date such Letter of Credit Issuer is reimbursed therefor at a
rate per annum which shall be the Applicable Base Rate Margin then in effect
for Revolving Loans plus the Base Rate as in effect from time to time (plus
an additional 2% per annum if not reimbursed by the third Business Day after
the date of such notice of payment or disbursement), such interest also to be
payable on demand. Each Letter of Credit Issuer shall provide the Borrower
prompt notice of any payment or disbursement made by it under any Letter of
Credit issued by it, although the failure of, or delay in, giving any such
notice shall not release or diminish the obligations of the Borrower under
this Section 2.04 (a) or under any other Section of this Agreement.

(b) The Borrower's obligation under this Section 2.04 to reimburse
the respective Letter of Credit Issuer with respect to Unpaid Drawings
(including, in each case,

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interest thereon) shall be absolute and unconditional under any and all
circumstances and irrespective of any setoff, counterclaim or defense to
payment which the Borrower may have or have had against such Letter of Credit
Issuer, the Administrative Agent or any Bank, including, without limitation,
any defense based upon the failure of any payment under a Letter of Credit to
conform to the terms of the Letter of Credit or any non-application or
misapplication by the beneficiary of the proceeds of such payment; provided,
however, that the Borrower shall not be obligated to reimburse any Letter of
Credit Issuer for any wrongful payment made by such Letter of Credit Issuer
under a Letter of Credit as a result of acts or omissions constituting
willful misconduct or gross negligence on the part of such Letter of Credit
Issuer as determined by a court of competent jurisdiction.

2.05 Letter of Credit Participations. (a) Immediately upon the
issuance by any Letter of Credit Issuer of a Letter of Credit, such Letter of
Credit Issuer shall be deemed to have sold and transferred to each other
Bank, and each such Bank (each a "Participant") shall be deemed irrevocably
and unconditionally to have purchased and received from such Letter of Credit
Issuer, without recourse or warranty, an undivided interest and
participation, to the extent of such Bank's Adjusted Percentage, in such
Letter of Credit, each substitute letter of credit, each payment made
thereunder and the obligations of the Borrower under this Agreement with
respect thereto (although the Letter of Credit Fee shall be payable directly
to the Administrative Agent for the account of the Banks as provided in
Section 3.01(b) and the Participants shall have no right to receive any
portion of any Facing Fees) and any security therefor or guaranty pertaining
thereto. Upon any change in the Commitments or Adjusted Percentages of the
Banks pursuant to Section 12.04(b) or upon a Bank Default, it is hereby
agreed that, with respect to all outstanding Letters of Credit and Unpaid
Drawings, there shall be an automatic adjustment to the participations
pursuant to this Section 2.05 to reflect the new Adjusted Percentages of the
assigning and assignee Bank or of all Banks, as the case may be.

(b) In determining whether to pay under any Letter of Credit, the
respective Letter of Credit Issuer shall not have any obligation relative to
the Participants other than to determine that any documents required to be
delivered under such Letter of Credit have been delivered and that they
substantially comply on their face with the requirements of such Letter of
Credit. Any action taken or omitted to be taken by any Letter of Credit
Issuer under or in connection with any Letter of Credit if taken or omitted
in the absence of gross negligence or willful misconduct, shall not create
for such Letter of Credit Issuer any resulting liability.

(c) In the event that the respective Letter of Credit Issuer makes
any payment under any Letter of Credit and the Borrower shall not have
reimbursed such amount in full to such Letter of Credit Issuer pursuant to
Section 2.04(a), such Letter of Credit Issuer shall promptly notify the
Administrative Agent, and the Administrative Agent shall promptly notify each
Participant of such failure, and each Participant shall promptly and
unconditionally pay

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to the Administrative Agent for the account of such Letter of Credit Issuer,
the amount of such Participant's Adjusted Percentage of such payment in U.S.
dollars and in same day funds; provided, however, that no Participant shall
be obligated to pay to the Administrative Agent its Adjusted Percentage of
such unreimbursed amount for any wrongful payment made by such Letter of
Credit Issuer under a Letter of Credit as a result of acts or omissions
constituting willful misconduct or gross negligence on the part of such
Letter of Credit Issuer. If the Administrative Agent so notifies any
Participant required to fund an Unpaid Drawing under a Letter of Credit prior
to 11:00 A.M. (New York time) on any Business Day, such Participant shall
make available to the Administrative Agent for the account of the respective
Letter of Credit Issuer (which funds the Administrative Agent shall promptly
forward to the Letter of Credit Issuer) such Participant's Adjusted
Percentage of the amount of such payment on such Business Day in same day
funds. If and to the extent such Participant shall not have so made its
Adjusted Percentage of the amount of such Unpaid Drawing available to the
Administrative Agent for the account of such Letter of Credit Issuer, such
Participant agrees to pay to the Administrative Agent for the account of such
Letter of Credit Issuer, forthwith on demand such amount, together with
interest thereon, for each day from such date until the date such amount is
paid to the Administrative Agent for the account of such Letter of Credit
Issuer at the overnight Federal Funds Effective Rate. The failure of any
Participant to make available to the Administrative Agent for the account of
the respective Letter of Credit Issuer its Adjusted Percentage of any Unpaid
Drawing under any Letter of Credit shall not relieve any other Participant of
its obligation hereunder to make available to the Administrative Agent for
the account of the respective Letter of Credit Issuer its Adjusted Percentage
of any payment under any Letter of Credit on the date required, as specified
above, but no Participant shall be responsible for the failure of any other
Participant to make available to the Administrative Agent for the account of
such Letter of Credit Issuer such other Participant's Adjusted Percentage of
any such payment.

(d) Whenever the respective Letter of Credit Issuer receives a
payment of a reimbursement obligation as to which the Administrative Agent
has received for the account of such Letter of Credit Issuer any payments
from the Participants pursuant to clause (c) above, such Letter of Credit
Issuer shall pay to the Administrative Agent and the Administrative Agent
shall promptly pay to each Participant which has paid its Adjusted Percentage
thereof, in U.S. dollars and in same day funds, an amount equal to such
Participant's Adjusted Percentage of the principal amount thereof and
interest thereon accruing at the overnight Federal Funds Effective Rate after
the purchase of the respective participations.

(e) The obligations of the Participants to make payments to the
Administrative Agent for the account of the respective Letter of Credit
Issuer with respect to Letters of Credit shall be irrevocable and not subject
to counterclaim, set-off or other defense or any other qualification or
exception whatsoever (provided that no Participant shall be required to make
payments resulting from the Letter of Credit Issuer's gross negligence

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or willful misconduct, as determined by a court of competent jurisdiction and
shall be made in accordance with the terms and conditions of this Agreement
under all circumstances, including, without limitation, any of the following
circumstances:

(i) any lack of validity or enforceability of this Agreement or any
of the other Credit Documents;

(ii) the existence of any claim, set-off, defense or other right
which the Borrower or any of it Subsidiaries may have at any time against
a beneficiary named in a Letter of Credit, any transferee of any Letter
of Credit (or any Person for whom any such transferee may be acting), the
Administrative Agent, the respective Letter of Credit Issuer, any Bank or
other Person, whether in connection with this Agreement, any Letter of
Credit, the transactions contemplated herein or any unrelated
transactions (including any underlying transaction between the Borrower
or any of its Subsidiaries and the beneficiary named in any such Letter
of Credit);

(iii) any draft, certificate or other document presented under the
Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;

(iv) the surrender or impairment of any security for the performance
or observance of any of the terms of any of the Credit Documents; or

(v) the occurrence of any Default or Event of Default.

(f) To the extent the respective Letter of Credit Issuer is not
indemnified for same by the Borrower, the Participants will reimburse and
indemnify the Letter of Credit Issuer, in proportion to their respective
Adjusted Percentages, for and against any and all liabilities, obligations,
losses, damages, penalties, claims, actions, judgments, costs, expenses or
disbursements of whatsoever kind or nature which may be imposed on, asserted
against or incurred by such Letter of Credit Issuer in performing its
respective duties in any way relating to or arising out of its issuance of
Letters of Credit; provided that no Participant shall be liable for any
portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting from
such Letter of Credit Issuer's gross negligence or willful misconduct, as
determined by a court of competent jurisdiction.

2.06 Increased Costs. If at any time after the Restatement
Effective Date, the adoption or effectiveness of any applicable law, rule or
regulation, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof,
or compliance by the respective Letter of Credit Issuer or any Bank with any
request or

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directive (whether or not having the force of law) by any such authority,
central bank or comparable agency shall either (i) impose, modify or make
applicable any reserve, deposit, capital adequacy or similar requirement
against Letters of Credit issued by such Letter of Credit Issuer or such
Bank's participation therein, or (ii) shall impose on such Letter of Credit
Issuer or any Bank any other conditions affecting this Agreement, any Letter
of Credit or such Bank's participation therein; and the result of any of the
foregoing is to increase the cost to such Letter of Credit Issuer or such
Bank of issuing, maintaining or participating in any Letter of Credit, or to
reduce the amount of any sum received or receivable by such Letter of Credit
Issuer or such Bank hereunder (other than any increased cost or reduction in
the amount received or receivable resulting from the imposition of or a
change in the rate of taxes or similar charges), then, upon demand to the
Borrower by such Letter of Credit Issuer or such Bank (a copy of which notice
shall be sent by such Letter of Credit Issuer or such Bank to the
Administrative Agent), the Borrower shall pay to such Letter of Credit Issuer
or such Bank such additional amount or amounts as will compensate such Letter
of Credit Issuer or such Bank for such increased cost or reduction. A
certificate submitted to the Borrower by the respective Letter of Credit
Issuer or such Bank, as the case may be (a copy of which certificate shall be
sent by such Letter of Credit Issuer or such Bank to the Administrative
Agent), setting forth the basis for the determination of such additional
amount or amounts necessary to compensate such Letter of Credit Issuer or
such Bank as aforesaid shall be conclusive and binding on the Borrower absent
manifest error, although the failure to deliver any such certificate shall
not release or diminish any of the Borrower's obligations to pay additional
amounts pursuant to this Section 2.06 upon the subsequent receipt thereof.

SECTION 3. Fees; Commitments.

3.01 Fees. (a) The Borrower agrees to pay to the Administrative
Agent a commitment commission ("Commitment Commission") for the account of
each Non-Defaulting Bank Commitment for the period from and including the
Restatement Effective Date to, but not including, the date the Total
Revolving Commitment has been terminated, computed at a rate for each day
equal to the Applicable Commitment Commission Percentage on the daily average
of such Bank's Unutilized Commitment. Such Commitment Commission shall be
due and payable in arrears on each August 31, November 30, February 28, and
May 31 of each year and on the date upon which the Total Commitment is
terminated.

(b) The Borrower agrees to pay to the Administrative Agent for the
account of each Non-Defaulting Bank pro rata on the basis of its Adjusted
Percentage, a fee in respect of each Letter of Credit (the "Letter of Credit
Fee") in an amount equal to the Applicable Eurodollar Margin then in effect
for Revolving Loans on the daily Stated Amount of such Letter of Credit.
Accrued Letter of Credit Fees shall be due and payable quarterly in arrears
on each August 31, November 30, February 28 and May 31 of each year and on
the date upon which the Total Commitment is terminated.

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(c) The Borrower agrees to pay to the Administrative Agent for the
account of each Letter of Credit Issuer a fee in respect of each Letter of
Credit (the "Facing Fee") issued by such Letter of Credit Issuer computed at
the rate equal to (A) in the case of Trade Letters of Credit, 1/4 of 1% per
annum on the daily Stated Amount of such Trade Letter of Credit, provided,
that in any event, the minimum amount of the Facing Fee payable for each
Trade Letter of Credit shall be $100 and (B) in the case of Standby Letters
of Credit, 1/4 of 1% per annum on the daily Stated Amount of such Standby
Letter of Credit, provided, that in any event, the minimum amount of the
Facing Fee payable in any 12-month period for each Standby Letter of Credit
shall be $500 (it being agreed that, on each anniversary of the issuance of
any Standby Letter of Credit or upon any earlier termination or expiration of
a Standby Letter of Credit, if $500 exceeds the amount of Facing Fees
theretofore paid or then accrued with respect to such Standby Letter of
Credit, in either case after the date of the issuance thereof, or if later,
after the date of the last anniversary of the issuance thereof (but excluding
any amounts paid after such anniversary with respect to periods ending on or
prior to such anniversary, including, without limitation, as a result of the
operation of this parenthetical), the amount of such excess shall be payable
on the next date upon which accrued Facing Fees are otherwise payable with
respect to Standby Letters of Credit). Accrued Facing Fees shall be due and
payable quarterly in arrears on each August 31, November 30, February 28 and
May 31 of each year and upon the first day on or after the termination of the
Total Commitment upon which no Letters of Credit remain outstanding.

(d) The Borrower agrees to pay directly to the respective Letter of
Credit Issuer upon each issuance of, payment under, and/or amendment of, a
Letter of Credit issued by such Letter of Credit such amount as shall at the
time of such issuance, payment or amendment be the administrative charge and
expenses which such Letter of Credit Issuer is customarily charging for
issuances of, payments under or amendments of, letters of credit issued by it.

(e) The Borrower agrees to pay to the Administrative Agent such
other fees as agreed to between the Borrower and the Administrative Agent,
when and as due.

(f) All computations of Fees shall be made in accordance with
Section 12.07(b).

3.02 Voluntary Reduction of Commitments. Upon at least three
Business Days' prior written notice (or telephonic notice confirmed in
writing) to the Administrative Agent at its Notice Office (which notice the
Administrative Agent shall promptly transmit to each of the Banks), the
Borrower shall have the right, without premium or penalty, to terminate or
partially reduce the Total Unutilized Commitment, provided that (x) any such
termination shall apply to proportionately and permanently reduce the
Commitment of each Bank, (y) no such reduction shall reduce any
Non-Defaulting Bank's Commitment to an amount that is less than the sum of
(I) the outstanding Revolving Loans of such Bank plus

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(II) such Bank's Adjusted Percentage of outstanding Swingline Loans and of
Letter of Credit Outstandings and (z) any partial reduction pursuant to this
Section 3.02 shall be in the amount of at least $1,000,000.

3.03 Mandatory Adjustments of Commitments, etc. (a) The Total
Commitment (and the Commitment of each Bank) shall terminate on October 20,
1997 unless the Restatement Effective Date has occurred on or before such
date.

(b) The Total Commitment (and the Commitment of each Bank) shall
terminate on the earlier of (x) the Maturity Date and (y) unless the Required
Banks otherwise agree in writing, the date on which any Change of Control
occurs.

(c) Within 5 Business Days following the date of receipt thereof by
the Borrower and/or any of its Subsidiaries of Cash Proceeds from any Asset
Sale, an amount equal to 100% of the Net Cash Proceeds from such Asset Sale
shall be applied as a mandatory reduction of the Total Commitment, provided
that up to an aggregate of $4,000,000 of Net Cash Proceeds from Asset Sales
shall not be required to be used to so reduce the Total Commitment in any
fiscal year of the Borrower to the extent the Borrower elects, as hereinafter
provided, to cause such Net Cash Proceeds to be reinvested in Reinvestment
Assets (a "Reinvestment Election"). The Borrower may exercise its
Reinvestment Election (within the parameters specified in the preceding
sentence) with respect to an Asset Sale if (x) no Default or Event of Default
exists and (y) the Borrower delivers a Reinvestment Notice to the
Administrative Agent within 3 Business Days following the date of the
consummation of the respective Asset Sale, with such Reinvestment Election
being effective with respect to an amount equal to the Net Cash Proceeds of
such Asset Sale equal to the Anticipated Reinvestment Amount specified in
such Reinvestment Notice.

(d) On the date of the receipt thereof by the Borrower and/or any
of its Subsidiaries, an amount equal to 100% of the proceeds (net of
underwriting discounts, commissions and taxes and other reasonable costs
associated therewith) of the incurrence of Indebtedness by the Borrower
and/or any of its Subsidiaries (other than Indebtedness permitted by Section
8.04 as in effect on the Restatement Effective Date) shall be applied as a
mandatory reduction of the Total Commitment.

(e) Within 30 days following each date on which the Borrower or any
of its Subsidiaries receives any proceeds from any Recovery Event, an amount
equal to 100% of the cash proceeds of such Recovery Event (net of reasonable
costs, expenses and taxes incurred in connection with such Recovery Event)
shall be applied as a mandatory reduction of the Total Commitment, provided
that so long as no Default or Event of Default then exists and such proceeds
do not exceed $5,000,000 in any fiscal year, such proceeds shall not be
required to be so applied to reduce the Total Commitment on such date to the
extent that the Borrower has delivered a certificate to the Administrative
Agent on or prior to such date

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stating that such proceeds shall be used or committed to be used to replace
or restore any properties or assets in respect of which such proceeds were
paid or otherwise acquire productive assets usable in the business of the
Borrower and its Subsidiaries within a period specified in such certificate
not to exceed 180 days after the date of receipt of such proceeds with
respect to such Recovery Event (which certificate shall set forth the
estimates of the proceeds to be so expended); and provided further, that if
all or any portion of such proceeds not required to be applied to reduce the
Total Commitment pursuant to the preceding proviso are not so used within the
period specified in the relevant certificate furnished pursuant to the
immediately preceding proviso, such remaining portion not used shall be
applied on the last day of such specified period as a mandatory reduction of
the Total Commitment.

(f) On the Reinvestment Prepayment Date with respect to a
Reinvestment Election, an amount equal to the Reinvestment Prepayment Amount,
if any, for such Reinvestment Election shall be applied as a mandatory
reduction of the Total Commitment.

(g) Notwithstanding anything to the contrary contained elsewhere in
this Agreement, (i) all then outstanding Swingline Loans shall be repaid in
full on the Swingline Expiry Date, and (ii) all then outstanding Revolving
Loans shall be repaid in full on the Maturity Date.

(h) Each reduction to the Total Commitment pursuant to this Section
3.03 shall be applied proportionately to reduce the Commitment, as the case
may be, of each Bank.

SECTION 4. Payments.

4.01 Voluntary Prepayments. The Borrower shall have the right to
prepay Loans in whole or in part, without premium or penalty, from time to
time on the following terms and conditions: (i) the Borrower shall give the
Administrative Agent at the Payment Office written notice (or telephonic
notice promptly confirmed in writing) of its intent to prepay the Loans,
whether such Loans are Revolving Loans or Swingline Loans, the amount of such
prepayment and (in the case of Eurodollar Loans) the specific Borrowing or
Borrowings pursuant to which made, which notice shall be given by the
Borrower at least one Business Day prior to the date of such prepayment with
respect to Base Rate Loans (other than Swingline Loans, with respect to which
notice may be given by the Borrower on the day of prepayment) and two
Business Days prior to the date of such prepayment with respect to Eurodollar
Loans, which notice shall promptly be transmitted by the Administrative Agent
to each of the Banks; (ii) (x) each partial prepayment of any Borrowing
(other than a Borrowing of Swingline Loans) shall be in an aggregate
principal amount of at least $500,000 and (y) each partial prepayment of any
Borrowing of Swingline Loans shall be in an aggregate principal amount of at
least $50,000, provided that no partial prepayment of Eurodollar Loans made
pursuant to a Borrowing shall reduce the aggregate principal

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amount of the Loans outstanding pursuant to such Borrowing to an amount less
than the Minimum Borrowing Amount applicable thereto; (iii) at the time of
any prepayment of Eurodollar Loans pursuant to this Section 4.01 on any date
other than the last day of the Interest Period applicable thereto, the
Borrower shall pay the amounts required pursuant to Section 1.11; and (iv)
each prepayment in respect of any Loans made pursuant to a Borrowing shall be
applied pro rata among such Loans, provided that at the Borrower's election
in connection with any prepayment of Revolving Loans pursuant to this Section
4.01, such prepayment shall not be applied to any Revolving Loans of a
Defaulting Bank.

4.02 Mandatory Prepayments.

(A) Requirements:

(a) (i) If on any date the sum of the aggregate outstanding
principal amount of Revolving Loans made by Non-Defaulting Banks, Swingline
Loans and the Letter of Credit Outstandings exceeds the Adjusted Total
Commitment as then in effect, the Borrower shall repay on such date the
principal of Swingline Loans, and if no Swingline Loans are or remain
outstanding, Revolving Loans of Non-Defaulting Banks, in an aggregate amount
equal to such excess. If, after giving effect to the repayment of all
outstanding Swingline Loans and Revolving Loans of Non-Defaulting Banks, the
aggregate amount of Letter of Credit Outstandings exceeds the Adjusted Total
Commitment, the Borrower shall pay to the Administrative Agent on such date
an amount in cash and/or Cash Equivalents equal to such excess (up to the
aggregate amount of the Letter of Credit Outstandings at such time) and the
Administrative Agent shall hold such payment as security for the obligations
of the Borrower hereunder pursuant to a cash collateral agreement to be
entered into in form and substance satisfactory to the Administrative Agent
(which shall permit certain investments in Cash Equivalents satisfactory to
the Administrative Agent, until the proceeds are applied to the secured
obligations).

(ii) If on any date the aggregate outstanding principal amount of
the Revolving Loans made by a Defaulting Bank exceeds the Commitment of such
Defaulting Bank, the Borrower shall repay on such date principal of Revolving
Loans of such Defaulting Bank in an amount equal to such excess.

(b) Notwithstanding anything to the contrary contained elsewhere in
this Agreement, (i) all then outstanding Swingline Loans shall be repaid in
full on the Swingline Expiry Date, and (ii) then outstanding Revolving Loans
shall be repaid in full on the Maturity Date.

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(B) Application:

With respect to each prepayment of Loans required by Section 4.02,
the Borrower may designate the Types of Loans which are to be prepaid and the
specific Borrowing or Borrowings pursuant to which made, provided that (i)
Eurodollar Loans may so be designated for prepayment pursuant to this Section
4.02 only on the last day of an Interest Period applicable thereto unless all
Eurodollar Loans with Interest Periods ending on such date of required
prepayment and all Base Rate Loans have been paid in full; (ii) if any
prepayment of Eurodollar Loans made pursuant to a single Borrowing shall
reduce the outstanding Loans made pursuant to such Borrowing to an amount
less than the Minimum Borrowing Amount for such Borrowing, such Borrowing
shall be immediately converted into Base Rate Loans; (iii) each prepayment of
any Revolving Loans made by Non-Defaulting Banks pursuant to a Borrowing
shall be applied pro rata among such Revolving Loans; and (iv) each
prepayment of any Revolving Loans made by Defaulting Banks pursuant to a
Borrowing shall be applied pro rata among such Revolving Loans. In the
absence of a designation by the Borrower as described in the preceding
sentence, the Administrative Agent shall, subject to the above, make such
designation in its sole discretion with a view, but no obligation, to
minimize breakage costs owing under Section 1.11. Notwithstanding the
foregoing provisions of this Section 4.02(B), if at any time a mandatory or
voluntary prepayment of Loans pursuant to Sections 4.01 or 4.02(A) above
would result, after giving effect to the procedures set forth above, in the
Borrower incurring breakage costs under Section 1.11 as a result of
Eurodollar Loans being prepaid other than on the last day of an Interest
Period applicable thereto (the "Affected Eurodollar Loans"), then the
Borrower may in its sole discretion initially deposit a portion (up to 100%)
of the amounts that otherwise would have been paid in respect of the Affected
Eurodollar Loans with the Administrative Agent (which deposit must be equal
in amount to the amount of the Affected Eurodollar Loans not immediately
prepaid) to be held as security for the obligations of the Borrower hereunder
pursuant to a cash collateral arrangement satisfactory to the Administrative
Agent and shall provide for investments satisfactory to the Administrative
Agent, with such cash collateral to be directly applied upon the first
occurrence (or occurrences) thereafter of the last day of an Interest Period
applicable to the relevant Loans that are Eurodollar Loans (or such earlier
date or dates as shall be requested by the Borrower), to repay an aggregate
principal amount of such Loans equal to the Affected Eurodollar Loans not
initially prepaid pursuant to this sentence. Notwithstanding anything to the
contrary contained in the immediately preceding sentence, all amounts
deposited as cash collateral pursuant to the immediately preceding sentence
shall be held for the sole benefit of the Banks whose Loans would otherwise
have been immediately prepaid with the amounts deposited and upon the taking
of any action by the Administrative Agent or the Banks pursuant to the
remedial provisions of Section 9, any amounts held as cash collateral
pursuant to this Section 4.02(B) shall, subject to the requirements of
applicable law, be immediately applied to repay Loans.

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4.03 Method and Place of Payment. Except as otherwise specifically
provided herein, all payments under this Agreement shall be made to the
Administrative Agent for the ratable (based on their respective pro rata shares)
account of the Banks entitled thereto (which funds the Administrative Agent
shall promptly forward to such Banks), not later than 1:00 P.M. (New York time)
on the date when due and shall be made in immediately available funds and in
lawful money of the United States of America at the Payment Office, it being
understood that written notice by the Borrower to the Administrative Agent to
make a payment from the funds in the Borrower's account at the Payment Office
shall constitute the making of such payment to the extent of such funds held in
such account. Any payments under this Agreement which are made later than 1:00
P.M. (New York time) shall be deemed to have been made on the next succeeding
Business Day. Whenever any payment to be made hereunder shall be stated to be
due on a day which is not a Business Day, the due date thereof shall be extended
to the next succeeding Business Day and, with respect to payments of principal,
interest shall be payable during such extension at the applicable rate in effect
immediately prior to such extension.

4.04 Net Payments. (a) All payments made by the Borrower hereunder
or under any Note will be made without setoff, counterclaim or other defense.
Except as provided in Section 4.04(b), all such payments will be made free and
clear of, and without deduction or withholding for, any present or future taxes,
levies, imposts, duties, fees, assessments or other charges of whatever nature
now or hereafter imposed by any jurisdiction or by any political subdivision or
taxing authority thereof or therein with respect to such payments (but
excluding, except as provided in the second succeeding sentence, any tax imposed
on or measured by the net income or net profits of a Bank pursuant to the laws
of the jurisdiction in which it is organized or managed and controlled or the
jurisdiction in which the principal office or applicable lending office of such
Bank is located or any subdivision thereof or therein) and all interest,
penalties or similar liabilities with respect thereto (all such non-excluded
taxes, levies, imposts, duties, fees, assessments or other charges being
referred to collectively as "Taxes"). If any Taxes are so levied or imposed,
the Borrower agrees to pay the full amount of such Taxes, and such additional
amounts, if any, as may be necessary so that every payment of all amounts due
under this Agreement or under any Note, after withholding or deduction for or on
account of any Taxes, will not be less than the amount provided for herein or in
such Note. If any amounts are payable in respect of Taxes pursuant to the
preceding sentence, the Borrower agrees to reimburse each Bank, upon the written
request of such Bank, for taxes imposed on or measured by the net income or net
profits of such Bank pursuant to the laws of the jurisdiction in which the
principal office or applicable lending office of such Bank is located or under
the laws of any political subdivision or taxing authority of any such
jurisdiction in which the principal office or applicable lending office of such
Bank is located and for any withholding of taxes as such Bank shall determine
are payable by, or withheld from, such Bank in respect of such amounts so paid
to or on behalf of such Bank pursuant to the preceding sentence and in respect
of any amounts paid to or on behalf of such Bank pursuant to this sentence. The

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Borrower will furnish to the Administrative Agent within 45 days after the date
the payment of any Taxes is due pursuant to applicable law certified copies of
tax receipts evidencing such payment by the Borrower. The Borrower agrees to
indemnify and hold harmless each Bank, and reimburse such Bank upon its written
request, for the amount of any Taxes so levied or imposed and paid by such Bank.

(b) Each Bank that is not a United States person (as such term is
defined in Section 7701(a)(30) of the Code) agrees to deliver to the Borrower
and the Administrative Agent on or prior to the Effective Date, or in the case
of a Bank that is an assignee or transferee of an interest under this Agreement
pursuant to Section 1.13 or 12.04 (unless the respective Bank was already a Bank
hereunder immediately prior to such assignment or transfer), on the date of such
assignment or transfer to such Bank, (i) two accurate and complete original
signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms)
certifying to such Bank's entitlement to a complete exemption from United States
withholding tax with respect to payments to be made under this Agreement and
under any Note, or (ii) if the Bank is not a "bank" within the meaning of
Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue
Service Form 1001 or 4224 pursuant to clause (i) above, (x) a certificate
substantially in the form of Exhibit C (any such certificate, a "Section
4.04(b)(ii) Certificate") and (y) two accurate and complete original signed
copies of Internal Revenue Service Form W-8 (or successor form) certifying to
such Bank's entitlement to a complete exemption from United States withholding
tax with respect to payments of interest to be made under this Agreement and
under any Note. In addition, each Bank agrees that from time to time after the
Effective Date, when a lapse in time or change in circumstances renders the
previous certification obsolete or inaccurate in any material respect, it will
deliver to the Borrower and the Administrative Agent two new accurate and
complete original signed copies of Internal Revenue Service Form 4224 or 1001,
or Form W-8 and a Section 4.04(b)(ii) Certificate, as the case may be, and such
other forms as may be required in order to confirm or establish the entitlement
of such Bank to a continued exemption from or reduction in United States
withholding tax with respect to payments under this Agreement and any Note, or
it shall immediately notify the Borrower and the Administrative Agent of its
inability to deliver any such Form or Certificate. Notwithstanding anything to
the contrary contained in Section 4.04(a), but subject to Section 12.04(b) and
the immediately succeeding sentence, (x) the Borrower shall be entitled, to the
extent it is required to do so by law, to deduct or withhold income or similar
taxes imposed by the United States (or any political subdivision or taxing
authority thereof or therein) from interest, fees or other amounts payable
hereunder for the account of any Bank which is not a United States person (as
such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income
tax purposes to the extent that such Bank has not provided to the Borrower U.S.
Internal Revenue Service Forms that establish a complete exemption from such
deduction or withholding and (y) the Borrower shall not be obligated pursuant to
Section 4.04(a) to gross-up payments to be made to a Bank in respect of income
or similar taxes imposed by the United States if (I) such Bank is not a U.S.
Person (defined as provided above) and has not provided to the Borrower the

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Internal Revenue Service Forms required to be provided to the Borrower pursuant
to this Section 4.04(b) or (II) in the case of a payment, other than interest,
to a Bank described in clause (ii) above, to the extent that such Forms do not
establish a complete exemption from withholding of such taxes. Notwithstanding
anything to the contrary contained in the preceding sentence or elsewhere in
this Section 4.04 and except as set forth in Section 12.04(b), the Borrower
agrees to pay additional amounts and to indemnify each Bank in the manner set
forth in Section 4.04(a) (without regard to the identity of the jurisdiction
requiring the deduction or withholding) in respect of any amounts deducted or
withheld by it as described in the immediately preceding sentence as a result of
any changes after the Effective Date in any applicable law, treaty, governmental
rule, regulation, guideline or order, or in the interpretation thereof, relating
to the deducting or withholding of such Taxes, provided such Bank shall provide
to the Borrower and the Administrative Agent, upon the request of the Borrower,
any reasonably available applicable IRS tax form (reasonably similar in its
simplicity and lack of detail to IRS Form 1001 or Form 4224 or a Section
4.04(b)(ii) Certificate) necessary or appropriate for the exemption or reduction
in the rate of such U.S. federal withholding tax.

(c) If the Borrower pays any additional amount under this Section 4.04
to a Bank and such Bank determines in its sole discretion that it has actually
received or realized in connection therewith any refund or any reduction of, or
credit against, its tax liabilities in or with respect to the taxable year in
which the additional amount is paid, such Bank shall pay to the Borrower an
amount that the Bank shall, in its sole discretion, determine is equal to the
net benefit, after tax, which was obtained by the Bank in such year as a
consequence of such refund, reduction or credit. Whether or not a Bank claims
any refund or credit or files any amended tax return shall be in the sole
discretion of such Bank. Nothing in this Section 4.04(c) shall require a Bank
to (i) disclose or detail the basis of its calculation of the amount of any tax
benefit or refund to the Borrower or any other party or (ii) disclose such
Bank's tax returns.

SECTION 5. Conditions Precedent. The occurrence of the Restatement
Effective Date, the obligation of the Banks to make each Loan hereunder, and the
obligation of the Letter of Credit Issuers to issue Letters of Credit hereunder,
is subject, at the time of each such Credit Event (except as otherwise
hereinafter indicated), to the satisfaction of each of the following conditions:

5.01 Execution of Agreement. On or prior to the Restatement
Effective Date, (i) this Agreement shall have become effective as provided in
Section 12.10 and (ii) there shall have been delivered to the Administrative
Agent for the account of each Bank the appropriate Revolving Note and, in the
case of BTCo, the Swingline Note, in each case, executed by the Borrower, and in
the amount, maturity and as otherwise provided herein.

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5.02 No Default; Representations and Warranties. At the time of each
Credit Event and also after giving effect thereto, (i) there shall exist no
Default or Event of Default and (ii) all representations and warranties
contained herein and in the other Credit Documents in effect at such time shall
be true and correct in all material respects with the same effect as though such
representations and warranties had been made on and as of the date of such
Credit Event, except to the extent that such representations and warranties
expressly relate to an earlier date, in which case such representations and
warranties will be true and correct in all material respects as of such earlier
date.

5.03 Officer's Certificate. On the Restatement Effective Date, the
Administrative Agent shall have received a certificate dated such date signed by
an appropriate officer of the Borrower stating that all of the applicable
conditions set forth in Sections 5.02, 5.08, 5.09, 5.10 and 5.11 exist or have
been satisfied as of such date.

5.04 Opinions of Counsel. On the Restatement Effective Date the
Administrative Agent shall have received an opinion, addressed to the
Administrative Agent and each of the Banks and dated the Restatement Effective
Date, from Kirkland & Ellis, special counsel to the Borrower and each Subsidiary
Guarantor, which opinion shall cover the matters contained in Exhibit D.

5.05 Corporate Proceedings. (a) On the Restatement Effective Date,
the Administrative Agent shall have received from each Credit Party a
certificate, dated the Restatement Effective Date, signed by the President or
any Vice-President of each such Credit Party in the form of Exhibit E with
appropriate insertions and deletions, together with copies of the certificate of
incorporation, the by-laws or other organizational documents of each such Credit
Party and the resolutions of each such Credit Party referred to in such
certificate and all of the foregoing shall be satisfactory to the Administrative
Agent.

(b) On the Restatement Effective Date, all corporate and legal
proceedings and all instruments and agreements in connection with the
transactions contemplated by this Agreement and the other Documents shall be
satisfactory in form and substance to the Administrative Agent, and the
Administrative Agent shall have received all information and copies of all
certificates, documents and papers, including good standing certificates and any
other records of corporate proceedings and governmental approvals, if any, which
the Administrative Agent may have reasonably requested in connection therewith,
such documents and papers, where appropriate, to be certified by proper
corporate or governmental authorities.

5.06 Plans; Existing Indebtedness Agreements; Shareholders'
Agreements; Management Agreements; Employment Agreements. On or prior to the
Restatement Effective Date, there shall have been delivered to the Banks, to the
extent not previously delivered to the Administrative Agent in connection with

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the Original Credit Agreement, copies, certified as true and correct by an
appropriate officer of the Borrower of:

(i) all Plans (and for each Plan that is required to file an annual
report on Internal Revenue Service Form 5500-series, a copy of the most
recent such report (including, to the extent required, the related
financial and actuarial statements and opinions and other supporting
statements, certifications, schedules and information), and for each Plan
that is a "single-employer plan," as defined in Section 4001(a)(15) of
ERISA, the most recently prepared actuarial valuation therefor) and any
other "employee benefit plans," as defined in Section 3(3) of ERISA, and
any other material agreements, plans or arrangements, with or for the
benefit of current or former employees of the Borrower or any Subsidiary of
the Borrower or any ERISA Affiliate (provided that the foregoing shall
apply in the case of any multiemployer plan, as defined in Section
4001(a)(3) of ERISA, only to the extent that any document described therein
is in the possession of the Borrower or any Subsidiary of the Borrower or
any ERISA Affiliate or reasonably available thereto from the sponsor or
trustee of any such plan);

(ii) all agreements evidencing or relating to Existing Indebtedness
(the "Existing Indebtedness Agreements");

(iii) all agreements entered into by the Borrower or any of its
Subsidiaries (after giving effect to the Transaction) governing the terms
and relative rights of its capital stock, and any agreements entered into
by members or shareholders relating to any such entity with respect to
their capital stock (collectively, the "Shareholders' Agreements");

(iv) any material agreement with members of, or with respect to, the
management of the Borrower or any of its Subsidiaries (after giving effect
to the Transaction) (collectively, the "Management Agreements"); and

(v) any material employment agreements entered into by the Borrower
or any of its Subsidiaries (collectively the "Employment Agreements");

all of which Plans, Existing Indebtedness Agreements, Shareholders' Agreements,
Management Agreements and Employment Agreements shall be in form and substance
satisfactory to the Administrative Agent.

5.07 Adverse Change, etc. On the Restatement Effective Date, nothing
shall have occurred (and neither the Banks nor the Administrative Agent shall
have become aware of any facts or conditions not previously known) which the
Administrative Agent or the Required Banks shall determine (a) has, or is

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reasonably likely to have, a material adverse effect on the rights or remedies
of the Banks or the Administrative Agent, or on the ability of the Credit
Parties to perform their obligations to them, or (b) has, or is reasonably
likely to have, a Material Adverse Effect.

5.08 Litigation. On the Restatement Effective Date, there shall be
no actions, suits or proceedings pending or threatened (a) with respect to this
Agreement or any other Document or the transactions contemplated hereby or
thereby (including the Transaction) or (b) which the Administrative Agent or the
Required Banks shall determine could reasonably be expected to (i) have a
Material Adverse Effect or (ii) have a material adverse effect on the rights or
remedies of the Banks hereunder or under any other Credit Document or on the
ability of any Credit Party to perform its respective obligations to the Banks
hereunder or under any other Credit Document.

5.09 Approvals. On or prior to the Restatement Effective Date, all
material and necessary governmental and third party approvals in connection with
the transactions contemplated by the Documents and otherwise referred to herein
or therein shall have been obtained and remain in effect, and all applicable
waiting periods shall have expired without any action being taken by any
competent authority which restrains or prevents such transactions or imposes, in
the reasonable judgment of the Required Banks or the Administrative Agent,
materially adverse conditions upon the consummation of such transactions.

5.10 Senior Notes. (a) On or prior to the Restatement Effective
Date, the Borrower shall have received gross cash proceeds of at least
$85,000,000 from the issuance of the Senior Notes, and the Banks shall have
received true and correct copies of all Senior Notes Documents (certified as
such by an appropriate officer of the Borrower), and all of the terms and
conditions of such Senior Notes Documents (including, without limitation,
maturities, interest rates, sinking fund provisions, absence of security,
covenants, defaults and remedies), shall be in form and substance satisfactory
to the Administrative Agent and the Required Banks. All of the Senior Note
Documents shall have been duly executed and delivered by the parties thereto,
shall be in full force and effect and each of the conditions precedent to the
obligations of the parties to effectuate the issuance of the Senior Notes as set
forth in the Senior Note Documents shall have been satisfied, or waived, all to
the satisfaction of the Administrative Agent, and the Senior Notes shall have
been issued in accordance with the Senior Note Documents and all applicable
laws, rules and regulations.

5.11 Repayment of Loans Under the Original Credit Agreement. On the
Restatement Effective Date, (i) all Original Loans shall have been repaid in
full in cash, together with accrued but unpaid interest thereon, and all letters
of credit issued thereunder shall have been assumed hereunder as Letters of
Credit pursuant to Section 2.01(b), (ii) there shall have been paid in cash in
full all accrued but unpaid Fees under, and as defined in, the Original Credit
Agreement (including, without limitation, commitment fees, letter of credit fees

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and facing fees) due prior to but excluding the Restatement Effective Date and
all other amounts, costs and expenses (including, without limitation, breakage
costs, if any, with respect to eurodollar rate loans due thereunder) then owing
to any of the Original Banks and/or the Administrative Agent, as agent under the
Original Credit Agreement, in each case to the satisfaction of the
Administrative Agent or the Original Banks, as the case may be, regardless of
whether or not such amounts would otherwise be due and payable at such time
pursuant to the terms of the Original Credit Agreement and (iii) all outstanding
Notes (as defined in the Original Credit Agreement) issued by the Borrower to
the Original Banks under the Original Credit Agreement shall be deemed
cancelled.

5.12 Security Documents Acknowledgments; Pledge Agreement; Security
Agreement; Mortgages. (a) On the Restatement Effective Date, the Borrower
and each Subsidiary Guarantor shall have duly authorized, executed and
delivered an assumption and acknowledgment in the form of Exhibit F and shall
have duly authorized, executed and delivered such assumption and
acknowledgement as shall be advised by local counsel to the Administrative
Agent in respect of (x) the Original Security Documents and (y) any pledge of
the stock of Subsidiary Guarantor (such assumptions and acknowledgements,
collectively, the "Security Documents Acknowledgment") with respect to the
Pledge Agreement, the Security Agreement, and the Mortgage, each of which
assumption and acknowledgement, among other things, (i) acknowledges and
agrees that the "Obligations" (as defined in each of such documents) or any
similar term include all of the Obligations under this Agreement after giving
effect to the Restatement Effective Date and (ii) acknowledges and agrees
that, after giving effect to the Restatement Effective Date, each of the
Pledge Agreement, the Security Agreement, and the Mortgage, shall remain in
full force and effect in accordance with the respective terms thereof, and
each of the Borrower and each Subsidiary Guarantor shall have taken all
actions reasonably requested by the Administrative Agent (including, without
limitation, the obtaining of UCC-11's or equivalent reports and the filing of
UCC-1's or UCC-3's) in connection with the granting of Liens pursuant to the
Pledge Agreement, the Security Agreement, and the Mortgage,.

(b) On the Restatement Effective Date, the Collateral Agent, as
pledgee shall have in its possession all of the Pledged Securities referred to
in the Pledge Agreement, endorsed in blank in the case of promissory notes or
accompanied by executed and undated stock powers in the case of capital stock,
and the Pledge Agreement shall be in full force and effect.

(c) On the Restatement Effective Date, (i) no filings, recordings,
registrations or other actions shall be necessary to maintain the perfection and
priority of the security interests granted pursuant to the Security Agreement in
the Collateral covered thereby, and (ii) the Banks shall have received evidence
that all other actions necessary or, in the opinion of the Collateral Agent,
desirable to perfect and protect the security interests purported to be created
by the Security Agreement have been taken.

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(d) On the Restatement Effective Date, the Banks shall have received
evidence that all other actions necessary or, in the opinion of the Collateral
Agent, desirable to perfect and protect the first priority Lien, subject only to
Permitted Encumbrances, on the respective Mortgaged Property in favor of the
Collateral Agent (or such other trustee as may be required or desired under
local law) for the benefit of the Banks have been taken, or arrangements
therefor have been made on a basis satisfactory to the Collateral Agent and
shall be in place.

5.13 Subsidiary Guaranty Acknowledgement. On the Restatement
Effective Date, each Subsidiary Guarantor shall have duly authorized, executed
and delivered an acknowledgment in the form of Exhibit G (the "Subsidiary
Guaranty Acknowledgment"), which acknowledgment, among other things, (i)
acknowledges this Agreement and the transactions contemplated hereby, (ii)
acknowledges and agrees that, the "Obligations" (as defined in the Subsidiary
Guaranty) include all of the Obligations under this Agreement after giving
effect to the Restatement Effective Date and any increase in the amounts owing
to the Banks or the Agent under this Agreement and (iii) acknowledges and agrees
that, after giving effect to the Restatement Effective Date, the Subsidiary
Guaranty shall remain in full force and effect in accordance with the terms
thereof.

5.14 Pro Forma Balance Sheets. On or prior the Restatement Effective
Date, there shall have been delivered to the Administrative Agent, an unaudited
pro forma consolidated balance sheet of Borrower and its Subsidiaries after
giving effect to the Transaction as of August 31, 1997 and prepared in
accordance with GAAP, together with a related funds flow statement, which pro
forma balance sheets and funds flow statement shall be reasonably satisfactory
in form and substance to the Administrative Agent and the Required Banks.

5.15 Projections. On or prior to the Restatement Effective Date, the
Banks shall have received the financial projections (the "Projections") of the
Borrower and its Subsidiaries for the five fiscal years ended after the
Restatement Effective Date, which Projections shall be in form and substance
satisfactory to the Administrative Agent and the Required Banks.

5.16 Existing Indebtedness; Preferred Stock. On the Restatement
Effective Date and after giving effect to the incurrence of the Senior Note and
the Loans incurred on the Restatement Effective Date, neither the Borrower nor
any of its Subsidiaries shall have any (i) Indebtedness outstanding except for
Indebtedness permitted under Section 8.04 and (ii) preferred stock outstanding
other than the Preferred Stock. On and as of the Restatement Effective Date,
all of the Existing Indebtedness shall remain outstanding after giving effect to
the Transaction and the other transactions contemplated hereby without any
default or events of default existing thereunder or arising as a result of the
Transaction as of August 31, 1997 and the other transactions contemplated hereby
(except to the extent amended or waived by the parties thereto on terms and

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conditions reasonably satisfactory to the Administrative Agent and the Required
Banks).

5.17 Payment of Fees. On the Restatement Effective Date, all fees
and expenses, due to the Administrative Agent or the Banks (including, without
limitation, reasonable fees and expenses of counsel) shall have been paid to the
extent due.

5.18 Notice of Borrowing; Letter of Credit Request. (a) Prior to
the making of each Loan (excluding Swingline Loans), the Administrative Agent
shall have received a Notice of Borrowing meeting the requirements of Section
1.03(a). Prior to the making of any Swingline Loan, BTCo shall have received
the notice required by Section 1.03(b)(i).

(b) Prior to the issuance of any Letter of Credit (other than Letters
of Credit assumed hereunder on the Restatement Effective Date pursuant to
Section 2.01(b)), the Administrative Agent and the respective Letter of Credit
Issuer shall have received a Letter of Credit Request required by Section
2.03(a).

5.19 Recording Taxes. Prior to any Credit Event, the Borrower shall
have paid any recording taxes to the satisfaction of the Collateral Agent
necessary to cover any additional advances as deemed necessary by the Collateral
Agent.

The acceptance of the benefits of each Credit Event shall constitute a
representation and warranty by the Borrower to the Administrative Agent and each
of the Banks that all of the applicable conditions specified above exist as of
that time. All of the certificates, legal opinions and other documents and
papers referred to in this Section 5, unless otherwise specified, shall be
delivered to the Administrative Agent at its Notice Office for the account of
each of the Banks and, except for the Notes, in sufficient counterparts or
copies for each of the Banks and shall be satisfactory in form and substance to
the Administrative Agent.

SECTION 6. Representations, Warranties and Agreements. In order to
induce the Banks to enter into this Agreement and to make the Loans and issue
and/or participate in Letters of Credit provided for herein, the Borrower makes
the following representations and warranties to, and agreements with, the Banks,
in each case after giving effect to the Transaction, all of which shall survive
the execution and delivery of this Agreement and the making of the Loans and the
issuance and/or participation in Letters of Credit (with the making of each
Credit Event thereafter being deemed to constitute a representation and warranty
that the matters specified in this Section 6 are true and correct in all
material respects on and as of the date of each such Credit Event unless such
representation and warranty expressly indicates that it is being made as of any

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specific date, in which case such representation and warranty shall be true and
correct in all material respects as of such specific date):

6.01 Corporate Status. Each of the Borrower and each of its
Subsidiaries (i) is a duly organized and validly existing corporation in good
standing under the laws of the jurisdiction of its organization and has the
corporate power and authority to own its property and assets and to transact the
business in which it is engaged and (ii) has duly qualified and is authorized to
do business and is in good standing in all jurisdictions where it is required to
be so qualified and where the failure to be so qualified could reasonably be
expected to have a Material Adverse Effect.

6.02 Corporate Power and Authority. Each Credit Party has the
corporate power and authority to execute, deliver and carry out the terms and
provisions of the Documents to which it is a party and has taken all necessary
corporate action to authorize the execution, delivery and performance of the
Documents to which it is a party. Each Credit Party has duly executed and
delivered each Document to which it is a party and each such Document
constitutes the legal, valid and binding obligation of such Person enforceable
in accordance with its terms, except to the extent that the enforceability
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws generally affecting creditors' rights and by
equitable principles (regardless of whether enforcement is sought in equity or
at law).

6.03 No Violation. Neither the execution, delivery and performance
by any Credit Party of the Documents to which it is a party nor compliance by it
with the terms and provisions thereof, nor the consummation of the transactions
contemplated therein, (i) will contravene any applicable provision of any law,
statute, rule, regulation, order, writ, injunction or decree of any court or
governmental instrumentality, (ii) will conflict or be inconsistent with, or
result in any breach of, any of the terms, covenants, conditions or provisions
of, or constitute a default under, or (other than pursuant to the Security
Documents) result in the creation or imposition of (or the obligation to create
or impose) any Lien upon any of the property or assets of the Borrower or any of
its Subsidiaries pursuant to the terms of, any material indenture, mortgage,
deed of trust, agreement or other instrument to which the Borrower or any of its
Subsidiaries is a party or by which it or any of its material property or assets
are bound or to which it may be subject or (iii) will violate any provision of
the certificate of incorporation or by-laws (or equivalent organizational
documents) of the Borrower or any of its Subsidiaries.

6.04 Litigation. There are no actions, suits or proceedings pending
or threatened with respect to the Borrower or any of its Subsidiaries (i) that
are likely to have a Material Adverse Effect or (ii) that could reasonably be
expected to have a material adverse effect on (a) the rights or remedies of the
Banks or on the ability of any Credit Party to perform its obligations to them

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hereunder and under the other Credit Documents to which it is a party or (b) the
ability to consummate the Transaction.

6.05 Use of Proceeds; Margin Regulations. (a) The proceeds of Loans
shall be utilized for the general corporate and working capital and capital
expenditure purposes of the Borrower and its Subsidiaries;

(b) Neither the making of any Loan hereunder, nor the use of the
proceeds thereof, will violate the provisions of Regulation G, T, U or X of the
Board of Governors of the Federal Reserve System and no part of the proceeds of
any Loan will be used to purchase or carry any Margin Stock or to extend credit
for the purpose of purchasing or carrying any Margin Stock.

6.06 Governmental Approvals. No material order, consent, approval,
license, authorization, or validation of, or filing, recording or registration
with, or exemption by, any foreign or domestic governmental or public body or
authority, or any subdivision thereof, is required to authorize or is required
in connection with (i) the execution, delivery and performance of any Document
or (ii) the legality, validity, binding effect or enforceability of any
Document.

6.07 Investment Company Act. Neither the Borrower nor any of its
Subsidiaries is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.

6.08 Public Utility Holding Company Act. Neither the Borrower nor
any of its Subsidiaries is a "holding company," or a "subsidiary company" of a
"holding company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company," within the meaning of the Public Utility
Holding Company Act of 1935, as amended.

6.09 True and Complete Disclosure. All factual information (taken as
a whole) heretofore or contemporaneously furnished by or on behalf of the
Borrower or any of its Subsidiaries in writing to the Administrative Agent or
any Bank for purposes of or in connection with this Agreement or any transaction
contemplated herein is true and accurate in all material respects on the date as
of which such information is dated or certified and not incomplete by omitting
to state any material fact necessary to make such information (taken as a whole)
not misleading at such time in light of the circumstances under which such
information was provided. There is no fact known to the Borrower which would be
reasonably likely to have a Material Adverse Effect which has not been disclosed
herein or in such other documents, certificates and statements furnished to the
Banks for use in connection with the transactions contemplated hereby.

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6.10 Financial Condition; Financial Statements. (a) On and as of the
Restatement Effective Date, on a pro forma basis after giving effect to the
Transaction and to all Indebtedness incurred, and to be incurred, and Liens
created, and to be created, by each Credit Party in connection therewith, (x)
the sum of the assets, at a fair valuation, of the Borrower and its Subsidiaries
taken as a whole will exceed its debts, (y) the Borrower and its Subsidiaries
taken as a whole will not have incurred or intended to, or believe that they
will, incur debts beyond their ability to pay such debts as such debts mature
and (z) the Borrower and its Subsidiaries taken as a whole will not have
unreasonably small capital with which to conduct its business. For purposes of
this Section 6.10 (a), "debt" means any liability on a claim, and "claim" means
(i) right to payment whether or not such a right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured or unsecured; or (ii) right to an
equitable remedy for breach of performance if such breach gives rise to a
payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured
or unsecured.

(b)(i) The consolidated balance sheet of the Borrower at May 31, 1997
and the related consolidated statements of operations and cash flows of the
Borrower for the fiscal year ended as of said date, which have been audited by
Coopers & Lybrand L.L.P., independent certified public accountants, who
delivered an unqualified audit opinion in respect therewith and (ii) the pro
forma unaudited consolidated balance sheet of the Borrower as of August 31,
1997, copies of which have heretofore been furnished to each Bank, present
fairly the consolidated financial position of the Borrower at the dates of said
statements and the results for the period covered thereby (or, in the case of
the pro forma balance sheet, presents a good faith estimate of the consolidated
pro forma financial condition of the Borrower (after giving effect to the
Transaction and the related financing thereof) at the date thereof) in
accordance with GAAP (except, in the case of the pro forma balance sheet, to the
extent provided therein), except to the extent provided in the notes to said
financial statements and, in the case of the balance sheet as of August 31,
1997, subject to normal year end adjustments. All such financial statements
(other than the aforesaid pro forma balance sheets) have been prepared in
accordance with GAAP consistently applied except to the extent provided in the
notes to said financial statements.

(c) Since August 31, 1997, and after giving effect to the Transaction,
nothing has occurred that has had or could reasonably be expected to have a
Material Adverse Effect.

(d)The Projections and pro forma financial information contained in
such materials are based on good faith estimates and assumptions believed by
such Persons to be reasonable at the time made, it being recognized by the Banks
that such Projections as to future events and pro forma adjustments are not to
be viewed as facts and that actual results during the period or periods covered
by any such projections may differ from the projected results or pro forma

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adjustments and that such differences may be material. On the Restatement
Effective Date, the Borrower believed that the Projections were reasonable and
attainable.

(e) Except as reflected in the financial statements and the notes
thereto described in Section 6.10(b), there were as of the Restatement Effective
Date no liabilities or obligations with respect to the Borrower or any of its
Subsidiaries of a nature (whether absolute, accrued, contingent or otherwise and
whether or not due) which, either individually or in aggregate, would be
material to the Borrower and its Subsidiaries taken as a whole.

6.11 Security Interests. On and after the Restatement Effective
Date, each of the Security Documents create, as security for the Obligations
purported to be secured thereby, a valid and enforceable perfected security
interest in and Lien on all of the Collateral subject thereto, superior to and
prior to the rights of all third Persons and subject to no other Liens (except
(x) to the extent expressly set forth in the Security Documents, (y) that the
Collateral may be subject to the security interests evidenced by Permitted Liens
relating thereto), and (z) that the Mortgaged Properties also may be subject to
Permitted Encumbrances relating thereto) in favor of the Collateral Agent for
the benefit of the Collateral Agent. No filings or recordings are required in
order to perfect the security interests created under any Security Document
except for filings or recordings required in connection with any such Security
Document (other than the Pledge Agreement) which shall have been made upon or
prior to (or are the subject of arrangements, satisfactory to the Administrative
Agent, for filing on or promptly after the date of, as set forth in Section
5.12(c)) the execution and delivery thereof.

6.12 Representations and Warranties in Senior Note Documents. All
representations and warranties of the Credit Parties and, to the best knowledge
of the Borrower, of all other Persons party thereto, set forth in the Senior
Note Documents were true and correct in all material respects as of the time
such representations and warranties were made and shall be true and correct in
all material respects as of the Restatement Effective Date as if such
representations and warranties were made on and as of such date, unless stated
to relate to a specific earlier date, in which case such representations and
warranties shall be true and correct in all material respects as of such earlier
date.

6.13 Consummation of Transaction. As of the Restatement Effective
Date, the Transaction shall have been consummated in accordance with the terms
and conditions of the Transaction Documents and all applicable laws. All
applicable waiting periods with respect thereto have or, prior to the time when
required, will have, expired without, in all such cases, any action being taken
by any competent authority which restrains, prevents, or imposes material
adverse conditions upon the consummation of the Transaction. As of the
Restatement Effective Date, there does not exist any judgment, order, or
injunction prohibiting the consummation of the Transaction, or the making of the
Loans or the performance by any Credit Party of its respective obligations under
the Documents.

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6.14 Tax Returns and Payments. Each of the Borrower and each of its
Subsidiaries has filed all federal income tax returns and all other material tax
returns, domestic and foreign, required to be filed by it and has paid, or
properly accrued in accordance with GAAP, all material taxes and assessments
payable by it which have become due, other than those not yet delinquent and
those contested in good faith and for which adequate reserves have been
established in accordance with GAAP. The Borrower and each of its Subsidiaries
have paid, or have provided adequate reserves (in the good faith judgment of the
management of the Borrower) for the payment of, all federal, state and foreign
income taxes applicable for all prior fiscal years and for the current fiscal
year to the date hereof. There is no material action, suit, proceeding,
investigation, audit or claim now pending or, to the best knowledge of the
Borrower, threatened by any authority regarding any taxes relating to the
Borrower or any of its Subsidiaries.

6.15 Compliance with ERISA. Each Plan (and each related trust,
insurance contract or fund) is in substantial compliance with its terms and with
all applicable laws, including without limitation, ERISA and the Code; with
respect to each Plan (and each related trust, if any) which is intended to be
qualified under Section 401(a) of the Code, such Plan has received a
determination letter from the Internal Revenue Service to the effect that it
meets the requirements of Sections 401(a) and 501(a) of the Code or the Borrower
intends to apply for such a determination letter within the time period
prescribed for submitting such application, and the Borrower has not been
notified of, and the Borrower does not know of any condition or circumstance
that has resulted or would be likely to result, in the rejection of such a
application or the failure to issue such a favorable determination letter; no
Reportable Event has occurred; no Plan which is a multiemployer plan (as defined
in Section 4001(a)(3) of ERISA) is insolvent or in reorganization; no Plan has
an Unfunded Current Liability; no Plan which is subject to Section 412 of the
Code or Section 302 of ERISA has an accumulated funding deficiency, within the
meaning of such sections of the Code or ERISA or has applied for or received a
waiver of an accumulated funding deficiency or an extension of any amortization
period, within the meaning of Section 412 of the Code or Section 303 or 304 of
ERISA; all contributions required to be made with respect to a Plan have been
timely made; neither the Borrower, nor any Subsidiary of the Borrower nor any
ERISA Affiliate has incurred any material liability to or on account of a Plan
pursuant to Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204
or 4212 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code or expects to
incur any such liability under any of the foregoing sections with respect to any
Plan; no condition exists which presents a material risk to the Borrower or any
Subsidiary of the Borrower or any ERISA Affiliate of incurring a liability to or
on account of a Plan pursuant to the foregoing provisions of ERISA and the Code;
no proceedings have been instituted to terminate or appoint a trustee to
administer any Plan which is subject to Title IV of ERISA; using actuarial
assumptions and computation methods consistent with Part 1 of subtitle E of
Title IV of ERISA, the aggregate liabilities of the Borrower and its
Subsidiaries and its ERISA Affiliates to all Plans which are multiemployer plans
(as defined in Section 4001(a)(3) of ERISA) in the event of a complete

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withdrawal therefrom, as of the close of the most recent fiscal year of each
such Plan ended prior to the date hereof, would not have a Material Adverse
Effect; no action, suit, proceeding, hearing, audit or investigation with
respect to the administration, operation or investment of assets of any Plans
(other than routine claims for benefits) is pending, expected or threatened;
each group health plan (as defined in Section 607(1) of ERISA or Section
4980B(g)(2) of the Code) which covers or has covered employees or former
employees of the Borrower, any of its Subsidiaries, or any ERISA Affiliate has
at all times been operated in compliance with the provisions of Part 6 of
subtitle B of Title I of ERISA and Section 4980B of the Code; no lien imposed
under the Code or ERISA on the assets of the Borrower or any Subsidiary of the
Borrower or any ERISA Affiliate exists or is likely to arise on account of any
Plan; and the Borrower and its Subsidiaries do not maintain or contribute to any
employee welfare benefit plan (as defined in Section 3(1) of ERISA) which
provides benefits to retired employees or other former employees (other than as
required by Section 601 of ERISA) or any Plan the obligations with respect to
which could reasonably be expected to have a Material Adverse Effect.

6.16 Subsidiaries; Subsidiary Restrictions. (a) Annex III lists
each Subsidiary of the Borrower (and the direct and indirect ownership interest
of the Borrower therein), in each case existing on the Restatement Effective
Date.

(b) There are no restrictions on the Borrower or any of its
Subsidiaries which prohibit or otherwise restrict the transfer of cash or other
assets from any Subsidiary of the Borrower to the Borrower, other than
prohibitions or restrictions existing under or by reason of (i) this Agreement
and the other Credit Documents, (ii) the Senior Note Documents, (iii) applicable
law, (iv) customary non-assignment provisions entered into in the ordinary
course of business and consistent with past practices, (v) any restriction or
encumbrance with respect to a Subsidiary of the Borrower imposed pursuant to an
agreement which has been entered into for the sale or disposition of all or
substantially all of the capital stock or assets of such Subsidiary, so long as
such sale or disposition is permitted under this Agreement, and (vi) any
documents or instruments governing the terms of any Indebtedness or other
obligations secured by Permitted Liens, provided that such prohibitions or
restrictions apply only to the assets subject to such Permitted Liens.

6.17 Patents, etc. The Borrower and each of its Subsidiaries have
obtained all material patents, trademarks, service marks, trade names,
copyrights and licenses, free from materially burdensome restrictions, that are
used for the operation of their businesses taken as a whole as presently
conducted.

6.18 Pollution and Other Regulations. (a) Each of the Borrower and
each of its Subsidiaries is in compliance with all applicable Environmental Laws
governing its business for which failure to comply is likely to have a Material
Adverse Effect, and neither the Borrower nor any of its Subsidiaries is liable

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for any material penalties, fines or forfeitures for failure to comply with
any of the foregoing in the manner set forth above. All licenses, permits,
registrations or approvals required for the business of the Borrower and each
of its Subsidiaries, as conducted as of the Restatement Effective Date, under
any Environmental Law have been secured and each of the Borrower and each of
its Subsidiaries is in substantial compliance therewith, except such
licenses, permits, registrations or approvals the failure to secure or to
comply therewith is not likely to have a Material Adverse Effect. Neither
the Borrower nor any of its Subsidiaries is in any respect in noncompliance
with, breach of or default under any applicable writ, order, judgment,
injunction, or decree to which the Borrower or such Subsidiary is a party or
which would affect the ability of the Borrower or such Subsidiary to conduct
its business and no event has occurred and is continuing which, with the
passage of time or the giving of notice or both, would constitute
noncompliance, breach of or default thereunder, except in each such case,
such noncompliance, breaches or defaults as are not likely to, in the
aggregate, have a Material Adverse Effect. There are as of the Restatement
Effective Date no Environmental Claims pending or, to the best knowledge of
the Borrower, threatened, against the Borrower or any of its Subsidiaries, or
which (a) question the validity, term or entitlement of the Borrower or any
of its Subsidiaries for any permit, license, order or registration required
for the operation of any facility which the Borrower or any of its
Subsidiaries currently operates and (b) wherein an unfavorable decision,
ruling or finding would be reasonably likely to have a Material Adverse
Effect. There are no facts, circumstances, conditions or occurrences on any
Real Property at any time owned or operated by the Borrower or any of its
Subsidiaries or, to the knowledge of the Borrower, on any property adjacent
to any such Real Property that could reasonably be expected (i) to form the
basis of an Environmental Claim against the Borrower, any of its Subsidiaries
or any currently owned or operated Real Property of the Borrower or any of
its Subsidiaries, or (ii) (a) to cause any such Real Property currently owned
or operated to be subject to any restrictions on the occupancy or use of such
Real Property under any Environmental Law or (b) to cause any such owned Real
Property to be subject to any restrictions on the ownership or
transferability of such owned Real Property under any Environmental Law,
except in each such case, such Environmental Claims or restrictions that
individually or in the aggregate are not reasonably likely to have a Material
Adverse Effect.

(b) Hazardous Materials have not at any time been (i) generated,
used, treated or stored on, or transported to or from, any Real Property of the
Borrower or any of its Subsidiaries or (ii) released on any such Real Property,
in each case where such occurrence or event individually or in the aggregate is
reasonably likely to have a Material Adverse Effect.

6.19 Properties. The Borrower and each of its Subsidiaries have good
title to all material properties owned by them, free and clear of all Liens,
other than (i) as referred to in the consolidated balance sheet referred to in
Section 6.10(b) or in the notes thereto or (ii) Permitted Liens. Annex IV
contains a true and complete list of each Real Property owned or leased by the

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Borrower or any of its Subsidiaries on the Restatement Effective Date and the
type of interest therein held by the Borrower or the respective Subsidiary.

6.20 Labor Relations. Neither the Borrower nor any of its
Subsidiaries is engaged in any unfair labor practice that could reasonably be
expected to have a Material Adverse Effect. There is (i) no unfair labor
practice complaint pending against the Borrower or any Subsidiary of the
Borrower or, to the Borrower's knowledge, threatened against any of them, before
the National Labor Relations Board, and no grievance or arbitration proceeding
arising out of or under any collective bargaining agreement is so pending
against the Borrower or any Subsidiary of the Borrower or, to the Borrower's
knowledge, threatened against any of them, (ii) no strike, labor dispute, work
slowdown or stoppage pending against the Borrower or any Subsidiary of the
Borrower or, to the Borrower's knowledge, threatened against any of them and
(iii) no union representation petition existing with respect to the employees of
the Borrower or any Subsidiary of the Borrower and no union organizing
activities are taking place, except with respect to any matter specified in
clause (i), (ii) or (iii) above, either individually or in the aggregate, such
as is not reasonably likely to have a Material Adverse Effect.

6.21 Existing Indebtedness. Annex V sets forth a true and complete
list of all Indebtedness of the Borrower and each of its Subsidiaries as of the
Restatement Effective Date and which is to remain outstanding after giving
effect to the Transaction (excluding the Loans, the Letters of Credit and the
Senior Notes, the "Existing Indebtedness"), in each case showing the aggregate
principal amount thereof and the name of the respective borrower (or issuer) and
any other entity which directly or indirectly guaranteed such debt.

6.22 Capitalization. On the Restatement Effective Date and after
giving effect to the Transaction and the other transactions contemplated hereby,
the authorized capital stock of the Borrower shall consist of (w) 1,150,000
shares of Class A Common Stock, $.001 par value per share, of which 1,015,714
shares shall be issued and outstanding, (x) 500,000 shares of Class B Common
Stock, $.001 par value, none of which shall be issued and outstanding, (y)
200,000 shares of Series A Preferred Stock, $1.00 par value per share, of which
153,636.55 shares shall be issued and outstanding and (z) 200,000 shares of
Series B Preferred Stock, $1.00 par value per share of which 3,856.60 shares
shall be issued and outstanding. All such outstanding shares have been duly and
validly issued, are fully paid and nonassessable and are free of preemptive
rights. Other than pursuant to the Options and the Warrants, neither the
Borrower nor any of its Subsidiaries has outstanding any securities convertible
into or exchangeable for its capital stock or outstanding any rights to
subscribe for or to purchase, or any options for the purchase of, or any
agreements providing for the issuance (contingent or otherwise) of, or any
calls, commitments or claims of any character relating to, its capital stock.

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SECTION 7. Affirmative Covenants. The Borrower covenants and agrees
that as of the Restatement Effective Date and thereafter for so long as this
Agreement is in effect and until the Commitments have terminated, no Letters of
Credit or Notes are outstanding and the Loans and Unpaid Drawings, together with
interest, Fees and all other Obligations (other than indemnities described in
Section 12.13 hereof which are not then due and payable) incurred hereunder, are
paid in full:

7.01 Information Covenants. The Borrower will furnish to each Bank:

(a) Annual Financial Statements. Within 90 days after the close of
each fiscal year of the Borrower, the consolidated balance sheet of the
Borrower and its Subsidiaries, as at the end of such fiscal year and the
related consolidated statements of income and retained earnings and of cash
flows for such fiscal year, in each case setting forth comparative
consolidated figures for the preceding fiscal year, and in the case of the
consolidated financial statements, examined by independent certified public
accountants of recognized national standing whose opinion shall not be
qualified as to the scope of audit or as to the status of the Borrower or
any of its Subsidiaries as a going concern, together with a certificate of
such accounting firm stating that in the course of its regular audit of the
business of the Borrower, which audit was conducted in accordance with
generally accepted auditing standards, such accounting firm has obtained no
knowledge of any Default or Event of Default which has occurred and is
continuing or, if in the opinion of such accounting firm such a Default or
Event of Default has occurred and is continuing, a statement as to the
nature thereof.

(b) Quarterly Financial Statements. As soon as available and in any
event within 45 days after the close of each of the first three quarterly
accounting periods in each fiscal year of the Borrower, the consolidated
balance sheet of the Borrower and its Subsidiaries, as at the end of such
quarterly accounting period and the related consolidated statements of
income and retained earnings and of cash flows for such quarterly
accounting period and for the elapsed portion of the fiscal year ended with
the last day of such quarterly accounting period, and in each case setting
forth comparative consolidated figures for the related periods in the prior
fiscal year, all of which shall be certified by the chief financial officer
or controller of the Borrower, subject to changes resulting from audit and
normal year-end audit adjustments.

(c) Monthly Reports. As soon as practicable, and in any event within
30 days after the end of each monthly accounting period of each fiscal year
of the Borrower (other than the last monthly accounting period in such
fiscal year), monthly reports in a form reasonably satisfactory to the
Administrative Agent, which shall include the consolidated balance sheet of
the Borrower and its Subsidiaries, as at the end of such monthly accounting
period, and the related consolidated statements of income and retained

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earnings and cash flow for such monthly accounting period, setting forth
comparative figures for the corresponding period of the previous year.

(d) Budgets; etc. Not more than 30 days after the commencement of
each fiscal year of the Borrower, a budget of the Borrower and its
Subsidiaries in reasonable detail for each of the twelve months of such
fiscal year. Together with each delivery of consolidated financial
statements pursuant to Sections 7.01(a), (b) and (c), a comparison of the
current year to date financial results against the budgets required to be
submitted pursuant to this clause (d) shall be presented.

(e) Officer's Certificates. At the time of the delivery of the
financial statements provided for in Sections 7.01(a) (b) and (c), a
certificate of the chief financial officer, controller or other Authorized
Officer of the Borrower to the effect that no Default or Event of Default
exists or, if any Default or Event of Default does exist, specifying the
nature and extent thereof, which certificate, in the case of the
certificate delivered pursuant to (x) Sections 7.01(a) and (b), shall set
forth the calculations required to establish whether the Borrower and its
Subsidiaries were in compliance with the provisions of Sections 8.07(a)
(but only to the extent the Borrower has made payments of the type
described in clause (ii) thereof in such fiscal quarter or year), 8.09 and
8.10 as at the end of such fiscal quarter or year, as the case may be, and
(y) Section 7.01(c), shall set forth the calculation of the Net Leverage
Ratio, together with the calculations required to establish such ratio.

(f) Notice of Default or Litigation. Promptly, and in any event
within three Business Days after the Borrower obtains knowledge thereof,
notice of (x) the occurrence of any event which constitutes a Default or an
Event of Default, which notice shall specify the nature thereof, the period
of existence thereof and what action the Borrower proposes to take with
respect thereto or (y) the commencement of or any significant development
in any litigation or governmental proceeding pending against the Borrower
or any of its Subsidiaries which is likely to have a Material Adverse
Effect or is likely to have a material adverse effect on the ability of the
Borrower or any other Credit Party to perform its obligations hereunder or
under any other Credit Document.

(g) Auditors' Reports. Promptly upon receipt thereof, a copy of each
final report or "management letter" submitted to the Borrower by its
independent accountants in connection with any annual, interim or special
audit made by it of the books of the Borrower.

(h) Other Information. From time to time, such other information or
documents (financial or otherwise) as the Administrative Agent on its own
behalf or on behalf of the Required Banks may reasonably request from time
to time.

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7.02 Books, Records and Inspections; Bank Meetings. (a) The
Borrower will, and will cause each of its Subsidiaries to, permit, upon
reasonable notice to the chief financial officer, controller or any other
Authorized Officer of the Borrower, (x) officers and designated representatives
of the Administrative Agent or the Required Banks to visit and inspect any of
the properties or assets of the Borrower or any of its Subsidiaries in
whomsoever's possession, and to examine the books of account of the Borrower or
any of its Subsidiaries and discuss the affairs, finances and accounts of the
Borrower or of any of its Subsidiaries with, and be advised as to the same by,
its and their officers and independent accountants, all at such reasonable times
and intervals and to such reasonable extent as the Administrative Agent or the
Required Banks may desire and (y) not more than once per year (and at any time
during the occurrence of a Default or an Event of Default) the Administrative
Agent, or a third party designated by the Administrative Agent, to conduct, at
the Borrower's expense, an audit of the accounts receivable and inventories of
the Borrower and its Subsidiaries at such times as the Administrative Agent
shall reasonably require.

(b) At the request of the Administrative Agent, the Borrower shall
within 120 days after the close of each fiscal year of the Borrower hold a
meeting at a time and place selected by the Borrower and acceptable to the
Administrative Agent with all of the Banks at which meeting shall be reviewed
the financial results of the previous fiscal year and the financial condition of
the Borrower and its Subsidiaries and the budgets presented for the current
fiscal year of the Borrower and its Subsidiaries.

7.03 Maintenance of Property; Insurance. The Borrower will, and will
cause each of its Subsidiaries to, at all times maintain in full force and
effect insurance in such amounts, covering such risks and liabilities and with
such deductibles or self-insured retentions as are in accordance with normal
industry practice. At any time that insurance at the levels described in Annex
VI is not being maintained by the Borrower and its Subsidiaries, the Borrower
will notify the Banks in writing thereof and, if thereafter notified by the
Administrative Agent to do so, the Borrower will, and will cause each of its
Subsidiaries to, obtain insurance at such levels at least equal to those set
forth in Annex VI to the extent then generally available, or otherwise as are
acceptable to the Administrative Agent. The Borrower will, and will cause each
of its Subsidiaries to, furnish annually after the Restatement Effective Date to
the Administrative Agent, upon its request, a summary of the insurance carried
together with certificates of insurance and other evidence of such insurance, if
any, naming the Collateral Agent as an additional insured and/or loss payee.

7.04 Payment of Taxes. The Borrower will pay and discharge, and will
cause each of its Subsidiaries to pay and discharge, all taxes, assessments and
governmental charges or levies imposed upon it or upon its income or profits, or
upon any properties belonging to it, prior to the date on which material
penalties attach thereto, and all lawful claims which, if unpaid, might become a
Lien not otherwise permitted pursuant to Section 8.03(a) or charge upon any

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properties of the Borrower or any of its Subsidiaries, provided that neither the
Borrower nor any Subsidiary of the Borrower shall be required to pay any such
tax, assessment, charge, levy or claim which is being contested in good faith
and by proper proceedings if it has maintained adequate reserves (in the good
faith judgment of the management of the Borrower) with respect thereto in
accordance with GAAP.

7.05 Corporate Franchises. The Borrower will do, and will cause each
of its Subsidiaries to do, or cause to be done, all things necessary to preserve
and keep in full force and effect its existence, material rights and authority,
provided that any transaction permitted by Section 8.02 will not constitute a
breach of this Section 7.05.

7.06 Compliance with Statutes, etc. The Borrower will, and will
cause each of its Subsidiaries to, comply with all applicable statutes
(including, without limitation, all applicable Environmental Laws), regulations
and orders of, and all applicable restrictions imposed by, all governmental
bodies, domestic or foreign, in respect of the conduct of its business and the
ownership of its property except for such non-compliance which would not have a
Material Adverse Effect or would not have a material adverse effect on the
ability of any Credit Party to perform its obligations under any Credit Document
to which it is party.

7.07 ERISA. As soon as possible and, in any event, within 15 days
after the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate knows
or has reason to know of the occurrence of any of the following, the Borrower
will deliver to each of the Banks a certificate of the chief financial officer
or any vice president of the Borrower setting forth the full details as to such
occurrence and the action, if any, which the Borrower, a Subsidiary or an ERISA
Affiliate is required or proposes to take, together with any notices required or
proposed to be given to or filed with or by the Borrower, the Subsidiary, the
ERISA Affiliate, the PBGC, a Plan participant or the Plan administrator with
respect thereto: that a Reportable Event has occurred; that an accumulated
funding deficiency within the meaning of Section 412 of the Code or Section 302
of ERISA has been incurred or an application may be or has been made for a
waiver or modification of the minimum funding standard (including any required
installment payments) or an extension of any amortization period under Section
412 of the Code or Section 303 or 304 of ERISA, with respect to a Plan; that any
contribution required to be made with respect to a Plan has not been timely
made; that a Plan has been or may be terminated, reorganized, partitioned or
declared insolvent under Title IV of ERISA; that a Plan has an Unfunded Current
Liability; that proceedings have been or are reasonably expected to be
instituted to terminate a Plan which is subject to Title IV of ERISA; that a
proceeding has been instituted pursuant to Section 515 of ERISA to collect a
delinquent contribution to a Plan; that the Borrower, any Subsidiary of the
Borrower or any ERISA Affiliate will or may incur any liability to or on account
of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064,
4069, 4201, 4204 or 4212 of ERISA or with respect to a Plan under Section
401(a)(29), 4971, 4975 or 4980 of the Code or Section 409, 502(i) or 502(l) of
ERISA or with respect to a group health plan (as defined in Section 607(1) of

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ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the Code; or
that the Borrower or any Subsidiary of the Borrower may incur any material
liability pursuant to any employee welfare benefit plan (as defined in Section
3(l) of ERISA) that provides benefits to retired employees or other former
employees (other than as required by Section 601 of ERISA) or any Plan other
than any Plan subject to Title IV of ERISA and/or Section 412 of the Code. The
Borrower will deliver to the Banks a complete copy of the annual report (on
Internal Revenue Service Form 5500-series) of each Plan (including, to the
extent required, the related financial and actuarial statements and opinions and
other supporting statements, certifications, schedules and information) required
to be filed with the Internal Revenue Service. In addition to any certificates
or notices delivered to the Banks pursuant to the first sentence hereof, copies
of annual reports and any material notices received by the Borrower with respect
to a Plan shall be delivered to the Banks no later than 10 days after the date
such report has been filed with the Internal Revenue Service or such notice has
been received by the Borrower and copies of any material notices received by any
Subsidiary of the Borrower or any ERISA Affiliate shall be delivered to the
Banks no later than 30 days after the date such notice has been received by such
Subsidiary or ERISA Affiliate.

7.08 Good Repair. The Borrower will, and will cause each of its
Subsidiaries to, ensure that its material properties and equipment used or
useful in its business in whomsoever's possession they may be, are kept, in all
material respects, in good repair, working order and condition, normal wear and
tear excepted, and, subject to Section 8.05, that from time to time there are
made in such properties and equipment all needful and proper repairs, renewals,
replacements, extensions, additions, betterments and improvements thereto, to
the extent and in the manner useful or customary for companies in similar
businesses.

7.09 End of Fiscal Years; Fiscal Quarters. The Borrower will, for
financial reporting and tax purposes, cause (i) each of its, and each of its
Subsidiaries' fiscal years to end on May 31 of each year and (ii) each of its,
and each of its Subsidiaries' fiscal quarters to end on August 31, November 30,
February 28 (or February 29) and May 31 of each year.

7.10 Use of Proceeds. All proceeds of the Loans shall be used as
provided in Section 6.05.

7.11 Further Assurances. (a) The Borrower will, and will cause each
of its Subsidiaries to, at the expense of the Borrower, make, execute, endorse,
acknowledge, file and/or deliver to the Collateral Agent from time to time such
vouchers, invoices, schedules, confirmatory assignments, conveyances, financing
statements, transfer endorsements, powers of attorney, certificates, real
property surveys, reports and other assurances or instruments and take such
further steps relating to the Collateral covered by any of the Security
Documents as the Collateral Agent may reasonably require. Furthermore, the

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Borrower will cause to be delivered to the Collateral Agent such opinions of
counsel, title insurance, and other related documents as may be requested by the
Administrative Agent to assure themselves that this Section 7.11 has been
complied with.

(b) The Borrower agrees that each action required by clause (a) above
in this Section 7.11 shall be completed as soon as possible, but in no event
later than 90 days after such action is requested to be taken by the
Administrative Agent or the Required Banks, provided that in no event shall the
Borrower be required to take any action, other than using its reasonable
commercial efforts without any material expenditure, to obtain consents from
third parties with respect to its compliance with such clause (a).

(d) In the event that the Administrative Agent or the Required Banks
at any time after the Restatement Effective Date determine in its or their good
faith discretion that real estate appraisals satisfying the requirements of
FIRREA (any such appraisal a "Required Appraisal") are or were required to be
obtained, or should be obtained, in connection with the Mortgaged Properties,
then, within 120 days after receiving written notice thereof from the
Administrative Agent or the Required Banks, as the case may be, such Required
Appraisal shall be delivered, at the expense of the Borrower, to the
Administrative Agent which Required Appraisal, and the respective appraiser,
shall be satisfactory to the Administrative Agent.

SECTION 8. Negative Covenants. The Borrower covenants and agrees
that as of the Restatement Effective Date and thereafter for so long as this
Agreement is in effect and until the Commitments have terminated, no Letters of
Credit or Notes are outstanding and the Loans and Unpaid Drawings, together with
interest, Fees and all other Obligations (other than indemnities described in
Section 12.13 which are not then due and payable) incurred hereunder, are paid
in full:

8.01 Changes in Business. The Borrower will not, and will not permit
any of its Subsidiaries to, materially alter the character of the business of
the Borrower and its Subsidiaries from that conducted on the Restatement
Effective Date, provided that this Section 8.01 shall not restrict the making of
any investment expressly permitted by Section 8.05 or the consummation of any
transaction expressly permitted by Section 8.02.

8.02 Consolidation, Merger, Sale of Assets, etc. The Borrower will
not, and will not permit any of its Subsidiaries to, wind up, liquidate or
dissolve its affairs, or enter into any transaction of merger or
consolidation, or sell or otherwise dispose of all or any part of its
property or assets (other than inventory or obsolete equipment or excess
equipment no longer needed in the conduct of the business in the ordinary
course of business) or agree to do any of the foregoing at any future time,
except that the following shall be permitted:

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(a) any Wholly-Owned Subsidiary of the Borrower may be merged or
consolidated with or into, or be liquidated into, the Borrower or a
Subsidiary Guarantor that is a Wholly-Owned Domestic Subsidiary of the
Borrower (so long as the Borrower or such Subsidiary Guarantor, as the case
may be, is the surviving corporation), or all or any part of the business,
properties or assets of any Wholly-Owned Subsidiary of the Borrower may be
conveyed, leased, sold or transferred to the Borrower or any Subsidiary
Guarantor that is a Wholly-Owned Domestic Subsidiary of the Borrower;

(b) the investments, acquisitions and transfers or dispositions of
properties permitted pursuant to Section 8.05;

(c) the Borrower and its Subsidiaries may lease (as lessee) real or
personal property in the ordinary course of business (so long as such lease
does not create a Capitalized Lease Obligation not otherwise permitted by
Section 8.04(c));

(d) licenses or sublicenses by the Borrower and its Subsidiaries of
software, customer lists, trademarks, service marks, patents, trade names
and copyrights and other intellectual property in the ordinary course of
business, provided, that such licenses or sublicenses shall not interfere
with the business of the Borrower or any such Subsidiary;

(e) other sales or dispositions of assets in the ordinary course of
business (other than assets disposed of in connection with a Recovery
Event), provided that (x) the aggregate Net Cash Proceeds received from all
such sales and dispositions shall not exceed $4,000,000 in any fiscal year
of the Borrower, (y) each such sale shall be in an amount at least equal to
the fair market value thereof (as determined in good faith by the Borrower)
and for proceeds consisting solely of not less than (A) 85% cash and (B)
seller indebtedness evidenced by promissory notes, which promissory notes
shall be pledged and delivered to the Collateral Agent pursuant to the
Pledge Agreement, and (z) the Net Cash Proceeds of any such sale are
applied to reduce the Total Commitment to the extent required by Section
3.03(c), and, provided further, that the sale or disposition of the capital
stock of (i) any Subsidiary Guarantor shall be prohibited and (ii) any
other Subsidiary of the Borrower shall be prohibited unless it is for all
of the outstanding capital stock of such Subsidiary owned by the Borrower
and its Subsidiaries;

(f) other sales or dispositions of assets (or similar transactions)
in each case to the extent the Required Banks have consented in writing
thereto and subject to such conditions as may be set forth in such consent;

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(g) any Subsidiary of the Borrower (including any Subsidiary
Guarantor so long as the assets of such Subsidiary Guarantor are
transferred pursuant to Section 8.02(j) may be liquidated into the Borrower
or a Subsidiary Guarantor that is a Wholly-Owned Domestic Subsidiary of the
Borrower;

(h) the Borrower and its Subsidiaries may dispose of assets in
connection with equipment trade-in/trade-up transactions;

(i) the Borrower and its Subsidiaries may, in the ordinary course of
business, sell, transfer or otherwise dispose of patents, trademarks,
service marks, trade names and copyrights which, in the reasonable judgment
of the Borrower or such Subsidiary, are determined to be uneconomical,
negligible or obsolete in the conduct of its business; and

(j) any Subsidiary of the Borrower may transfer assets to the
Borrower or to a Subsidiary Guarantor that is a Wholly-Owned Domestic
Subsidiary of the Borrower so long as the security interests granted to the
Collateral Agent pursuant to the Security Documents in the assets so
transferred shall remain in full force and effect and perfected (to at
least the same extent as in effect immediately prior to such transfer).

To the extent the Required Banks waive the provisions of this Section 8.02 with
respect to the sale or other disposition of any Collateral, or any Collateral is
sold or otherwise disposed of as permitted by this Section 8.02, such Collateral
(unless sold to the Borrower or a Subsidiary of the Borrower) shall be sold or
otherwise disposed of free and clear of the Liens created by the Security
Documents, and the Administrative Agent and Collateral Agent shall be authorized
to take any actions deemed appropriate in order to effect the foregoing.

8.03 Liens. The Borrower will not, and will not permit any of its
Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with
respect to any property or assets of any kind (real or personal, tangible or
intangible) of the Borrower or any such Subsidiary whether now owned or
hereafter acquired, or sell any such property or assets subject to an
understanding or agreement, contingent or otherwise, to repurchase such property
or assets (including sales of accounts receivable or notes with recourse to the
Borrower or any of its Subsidiaries) or assign any right to receive income, or
file or permit the filing of any financing statement under the UCC or any other
similar notice of Lien under any similar recording or notice statute; provided
that the provisions of this Section 8.03 shall not prevent the creation,
incurrence, assumption or existence of the following (with such Liens described
below being herein referred to as "Permitted Liens"):

(a) inchoate Liens for taxes, assessments or governmental charges or
rules not yet due or Liens for taxes, assessments or governmental charges

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or rules being contested in good faith and by appropriate proceedings for
which adequate reserves (in the good faith judgment of the management of
the Borrower) have been established;

(b) Liens in respect of property or assets of the Borrower or any of
its Subsidiaries imposed by law which were incurred in the ordinary course
of business, such as carriers', warehousemen's and mechanics' Liens,
statutory landlord's Liens, and other similar Liens arising in the ordinary
course of business, and (x) which do not in the aggregate materially
detract from the value of such property or assets or materially impair the
use thereof in the operation of the business of the Borrower or any such
Subsidiary or (y) which are being contested in good faith by appropriate
proceedings, which proceedings have the effect of preventing the forfeiture
or sale of the property or asset subject to such Lien;

(d) Liens existing on the Restatement Effective Date to the extent
listed on Annex VII, without giving effect to any subsequent extensions or
renewals thereof;

(e) Liens arising from judgments, decrees or attachments (or securing
of appeal bonds with respect thereto) in circumstances not constituting an
Event of Default under Section 9.09, so long as no cash or property (other
than proceeds of insurance payable by reason of such judgments, decrees or
attachments) is deposited or delivered to secure any respective judgment or
award, or any appeal bond in respect thereof, the fair market value of
which exceeds $1,500,000;

(f) Liens (other than any Lien imposed by ERISA) incurred or deposits
made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security, or
to secure the performance of tenders, statutory obligations, surety bonds
(other than appeal bonds), bids, leases, government contracts, performance
and return-of-money bonds and other similar obligations incurred in the
ordinary course of business (exclusive of obligations in respect of the
payment for borrowed money);

(g) leases, subleases or licenses granted to others not interfering
in any material respect with the business of the Borrower or any of its
Subsidiaries;

(h) easements, rights-of-way, restrictions, minor defects or
irregularities in title and other similar charges or encumbrances not
interfering in any material respect with the ordinary conduct of the
business of the Borrower or any of its Subsidiaries;

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(i) Liens arising from UCC financing statements regarding leases
permitted by this Agreement;

(j) purchase money Liens securing payables arising from the purchase
by the Borrower or any of its Subsidiaries of any equipment or goods in the
normal course of business, provided that such payables shall not constitute
Indebtedness;

(k) any interest or title of a lessor under any lease permitted by
this Agreement;

(l) Liens arising pursuant to purchase money mortgages relating to,
or security interests securing Indebtedness representing, the purchase
price or financing thereof of assets acquired by the Borrower or any of its
Subsidiaries after the Restatement Effective Date and Liens created
pursuant to Capital Leases, provided that any such Liens attach only to the
assets so acquired and that all Indebtedness secured by Liens created
pursuant to this clause (l) shall not exceed the amount permitted pursuant
to Section 8.04(d) at any time outstanding;

(m) Permitted Encumbrances; and

(n) Liens securing Indebtedness not in excess of $250,000 at any
time outstanding.

8.04 Indebtedness. The Borrower will not, and will not permit any of
its Subsidiaries to, contract, create, incur, assume or suffer to exist any
Indebtedness, except:

(a) Indebtedness incurred pursuant to this Agreement and the other
Credit Documents;

(b) Indebtedness of the Borrower incurred under the Senior Notes not
to exceed $125,000,000 in aggregate principal amount;

(c) Indebtedness owing by (i) any Subsidiary Guarantor to another
Subsidiary Guarantor or to the Borrower, (ii) any Subsidiary of the
Borrower that is not a Subsidiary Guarantor to another Subsidiary of the
Borrower that is not a Subsidiary Guarantor and (iii) the Borrower to any
Subsidiary Guarantor;

(d) Capitalized Lease Obligations of the Borrower and its
Subsidiaries incurred by the Borrower or any of its Subsidiaries after the
Restatement Effective Date and Indebtedness incurred pursuant to purchase
money mortgages permitted by Section 8.03(l), provided that the aggregate
amount of Indebtedness incurred pursuant to this clause (d) shall not
exceed $15,000,000 at any time outstanding;

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(e) Existing Indebtedness, without giving effect to any subsequent
extension, renewal or refinancing thereof;

(f) Indebtedness under Interest Rate Agreements relating to
Indebtedness otherwise permitted under this Section 8.04;

(g) Indebtedness consisting of guaranties by the Borrower of leases
permitted to be incurred by Wholly-Owned Subsidiaries;

(h) Contingent Obligations of the Borrower or any Subsidiary
Guarantor with respect to Indebtedness and lease obligations of the
Borrower or any Subsidiary Guarantor otherwise permitted under this
Agreement;

(i) Additional Indebtedness of the Borrower and its Subsidiaries not
to exceed an aggregate outstanding principal amount of $5,000,000 at any
time.

8.05 Advances, Investments and Loans. The Borrower will not, and
will not permit any of its Subsidiaries to, lend money or credit or make
advances to any Person, or purchase or acquire any stock, obligations or
securities of, or any other interest in, or make any capital contribution to,
any Person, except:

(a) investments made by the Borrower or any of its subsidiaries in
those partnerships and managed entities listed on Annex VIII (the "Existing
Ventures") (including the purchase of the interests held by third parties
in the Existing Ventures) in an aggregate principal amount not to exceed
$6,000,000 and reinvestments in Existing Ventures by the Borrower or any of
its Subsidiaries of any capital returned to the Borrower or any of its
Subsidiaries as a result of its interests in such Existing Ventures;

(b) the Borrower and its Subsidiaries may acquire and hold
receivables owing to them, if created or acquired in the ordinary course of
business and payable or dischargeable in accordance with customary trade
terms;

(d) investments made by the Borrower in Subsidiary Guarantors that
are Wholly-Owned Subsidiaries shall be permitted;

(e) loans and advances to employees in an aggregate principal amount
not to exceed $200,000 at any time outstanding shall be permitted;

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(f) the Borrower and its Subsidiaries may acquire and own investments
(including debt obligations) received in connection with the bankruptcy or
reorganization of suppliers and customers and in settlement of delinquent
obligations of, and other disputes with, customers and suppliers arising in
the ordinary course of business;

(g) Interest Rate Agreements permitted by Section 8.04(f) shall be
permitted;

(h) the Borrower may hold the promissory notes acquired in accordance
with Section 8.02(e);

(i) the Borrower may repurchase stock to the extent permitted by
Section 8.07(a)(ii) and (iii); and

(j) investments made by the Borrower in Cash Equivalents shall be
permitted.

8.06 Prepayments of Indebtedness, etc. The Borrower will not, and
will not permit any of its Subsidiaries to, (x) make (or give any notice in
respect thereof) any voluntary or optional payment or prepayment or redemption
or acquisition for value of (including, without limitation, by way of depositing
with the trustee with respect thereto money or securities before due for the
purpose of paying when due) or exchange of any Existing Indebtedness or the
Senior Notes; provided, that (i) the Borrower and/or its Subsidiaries may prepay
Existing Indebtedness in an aggregate amount not to exceed $2,000,000 and (ii)
the Borrower may repay, repurchase or otherwise acquire Senior Notes under the
clawback provisions of the Senior Note Documents, (y) amend, modify or change in
any manner any agreements (including, without limitation, the Senior Note
Documents and the Existing Indebtedness Agreements) (A) relating to the Senior
Notes or (B) relating to the Existing Indebtedness, in a manner adverse to the
interests of the Banks in the case of this clause (B) or (z) amend, modify or
change in any manner materially adverse to the interests of the Banks, the
Certificate of Incorporation (including, without limitation, by the filing of
any additional certificate of designation) or By-Laws of the Borrower or any of
its Subsidiaries, the terms of any of its capital stock or any agreement entered
into by the Borrower with respect to its capital stock, the Shareholders
Agreement, or enter into any new agreement in any manner materially adverse to
the interests of the Banks with respect to the capital stock of the Borrower.

8.07 Dividends, etc. (a) The Borrower will not, and will not permit
any of its Subsidiaries to, declare or pay any dividends (other than dividends
payable solely in capital stock of such Person) or return any capital to its
stockholders or authorize or make any other distribution, payment or delivery of
property or cash to its stockholders as such, or redeem, retire, purchase or
otherwise acquire, directly or indirectly, for a consideration, any shares of
any class of its capital stock now or hereafter outstanding (or any warrants for

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or options or stock appreciation rights in respect of any of such shares), or
set aside any funds for any of the foregoing purposes, or permit any of its
Subsidiaries to purchase or otherwise acquire for consideration any shares of
any class of the capital stock of the Borrower or any other Subsidiary, as the
case may be, now or hereafter outstanding (or any options or warrants or stock
appreciation rights issued by such Person with respect to its capital stock)
(all of the foregoing "Dividends"), except that:

(i) any Subsidiary of the Borrower may pay cash dividends to the
Borrower or to a Wholly-Owned Subsidiary of the Borrower; and

(ii) so long as no Default or Event of Default has occurred and is
continuing or would result therefrom, the Borrower may redeem or repurchase
for cash, at fair value, the capital stock of the Borrower (or options to
purchase capital stock) from any employee or director of the Borrower upon
the death, disability, retirement or other termination of such employee or
director, provided, that all such repurchases under this clause (ii) shall
not exceed, in the aggregate, $2,500,000 (increased by the amount of
proceeds received by the Borrower in connection with the issuance of
capital stock to directors or employees of the Borrower and its
Subsidiaries after the Restatement Effective Date); provided further, the
Borrower may effect such repurchases without regard to the dollar
limitations set forth above solely with the proceeds of key man life
insurance obtained for the purpose of making such repurchases; and

(iii) so long as no Default or Event of Default has occurred and is
continuing or would result therefrom, the Borrower may repurchase options
of the Preferred Optionholders, so long as no net cash is used by the
Borrower in connection therewith.

(b) The Borrower will not, and will not permit any of its
Subsidiaries to, create or otherwise cause or suffer to exist any encumbrance or
restriction which prohibits or otherwise restricts (A) the ability of any
Subsidiary of the Borrower to (a) pay dividends or make other distributions or
pay any Indebtedness owed to the Borrower or any other Subsidiary of the
Borrower, (b) make loans or advances to the Borrower or any other Subsidiary of
the Borrower, (c) transfer any of its properties or assets to the Borrower or
any other Subsidiary of the Borrower or (B) the ability of the Borrower or any
other Subsidiary of the Borrower to create, incur, assume or suffer to exist any
Lien upon its property or assets to secure the Obligations, other than
prohibitions or restrictions existing under or by reason of:

(i) this Agreement and the other Credit Documents;

(ii) the Senior Note Documents;

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(iii) applicable law;

(iv) customary non-assignment provisions entered into in the ordinary
course of business and consistent with past practices;

(v) any restriction or encumbrance with respect to a Subsidiary of
the Borrower imposed pursuant to an agreement which has been entered into
for the sale or disposition of all or substantially all of the capital
stock or assets of such Subsidiary, so long as such sale or disposition is
permitted under this Agreement; and

(vi) Liens permitted under Section 8.03 and any documents or
instruments governing the terms of any Indebtedness or other obligations
secured by any such Liens, provided that such prohibitions or restrictions
apply only to the assets subject to such Liens.

8.08 Transactions with Affiliates. The Borrower will not, and will
not permit any of its Subsidiaries to, enter into any transaction or series of
transactions after the Restatement Effective Date whether or not in the ordinary
course of business, with any Affiliate other than on terms and conditions
substantially as favorable to the Borrower or such Subsidiary as would be
obtainable by the Borrower or such Subsidiary at the time in a comparable arm's
length transaction with a Person other than an Affiliate; provided, that the
foregoing restrictions shall not apply to (i) advances to employees of the
Borrower and its Subsidiaries to the extent permitted by Section 8.05(e), (ii)
annual management fees to be paid to an Affiliate of BRS not to exceed $250,000
in any fiscal year, (iii) the reimbursement of the reasonable out-of-pocket
expenses incurred by the Investors in connection with the Transaction, (iv)
Dividends permitted under Section 8.07, (v) transactions between the Borrower
and its Subsidiaries to the extent otherwise expressly permitted under this
Agreement, (vi) employment arrangements (including arrangements made with
respect to bonuses) entered into in the ordinary course of business with members
of the Board of Directors of the Borrower and of its Subsidiaries, (vii) the
Shareholders' Agreements as in effect on the Restatement Effective Date, and
(viii) the Warrant Agreement.

8.09 Net Interest Coverage Ratio. The Borrower will not permit the
Net Interest Coverage Ratio for any Test Period ending on a date set forth below
to be less than the ratio set forth opposite such date:

Date Ratio
----- --------

November 30, 1997 1.75:1
February 28, 1998 1.75:1
May 31, 1998 1.75:1

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August 31, 1998 1.75:1
November 30, 1998 1.8:1
February 28, 1999 1.9:1
May 31, 1999 2.0:1

August 31, 1999 2.0:1
November 30, 1999 2.1:1
February 29, 2000 2.2:1
May 31, 2000 2.3:1

August 31, 2000 2.3:1
November 30, 2000 2.4:1
February 28, 2001 2.4:1
The Last Day of Each Fiscal Quarter Thereafter 2.5:1

8.10 Net Leverage Ratio. The Borrower will not permit the Net
Leverage Ratio on the last day of any calendar month which day occurs during a
period set forth below to be greater than the ratio set forth opposite such
period below:

Period Ratio
------ ------

Effective Date through November 30, 1997 4.5:1
Fiscal quarter ending February 28, 1998 4.5:1
Fiscal quarter ending May 31, 1998 4.5:1

Fiscal quarter ending August 31, 1998 4.5:1
Fiscal quarter ending November 30, 1998 4.5:1
Fiscal quarter ending February 28, 1999 4.4:1
Fiscal quarter ending May 31, 1999 4.3:1

Fiscal quarter ending August 31, 1999 4.3:1
Fiscal quarter ending November 30, 1999 4.2:1
Fiscal quarter ending February 29, 2000 4.1:1
Fiscal quarter ending May 31, 2000 4.0:1

Fiscal quarter ending August 31, 2000 3.9:1
Fiscal quarter ending November 30, 2000 3.85:1
Fiscal quarter ending February 28, 2001 3.80:1
Each Fiscal Quarter Thereafter 3.75:1

8.11 Issuance of Stock. The Borrower will not issue any shares of
capital stock (other than issuances of Common Stock not creating a Change of

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Control), and will not permit any of its Subsidiaries directly or indirectly to
issue, sell, assign, pledge or otherwise encumber or dispose of any shares of
its capital stock or other securities (or warrants, rights or options to acquire
shares or other equity securities) of such Subsidiary, except (x) to the extent
permitted by Section 8.05, (y) to the Borrower and/or any Subsidiary Guarantor
or (z) to qualify directors if required by applicable law.

8.12 Limitation on Creation of Subsidiaries. The Borrower shall not,
and shall not permit any of its Subsidiaries to, establish, create or acquire
any additional Subsidiaries without the prior written consent of the Required
Banks, provided that the Borrower and its Wholly-Owned Subsidiaries shall be
permitted to establish or create Wholly-Owned Subsidiaries in connection with
the acquisition or development of new fitness clubs or sports facilities so long
as (i) at least 5 days' prior written notice thereof (or such lesser notice as
is acceptable to the Administrative Agent) is given to the Administrative Agent,
(ii) such new Subsidiaries shall execute and deliver such guarantees and
security documents as the Required Banks shall request (including documents
substantially similar to or amendments to each of the Pledge Agreement and the
Security Agreement), and in such forms as shall be satisfactory to them, (iii)
the holders of the capital stock of such new Subsidiaries shall execute and
deliver additional pledge agreements, in form and substance satisfactory to the
Administrative Agent and (iv) such new Subsidiaries shall execute and deliver,
or cause to be executed and delivered, all other relevant documentation of the
type described in Section 5 as such new Subsidiaries would have had to deliver
if such new Subsidiaries were Credit Parties on the Restatement Effective Date.

SECTION 9. Events of Default. Upon the occurrence of any of the
following specified events (each an "Event of Default"):

9.01 Payments. The Borrower shall (i) default in the payment when
due of any principal of the Loans or (ii) default, and such default shall
continue for three or more Business Days, in the payment when due of any Unpaid
Drawing, any interest on the Loans or any Fees or any other amounts owing
hereunder or under any other Credit Document; or

9.02 Representations, etc. Any representation, warranty or statement
made by any Credit Party herein or in any other Credit Document or in any
statement or certificate delivered or required to be delivered pursuant hereto
or thereto shall prove to be untrue in any material respect on the date as of
which made or deemed made; or

9.03 Covenants. The Borrower or any of its Subsidiaries shall (a)
default in the due performance or observance by it of any term, covenant or
agreement contained in Sections 7.01(f)(x), 7.11 or 8, or (b) default in the due
performance or observance by it of any term, covenant or agreement (other than
those referred to in Section 9.01, 9.02 or clause (a) of this Section 9.03)
contained in this Agreement and such default shall continue

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unremedied for a period of at least 30 days after notice to the defaulting
party by the Administrative Agent or the Required Banks; or

9.04 Default Under Other Agreements. (a) The Borrower or any of its
Subsidiaries shall (i) default in any payment with respect to any Indebtedness
(other than the Obligations) beyond the period of grace, if any, applicable
thereto or (ii) default in the observance or performance of any agreement or
condition relating to any such Indebtedness or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event shall
occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such Indebtedness
(or a trustee or agent on behalf of such holder or holders) to cause, any such
Indebtedness to become due prior to its stated maturity or (b) any such
Indebtedness of the Borrower or any of its Subsidiaries shall be declared to be
due and payable, or required to be prepaid other than by a regularly scheduled
required prepayment, prior to the stated maturity thereof, provided that it
shall not constitute an Event of Default pursuant to this Section 9.04 unless
the principal amount of any one issue of such Indebtedness exceeds $2,000,000 or
the aggregate amount of all Indebtedness referred to in clauses (a) and (b)
above exceeds $5,000,000 at any one time; or

9.05 Bankruptcy, etc. The Borrower or any of its Subsidiaries shall
commence a voluntary case concerning itself under Title 11 of the United States
Code entitled "Bankruptcy," as now or hereafter in effect, or any successor
thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the
Borrower or any of its Subsidiaries and the petition is not controverted within
10 days, or is not dismissed within 60 days, after commencement of the case; or
a custodian (as defined in the Bankruptcy Code) is appointed for, or takes
charge of, all or substantially all of the property of the Borrower or any of
its Subsidiaries; or the Borrower or any of its Subsidiaries commences any other
proceeding under any reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Borrower or any
of its Subsidiaries; or there is commenced against the Borrower or any of its
Subsidiaries any such proceeding which remains undismissed for a period of 60
days; or the Borrower or any of its Subsidiaries is adjudicated insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; the Borrower or any of its Subsidiaries suffers any
appointment of any custodian or the like for it or any substantial part of its
property to continue undischarged or unstayed for a period of 60 days; or the
Borrower or any of its Subsidiaries makes a general assignment for the benefit
of creditors; or any corporate action is taken by the Borrower or any of its
Subsidiaries for the purpose of effecting any of the foregoing; or

9.06 ERISA. (a) Any Plan shall fail to satisfy the minimum funding
standard required for any plan year or part thereof under Section 412 of the
Code or Section 302 of ERISA or a waiver of such standard or extension of any
amortization period is sought or granted under Section 412 of the Code or

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Section 303 or 304 of ERISA, a Reportable Event shall have occurred, any Plan
which is subject to Title IV of ERISA shall have had or is likely to have a
trustee appointed to administer such Plan, any Plan which is subject to Title IV
of ERISA is, shall have been or is likely to be terminated or to be the subject
of termination proceedings under ERISA, any Plan shall have an Unfunded Current
Liability, a contribution required to be made with respect to a Plan has not
been timely made, the Borrower or a Subsidiary of the Borrower or any ERISA
Affiliate has incurred or is reasonably likely to incur any liability to or on
account of a Plan under Section 409, 502(i), 502(l), 515, 4062, 4063, 4064,
4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971 or 4975 of the
Code or on account of a group health plan (as defined in Section 607(1) of ERISA
or Section 4980B(g)(2) of the Code), or the Borrower or any of its Subsidiaries
has incurred or is likely to incur liabilities pursuant to one or more employee
welfare benefit plans (as defined in Section 3(1) of ERISA) that provide
benefits to retired employees or other former employees (other than as required
by Section 601 of ERISA) or Plans (other than any Plan subject to Title IV of
ERISA); and (b) there shall result from any such event or events the imposition
of a Lien, the granting of a security interest, or a liability or a material
risk of incurring a liability; and (c) such Lien, security interests or
liability, individually or in the aggregate, in the reasonable opinion of the
Required Banks, has had, or could reasonably be expected to have, a Material
Adverse Effect; or

9.07 Security Documents. Any Security Document shall cease to be in
full force and effect or, except as expressly set forth in the Security
Agreement, shall cease to give the Collateral Agent any perfected Lien
encumbering Collateral, or shall cease to give the Collateral Agent any material
rights, powers and privileges purported to be created thereby in favor of the
Collateral Agent or any Credit Party shall default in the due performance or
observance of any term, covenant or agreement on its part to be performed or
observed pursuant to any such Security Document and such default shall continue
unremedied for a period of 30 days after notice to the Borrower by the
Administrative Agent or the Required Banks; or

9.08 Subsidiary Guaranty. The Subsidiary Guaranty or any provision
thereof shall cease to be in full force or effect, or any Subsidiary Guarantor
or any Person acting by or on behalf of any Subsidiary Guarantor shall deny or
disaffirm such guarantor's obligations under such Subsidiary Guaranty or any
Subsidiary Guarantor shall default in the due performance or observance of any
term, covenant or agreement on its part to be performed or observed pursuant to
the Subsidiary Guaranty; or

9.09 Judgments. One or more judgments or decrees shall be entered
against the Borrower or any of its Subsidiaries involving a liability of
$2,000,000 or more in the case of any one such judgment or decree and $5,000,000
or more in the aggregate for all such judgments and decrees for the Borrower and
its Subsidiaries (in each case, not paid or to the extent not covered by
insurance) and any such judgments or decrees shall not have been vacated,

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discharged or stayed or bonded pending appeal within 60 days from the entry
thereof; or

9.10 Change of Control. A Change of Control shall occur;

then, and in any such event, and at any time thereafter, if any Event of Default
shall then be continuing, the Administrative Agent shall, upon the written
request of the Required Banks, by written notice to the Borrower, take any or
all of the following actions, without prejudice to the rights of the
Administrative Agent or any Bank to enforce its claims against the Borrower,
except as otherwise specifically provided for in this Agreement (provided that,
if an Event of Default specified in Section 9.05 shall occur with respect to the
Borrower, the result which would occur upon the giving of written notice by the
Administrative Agent as specified in clauses (i) and (ii) below shall occur
automatically without the giving of any such notice): (i) declare the Total
Commitment terminated, whereupon the Commitment of each Bank shall forthwith
terminate immediately and any Commitment Commission shall forthwith become due
and payable without any other notice of any kind; (ii) declare the principal of
and any accrued interest in respect of all Loans and all Obligations owing
hereunder (including Unpaid Drawings) and thereunder to be, whereupon the same
shall become, forthwith due and payable without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the Borrower; (iii)
enforce, as Collateral Agent (or direct the Collateral Agent to enforce), any or
all of the Liens and security interests created pursuant to the Security
Documents; (iv) terminate any Letter of Credit which may be terminated in
accordance with its terms; (v) direct the Borrower to pay (and the Borrower
hereby agrees upon receipt of such notice, or upon the occurrence of any Event
of Default specified in Section 9.05 in respect of the Borrower, it will pay) to
the Collateral Agent at the Payment Office such additional amounts of cash, to
be held as security for the Borrower's reimbursement obligations in respect of
Letters of Credit then outstanding equal to the aggregate Stated Amount of all
Letters of Credit then outstanding; and (vi) apply any cash collateral held
pursuant to this Agreement to repay the Obligations.

SECTION 10. Definitions. As used herein, the following terms shall
have the meanings herein specified unless the context otherwise requires.
Defined terms in this Agreement shall include in the singular number the plural
and in the plural the singular:

"Adjusted Percentage" shall mean (x) at a time when no Bank Default
exists, for each Bank such Bank's Percentage and (y) at a time when a Bank
Default exists (i) for each Bank that is a Defaulting Bank, zero and (ii) for
each Bank that is a Non-Defaulting Bank, the percentage determined by dividing
such Bank's Commitment at such time by the Adjusted Total Commitment at such
time, it being understood that all references herein to Commitments and the
Adjusted Total Commitment at a time when the Total Commitment or Adjusted Total
Commitment, as the case may be, has been terminated shall be references to the
Commitments or Adjusted Total Commitment, as the case may be, in effect

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immediately prior to such termination, provided that (A) no Bank's Adjusted
Percentage shall change upon the occurrence of a Bank Default from that in
effect immediately prior to such Bank Default if, after giving effect to such
Bank Default and any repayment of Loans and Swingline Loans at such time
pursuant to Section 4.02(A)(a) or otherwise, the sum of (i) the aggregate
outstanding principal amount of Loans of all Non-Defaulting Banks plus (ii) the
aggregate outstanding principal amount of Swingline Loans plus (iii) the Letter
of Credit Outstandings, exceeds the Adjusted Total Commitment, (B) the changes
to the Adjusted Percentage that would have become effective upon the occurrence
of a Bank Default but that did not become effective as a result of the preceding
clause (A) shall become effective on the first date after the occurrence of the
relevant Bank Default on which the sum of (i) the aggregate outstanding
principal amount of the Loans of all Non-Defaulting Banks plus (ii) the
aggregate outstanding principal amount of the Swingline Loans plus (iii) the
Letter of Credit Outstandings is equal to or less than the Adjusted Total
Commitment and (C) if (i) a Non-Defaulting Bank's Adjusted Percentage is changed
pursuant to the preceding clause (B) and (ii) any repayment of such Bank's
Loans, or of Unpaid Drawings with respect to Letters of Credit or of Swingline
Loans, that were made during the period commencing after the date of the
relevant Bank Default and ending on the date of such change to its Adjusted
Percentage must be returned to any Borrower as a preferential or similar payment
in any bankruptcy or similar proceeding of such Borrower, then the change to
such Non-Defaulting Bank's Adjusted Percentage effected pursuant to said clause
(B) shall be reduced to that positive change, if any, as would have been made to
its Adjusted Percentage if (x) such repayments had not been made and (y) the
maximum change to its Adjusted Percentage would have resulted, in the sum of the
outstanding principal of Loans made by such Bank plus such Bank's new Adjusted
Percentage of the outstanding principal amount of Swingline Loans and of Letter
of Credit Outstandings equalling such Bank's Commitment at such time.

"Adjusted Commitment" for each Non-Defaulting Bank shall mean at any
time the product of such Bank's Adjusted Percentage and the Adjusted Total
Commitment.

"Adjusted Total Commitment" shall mean at any time the Total
Commitment less the aggregate Commitments of all Defaulting Banks.

"Administrative Agent" shall have the meaning provided in the first
paragraph of this Agreement and shall include any successor to the
Administrative Agent appointed pursuant to Section 11.09.

"Affected Eurodollar Loans" shall have the meaning provided in Section
4.02(B).

"Affiliate" shall mean, with respect to any Person, any other Person
directly or indirectly controlling (including, but not limited to, all directors
and officers of such Person), controlled by, or under direct or indirect common
control with such Person. A Person shall be deemed to control a corporation if

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such Person possesses, directly or indirectly, the power (i), other than for
purposes of the definition of Permissible Transferees, to vote 5% or more of the
securities having ordinary voting power for the election of directors of such
corporation or (ii) to direct or cause the direction of the management and
policies of such corporation, whether through the ownership of voting
securities, by contract or otherwise.

"Agreement" shall mean this Credit Agreement, as the same may be from
time to time modified, amended and/or supplemented.

"Anticipated Reinvestment Amount" shall mean, with respect to any
Reinvestment Election, the amount specified in the Reinvestment Notice delivered
by the Borrower in connection therewith as the amount of the Net Cash Proceeds
from the related Asset Sale that the Borrower and/or the Subsidiary Guarantors
intend to use to purchase, construct or otherwise acquire Reinvestment Assets.

"Applicable Base Rate Margin" shall mean 1.50%.

"Applicable Commitment Commission Percentage" shall mean, at any time,
a percentage per annum equal to 1/2 of 1%, provided that the Applicable
Commitment Commission Percentage shall be 3/8 of 1% if, but only if, as of the
date that such Commitment Commission shall be due and payable as referenced in
Section 3.01, the Net Leverage Ratio for the Test Period then most recently
ended shall be less than 4.00:1.00.

"Applicable Eurodollar Margin" shall mean 2.50%.

"Asset Sale" shall mean the sale, transfer or other disposition by the
Borrower or any Subsidiary of the Borrower to any Person other than the Borrower
or any Subsidiary Guarantor of any asset of the Borrower or such Subsidiary
(other than sales, transfers or other dispositions (x) in the ordinary course of
business of inventory and/or obsolete or excess equipment or intellectual
property pursuant to 8.02(i) or (d) and/or pursuant to equipment
trade-in/trade-up transactions or (y) the proceeds of which do not exceed
$100,000 per annum).

"Assignment and Assumption Agreement" shall have the meaning provided
in Section 12.04(b).

"Authorized Officer" shall mean any senior officer of the Borrower
designated as such in writing to the Administrative Agent by the Borrower in
each case to the extent acceptable to the Administrative Agent.

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"Bank" shall have the meaning provided in the first paragraph of this
Agreement, and shall include each financial institution which becomes a party
hereto in accordance with Sections 1.13 and/or 12.04(b).

"Bank Default" shall mean (i) the refusal (which has not been
retracted) of a Bank to make available its portion of any incurrence of Loans
(including pursuant to a Mandatory Borrowing) or to fund its portion of any
unreimbursed payment under Section 2.05(c) or (ii) a Bank having notified the
Administrative Agent and/or the Borrower that it does not intend to comply with
its obligations under Section 1.01 or under Section 2.05(c).

"Bankruptcy Code" shall have the meaning provided in Section 9.05.

"Base Rate" at any time shall mean the higher of (i) the rate which is
1/2 of 1% in excess of the Federal Funds Effective Rate and (ii) the Prime
Lending Rate.

"Base Rate Loan" shall mean each Loan bearing interest at the rates
provided in Section 1.08(a).

"Borrower" shall have the meaning provided in the first paragraph of
this Agreement.

"Borrowing" shall mean the incurrence of (i) Swingline Loans by the
Borrower from BTCo on a given date or (ii) one Type of Loan by the Borrower from
all of the Banks on a pro rata basis on a given date (or resulting from
conversions on a given date), having in the case of Eurodollar Loans the same
Interest Period; provided that Base Rate Loans incurred pursuant to Section
1.10(b) shall be considered part of any related Borrowing of Eurodollar Loans.

"BRS" shall mean Bruckmann, Rosser, Sherrill & Co., L.P., a limited
partnership organized under the laws of the State of Delaware.

"BRS Investors" shall mean each of the "BRS Investors" (as such term
is defined in the Stockholders Agreement).

"BTCo" shall mean Bankers Trust Company.

"Business Day" shall mean (i) for all purposes other than as covered
by clause (ii) below, any day excluding Saturday, Sunday and any day which shall
be in the City of New York a legal holiday or a day on which banking
institutions are authorized by law or other governmental actions to close and
(ii) with respect to all notices and determinations in connection with, and
payments of principal and interest on, Eurodollar Loans, any day which is a

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Business Day described in clause (i) and which is also a day for trading by and
between banks in U.S. dollar deposits in the interbank Eurodollar market.

"Capital Lease" as applied to any Person shall mean any lease of any
property (whether real, personal or mixed) by that Person as lessee which, in
conformity with GAAP, is accounted for as a capital lease on the balance sheet
of that Person.

"Capitalized Lease Obligations" shall mean all obligations under
Capital Leases of the Borrower or any of its Subsidiaries in each case taken at
the amount thereof accounted for as liabilities in accordance with GAAP.

"Cash Equivalents" shall mean (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) having maturities of not more
than six months from the date of acquisition, (ii) U.S. dollar denominated time
deposits, certificates of deposit and bankers' acceptances of (x) any Bank, (y)
any domestic commercial bank of recognized standing having capital and surplus
in excess of $500,000,000 or (z) any bank (or the parent company of such bank)
whose short-term commercial paper rating from Standard & Poor's Ratings Services
("S&P") is at least A-2 or the equivalent thereof or from Moody's Investors
Service, Inc. ("Moody's") is at least P-2 or the equivalent thereof (any such
bank, an "Approved Bank"), in each case with maturities of not more than six
months from the date of acquisition, (iii) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clause (i) above entered into with any bank meeting the qualifications specified
in clause (ii) above, (iv) commercial paper issued by any Bank or Approved Bank
or by the parent company of any Bank or Approved Bank and commercial paper
issued by, or guaranteed by, any industrial or financial company with a
short-term commercial paper rating of at least A-2 or the equivalent thereof by
S&P or at least P-2 or the equivalent thereof by Moody's (any such company, an
"Approved Company"), or guaranteed by any industrial company with a long term
unsecured debt rating of at least A or A2, or the equivalent of each thereof,
from S&P or Moody's, as the case may be, and in each case maturing within six
months after the date of acquisition and (v) investments in money market funds
substantially all of whose assets are comprised of securities of the type
described in clauses (i) through (iv) above.

"Cash Proceeds" shall mean, with respect to any Asset Sale, the
aggregate cash payments (including any cash received by way of deferred payment
pursuant to a note receivable issued in connection with such Asset Sale, other
than the portion of such deferred payment constituting interest, but only as and
when so received) received by the Borrower and/or any Subsidiary from such Asset
Sale.

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"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et
seq.

"Change of Control" shall mean either (i) prior to a registered
initial public offering of the Common Stock, (x) the Management Investors, BRS,
the BRS Investors and their Permissible Transferees shall in the aggregate cease
to own Common Stock representing more than 50% of the common voting equity
interest in the Borrower's capital stock on a fully-diluted basis assuming the
exercise of all securities exercisable, convertible or exchangeable for or into
common equity interests and (y) BRS, BRS Investors and their Permissible
Transferees shall in the aggregate cease to own Common Stock representing 37.5%
of the voting common equity interests with the Borrower's capital stock on a
fully diluted basis assuming the exercise of all securities exercisable,
convertible or exchangeable for or into common equity interests, (ii) after a
registered initial public offering, (x) the Management Investors, BRS, the BRS
Investors and their Permissible Transferees shall cease to own Common Stock
representing not less than 33% of the common voting equity interest in the
Borrower's capital stock or (y) BRS, BRS Investors and their Permissible
Transferees shall in the aggregate cease to own Common Stock representing 20% of
the common voting equity interests with the Borrower's capital stock on a fully
diluted basis assuming the exercise of all securities exercisable, convertible
or exchangeable for into common equity interests or (z) any Person or group (as
such term is used under the Exchange Act) of Persons, owns (beneficially or of
record) a greater percentage than BRS, the BRS Investors and their Permissible
Transferees of common equity interest in the Borrower's capital stock, in each
case, on a fully-diluted basis assuming the exercise of all securities
exercisable, convertible or exchangeable for or into common equity interests,
(iii) a "change of control" pursuant to, and as defined in, the Certificate of
Merger of the Borrower, as filed on December 10, 1996 and (iv) a "change of
control" pursuant to, and as defined in, the Senior Note Documents.

"Class A Common Stock" shall mean the Class A Common Stock of the
Borrower, par value $.001 per share.

"Class B Common Stock" shall mean the Class B Common Stock of the
Borrower, par value $.001 per share.

"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and the regulations promulgated and rulings issued thereunder.
Section references to the Code are to the Code, as in effect at the date of this
Agreement and any subsequent provisions of the Code, amendatory thereof,
supplemental thereto or substituted therefor.

"Collateral" shall mean all of the Collateral as defined in each of
the Security Documents.

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"Collateral Agent" shall mean the Administrative Agent acting as
collateral agent for the Banks pursuant to the Security Documents.

"Commitment" shall mean, with respect to each Bank, the amount set
forth opposite such Bank's name in Annex I directly below the column entitled
"Commitment," (x) as the same may be reduced from time to time pursuant to
Sections 1.13, 3.02 and/or 3.03 or (y) adjusted from time to time as a result of
assignments to or from such Bank pursuant to Section 12.04.

"Commitment Commission" shall have the meaning provided in
Section 3.01(a).

"Common Optionholders" shall mean those employees of the Borrower
designated as Common Optionholders on Annex X.

"Common Stock" shall mean, collectively, the Class A Common Stock and
the Class B Common Stock.

"Consolidated EBIT" shall mean, for any period, (A) the sum of the
amounts for such period of (i) Consolidated Net Income, (ii) provisions for cash
taxes based on income, (iii) Consolidated Interest Expense, (iv) amortization or
write-off of deferred financing costs to the extent deducted in determining
Consolidated Net Income and (v) losses on sales of assets (excluding sales in
the ordinary course of business) and other extraordinary or nonrecurring losses
less (B) the amount for such period of gains on sales of assets (excluding sales
in the ordinary course of business) and other extraordinary or nonrecurring
gains, all as determined on a consolidated basis in accordance with GAAP.

"Consolidated EBITDAD" shall mean, for any period, the sum of the
amounts for such period of (i) Consolidated EBIT, (ii) depreciation expense,
(iii) amortization expense, (iv) deferred rent expense and (v) without
duplication, all other non-cash charges included in determining Consolidated Net
Income during such period, all as determined on a consolidated basis in
accordance with GAAP.

"Consolidated Indebtedness" shall mean, as at any date of
determination, the aggregate amount of all Indebtedness of the Borrower and its
Subsidiaries on a consolidated basis.

"Consolidated Interest Expense" shall mean, for any period, total
interest expense (including that attributable to Capital Leases in accordance
with GAAP) of the Borrower and its Subsidiaries on a consolidated basis with
respect to all outstanding Indebtedness of the Borrower and its Subsidiaries,
including, without limitation, all capitalized interest, but excluding (x) all

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commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing and net costs under Interest Rate
Agreements and (y) Transaction Expenses.

"Consolidated Net Income" shall mean, for any period, the net income
(or loss) of the Borrower and its Subsidiaries on a consolidated basis for such
period taken as a single accounting period determined in conformity with GAAP,
provided that there shall be excluded (i) the income (or loss) of any Person
(other than Subsidiaries of the Borrower) in which any other Person (other than
the Borrower or any of its Subsidiaries) has a joint interest, except to the
extent of the amount of dividends or other distributions actually paid to the
Borrower or any of its Subsidiaries by such Person during such period, (ii) the
income (or loss) of any Person accrued prior to the date it becomes a Subsidiary
of the Borrower or is merged into or consolidated with the Borrower or any of
its Subsidiaries or that Person's assets are acquired by the Borrower or any of
its Subsidiaries, (iii) the income of any Subsidiary of the Borrower to the
extent that the declaration or payment of dividends or similar distributions by
that Subsidiary of that income is not at the time permitted by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary, (iv)
Transaction Expenses, (v) compensation expense resulting from the issuance of
capital stock, stock options or stock appreciation rights issued to former or
current employees, including officers, of the Borrower or any Subsidiary of the
Borrower, or the exercise of such options or rights, in each case to the extent
the obligation (if any) associated therewith is not expected to be settled by
the payment of cash by the Borrower or any Affiliate of the Borrower and (vi)
compensation expense resulting from the repurchase of capital stock, options and
rights described in clause (v) of this definition of Consolidated Net Income.

"Consolidated Net Interest Expense" shall mean, for any period,
Consolidated Interest Expense for such period less consolidated interest income
shown on the financial statements of the Borrower for such period.

"Contingent Obligations" shall mean, as to any Person, any obligation
of such Person guaranteeing or intending to guarantee any Indebtedness, leases,
dividends or other obligations ("primary obligations") of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(a) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (b) to advance or supply funds (i) for the
purchase or payment of any such primary obligation or (ii) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, (c) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation or (d) otherwise to assure or hold harmless the owner of
such primary obligation against loss in respect thereof, provided, however, that
the term Contingent Obligation shall not include endorsements of instruments for

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deposit or collection in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determinable amount of the primary obligation in respect of which such
Contingent Obligation is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof (assuming such Person is
required to perform thereunder) as determined by such Person in good faith.

"Credit Documents" shall mean this Agreement, each of the Notes, each
of the Security Documents (including the Security Documents Acknowledgments),
the Subsidiary Guaranty (including the Subsidiary Guaranty Acknowledgment) and
any documents executed in connection therewith.

"Credit Event" shall mean and include the making of a Loan or the
issuance of a Letter of Credit.

"Credit Party" shall mean the Borrower and the Subsidiary Guarantors.

"Default" shall mean any event, act or condition which with notice or
lapse of time, or both, would constitute an Event of Default.

"Defaulting Bank" shall mean any Bank with respect to which a Bank
Default is in effect.

"Dividends" shall have the meaning provided in Section 8.07.

"Documents" shall mean, collectively, (a) the Credit Documents and (b)
the Senior Note Documents.

"Eligible Transferee" shall mean and include a commercial bank,
financial institution or other "accredited investor" (as defined by Regulation D
of the Securities Act of 1933).

"Employment Agreements" shall have the meaning provided in Section
5.06(v).

"Environmental Claims" shall mean any and all administrative,
regulatory or judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, administrative investigations or
proceedings relating in any way to any violation of or any liability under any
Environmental Law or any permit issued, or under any approval given, under any
such Environmental Law (hereafter, "Claims"), including, without limitation,
(a) any and all Claims by governmental or regulatory authorities for
enforcement, cleanup, removal, response, remedial or other actions or damages

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pursuant to any applicable Environmental Law, and (b) any and all Claims by any
third party seeking damages, contribution, indemnification, cost recovery,
compensation or injunctive relief resulting from Hazardous Materials arising
from alleged injury or threat of injury to health, safety or the environment.

"Environmental Law" shall mean any applicable Federal, state, foreign
or local statute, law, rule, regulation, ordinance, code, rule of common law or
written and binding policy or guide, now or hereafter in effect and in each case
as amended, and any judicial or administrative interpretation thereof, including
any judicial or administrative order, consent decree or judgment, relating to
the environment, health, safety or Hazardous Materials, including, without
limitation, CERCLA; RCRA; the Federal Water Pollution Control Act, as amended,
33 U.S.C. Section 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C.
Section 7401 et seq.; the Clean Air Act, 42 U.S.C. Section 7401 et seq.; the
Safe Drinking Water Act, 42 U.S.C. Section 3808 et seq.; the Oil Pollution Act
of 1990, 33 U.S.C. Section 2701 et seq.; and any applicable state and local or
foreign counterparts or equivalents.

"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated and rulings
issued thereunder. Section references to ERISA are to ERISA, as in effect at
the date of this Agreement and any subsequent provisions of ERISA, amendatory
thereof, supplemental thereto or substituted therefor.

"ERISA Affiliate" shall mean each person (as defined in Section 3(9)
of ERISA) which together with the Borrower or a Subsidiary of the Borrower would
be deemed to be a "single employer" within the meaning of Section 414(b), (c),
(m) or (o) of the Code.

"Eurodollar Loans" shall mean each Loan bearing interest at the rates
provided in Section 1.08(b).

"Eurodollar Rate" shall mean with respect to each Interest Period for
a Eurodollar Loan, (i) the offered quotation to first-class banks in the New
York interbank Eurodollar market by the Administrative Agent for dollar deposits
of amounts in same day funds comparable to the outstanding principal amount of
the Eurodollar Loan of the Administrative Agent for which an interest rate is
then being determined with maturities comparable to the Interest Period to be
applicable to such Eurodollar Loan, determined as of 10:00 A.M. (New York time)
on the date which is two Business Days prior to the commencement of such
Interest Period divided (and rounded upward to the next whole multiple of 1/16
of 1%) by (ii) a percentage equal to 100% minus the then stated maximum rate of
all reserve requirements (including without limitation any marginal, emergency,
supplemental, special or other reserves) applicable to any member bank of the
Federal Reserve System in respect of Eurocurrency liabilities as defined in
Regulation D (or any successor category of liabilities under Regulation D).

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"Event of Default" shall have the meaning provided in Section 9.

"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.

"Existing Indebtedness" shall have the meaning provided in Section
6.21.

"Existing Indebtedness Agreements" shall have the meaning provided in
Section 5.06(ii).

"Existing Ventures" shall have the meaning provided in Section
8.05(a).

"Facing Fee" shall have the meaning provided in Section 3.01(c).

"Farallon" shall mean, collectively, Farallon Capital Partners, L.P.,
Farallon Capital Institutional Partners, L.P., RR Capital Partners, L.P., and
Farallon Capital Institutional Partners II, L.P.

"Federal Funds Effective Rate" shall mean, for any period, a
fluctuating interest rate equal for each day during such period to the weighted
average of the rates on overnight Federal Funds transactions with members of the
Federal Reserve System arranged by Federal Funds brokers, as published for such
day (or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of New York, or, if such rate is not so published
for any day which is a Business Day, the average of the quotations for such day
on such transactions received by the Administrative Agent from three Federal
Funds brokers of recognized standing selected by the Administrative Agent.

"Fees" shall mean all amounts payable pursuant to, or referred to in,
Section 3.01.

"FIRREA" shall mean Financial Institution Reform, Recovery and
Enforcement Act of 1989.

"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect on the date of this Agreement; it being
understood and agreed that determinations in accordance with GAAP for purposes
of Section 8, including defined terms as used therein, are subject (to the
extent provided therein) to Section 12.07(a).

"Hazardous Materials" shall mean (a) any petroleum or petroleum
products, radioactive materials, asbestos in any form that is or could become
friable, urea formaldehyde foam insulation, transformers or other equipment that

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contained, electric fluid containing levels of polychlorinated biphenyls, and
radon gas; (b) any chemicals, materials or substances defined as or included in
the definition of "hazardous substances," "hazardous waste," "hazardous
materials," "extremely hazardous waste," "restricted hazardous waste," "toxic
substances," "toxic pollutants," "contaminants," or "pollutants," or words of
similar meaning and regulatory effect, under any applicable Environmental Law;
and (c) any other chemical, material or substance, exposure to which is
prohibited, limited or regulated by any governmental authority.

"Indebtedness" of any Person shall mean, without duplication, (i) all
indebtedness of such Person for borrowed money, (ii) the deferred purchase price
of assets or services which in accordance with GAAP would be shown on the
liability side of the balance sheet of such Person, (iii) the face amount of all
letters of credit issued for the account of such Person and, without
duplication, all drafts drawn thereunder, (iv) all Indebtedness of a second
Person secured by any Lien on any property owned by such first Person, whether
or not such indebtedness has been assumed, (v) all Capitalized Lease Obligations
of such Person, (vi) all obligations of such Person to pay a specified purchase
price for goods or services whether or not delivered or accepted, i.e.,
take-or-pay and similar obligations, (vii) all net obligations of such Person
under Interest Rate Agreements and (viii) all Contingent Obligations of such
Person, (other than Contingent Obligations arising from the guaranty by such
Person of the obligations of the Borrower and/or its Subsidiaries to the extent
such guaranteed obligations do not constitute Indebtedness), provided that
Indebtedness shall not include trade payables, deferred revenue, taxes and
accrued expenses, in each case arising in the ordinary course of business.

"Interest Period" with respect to any Eurodollar Loan shall mean the
interest period applicable thereto, as determined pursuant to Section 1.09.

"Interest Rate Agreement" shall mean any interest rate swap agreement,
any interest rate cap agreement, any interest rate collar agreement or other
similar agreement or arrangement designed to hedge the position of the Borrower
or any Subsidiary with respect to interest rates.

"Investors" shall mean, collectively, BRS, the BRS Investors,
Farallon, and the Management Investors and their respective "Permitted
Transferees" (as such term is defined in the Stockholders Agreement).

"L/C Supportable Obligations" shall mean and include obligations of
the Borrower or its Subsidiaries incurred in the ordinary course of business
(including without limitation pursuant to lease obligations in respect of real
property leased by the Borrower or any of its Subsidiaries) and such other
obligations of the Borrower or any of its Subsidiaries as are reasonably
acceptable to the Administrative Agent and the respective Letter of Credit
Issuer and otherwise permitted to exist pursuant to the terms of this Agreement.

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"Leasehold" of any Person shall mean all of the right, title and
interest of such Person as lessee or licensee in, to and under leases or
licenses of land, improvements and/or fixtures.

"Letter of Credit" shall have the meaning provided in Section 2.01(a).

"Letter of Credit Fee" shall have the meaning provided in Section
3.01(b).

"Letter of Credit Issuer" shall mean BTCo and any other Bank which at
the request of the Borrower and with the consent of the Administrative Agent
agrees, in such Bank's sole discretion, to become a Letter of Credit Issuer for
purposes of issuing Letters of Credit pursuant to Section 2.

"Letter of Credit Outstandings" shall mean, at any time, the sum of,
without duplication, (i) the aggregate Stated Amount of all outstanding Letters
of Credit and (ii) the aggregate amount of all Unpaid Drawings in respect of all
Letters of Credit.

"Letter of Credit Request" shall have the meaning provided in Section
2.03(a).

"Lien" shall mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any agreement to give any of
the foregoing, any conditional sale or other title retention agreement or any
lease in the nature thereof).

"Loan" shall have the meaning provided in Section 1.01.

"Management Agreements" shall have the meaning provided in Section
5.06 (iv).

"Management Investors" shall mean the directors, executive officers
and other senior management investors of the Borrower party to the
Recapitalization Agreement or the Stockholders Agreement.

"Mandatory Borrowing" shall have the meaning provided in Section
1.01(c).

"Margin Stock" shall have the meaning provided in Regulation U.

"Material Adverse Effect" shall mean a material adverse effect on the
business, property, assets, liabilities, operations, condition (financial or
otherwise) or prospects of the Borrower or of the Borrower and its Subsidiaries
taken as a whole, after giving effect to the Transaction.

"Maturity Date" shall mean October 15, 2002.

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"Maximum Swingline Amount" shall mean $2,000,000.

"Minimum Borrowing Amount" shall mean (i) for Revolving Loans
maintained as Base Rate Loans, $250,000 and (ii) for Revolving Loans maintained
as Eurodollar Loans, $500,000.

"Mortgage" shall mean the Mortgage as defined in, and delivered
pursuant to, the Original Credit Agreement, as same may be amended, modified or
supplemented from time to time.

"Mortgage Policies" shall have the meaning provided in the Original
Credit Agreement.

"Mortgaged Properties" shall mean each of the Real Properties listed
on Annex IV hereto and designated as a "Mortgaged Property" thereon.

"Multiemployer Plan" shall have the meaning provided in Section
4001(a)(3) of ERISA.

"Net Cash Proceeds" shall mean, with respect to any Asset Sale, the
Cash Proceeds resulting therefrom net of expenses of sale (including payment of
principal, premium and interest of other Indebtedness secured by the assets the
subject of the Asset Sale and required to be, and which is, repaid under the
terms thereof as a result of such Asset Sale), and incremental taxes paid or
payable as a result thereof; provided that Net Cash Proceeds shall not include
cash deposited with the Administrative Agent pursuant to a cash collateral
arrangement pursuant to this Agreement.

"Net Interest Coverage Ratio" shall mean, for any Test Period, the
ratio of (i) Consolidated EBITDAD for such Test Period to (ii) Consolidated Net
Interest Expense for such Test Period.

"Net Leverage Ratio" shall mean, at any date of determination, the
ratio of (i) Consolidated Indebtedness on such date less cash and Cash
Equivalents held by the Borrower and its Subsidiaries on such date to (ii)
Consolidated EBITDAD for the Test Period most recently ended (taken as one
accounting period).

"Non-Defaulting Bank" shall mean each Bank other than a Defaulting
Bank.

"Note" shall mean and include each Revolving Note and the Swingline
Note.

"Notice of Borrowing" shall have the meaning provided in Section
1.03(a).

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"Notice of Conversion" shall have the meaning provided in Section
1.06.

"Notice Office" shall mean the office of the Administrative Agent
located at 130 Liberty Street, New York, New York or such other office as the
Administrative Agent may designate to the Borrower from time to time.

"Obligations" shall mean all amounts, direct or indirect, contingent
or absolute, of every type or description, and at any time existing, owing to
the Administrative Agent, the Collateral Agent or any Bank pursuant to the terms
of this Agreement or any other Credit Document.

"Option Agreements" shall mean, collectively, (i) the Preferred Stock
Option Agreements by and among the Borrower and the Preferred Optionholders and
(ii) the Common Stock Option Agreements by and among the Borrower and the Common
Optionholders.

"Option Plan" shall mean the Town Sports International, Inc. 1996
Stock Option Plan, as in effect from time to time.

"Optionholders" shall mean, collectively, the Common Optionholders and
the Preferred Optionholders.

"Options" shall mean, collectively, (i) the options to purchase Series
B Preferred Stock issued pursuant to the Recapitalization Documents and (ii) the
options to purchase Common Stock granted pursuant to the Option Plan.

"Original Bank" shall mean each Person which was a Bank under, and as
defined in, the Original Credit Agreement.

"Original Credit Agreement" shall have the meaning provided in the
first WHEREAS clause of this Agreement.

"Original Loans" shall mean the Loans under, and as defined in, the
Original Credit Agreement.

"Participant" shall have the meaning provided in Section 2.05(a).

"Payment Office" shall mean the office of the Administrative Agent
located at 130 Liberty Street, New York, New York or such other office as the
Administrative Agent may designate to the Borrower from time to time.

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"PBGC" shall mean the Pension Benefit Guaranty Corporation established
pursuant to Section 4002 of ERISA, or any successor thereto.

"Percentage" shall mean at any time for each Bank the percentage
obtained by dividing such Bank's Commitment by the Total Commitment, provided
that if the Total Commitment has been terminated, the Percentage of each Bank
shall be determined by dividing such Bank's Commitment immediately prior to such
termination by the Total Commitment immediately prior to such termination.

"Permissible Transferees" shall mean (i) in the case of BRS or any BRS
Investor, (A) any Affiliate of BRS (other than any corporation or other Person
(except for any corporation or other Person engaged in a business similar,
complementary or related to the nature or type of the business of the Borrower
and its Subsidiaries) controlled by, or any investment fund managed by, BRS),
(B) any managing director, general partner, limited partner, director, officer
or employee of BRS or any Affiliate thereof (collectively, "BRS Associates"),
and his or her spouse, parents, siblings, members of his or her immediate family
(including adopted children) and/or direct lineal descendants or (C) the heirs,
executors, administrators, testamentary trustees, legatees or beneficiaries of
any BRS Associate and (D) any trust, the beneficiaries of which, or a
corporation or partnership, the stockholders or partners of which, include only
a BRS Associate, his or her spouse, parents, siblings, or direct lineal
descendants, and (ii) in the case of any Management Investor, (A) his or her
executor, administrator, testamentary trustee, legatee or beneficiaries, (B) his
or her spouse, parents, siblings, members of his or her immediate family
(including adopted children) and/or direct lineal descendants or (C) a trust,
the beneficiaries of which, or a corporation or partnership, the stockholders or
partners of which, include only the Management Investor, as the case may be, and
his or her spouse, parents, siblings, members of his or her immediate family
(including adopted children) and/or direct lineal descendants.

"Permitted Encumbrances" shall mean, with respect to any Real Property
subject to a Mortgage or an Additional Mortgage, such exceptions to title as are
set forth in the title insurance policy or title commitment delivered with
respect thereto, all of which exceptions must be reasonably acceptable to the
Administrative Agent.

"Permitted Liens" shall have the meaning provided in Section 8.03.

"Person" shall mean any individual, partnership, joint venture, firm,
corporation, limited liability company, association, trust or other enterprise
or any government or political subdivision or any agency, department or
instrumentality thereof.

"Plan" shall mean any pension plan as defined in Section 3(2) of
ERISA, which is maintained or contributed to by (or to which there is an
obligation to contribute of) the Borrower, a Subsidiary of the Borrower or an

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ERISA Affiliate, and each such plan for the five-year period immediately
following the latest date on which the Borrower, a Subsidiary of the Borrower,
or an ERISA Affiliate maintained, contributed to or had an obligation to
contribute to such plan.

"Pledge Agreement" shall mean the Pledge Agreement delivered in, and
delivered pursuant to, the Original Credit Agreement, as same may be amended,
modified or supplemented from time to time.

"Pledged Securities" shall mean all the Pledged Securities as defined
in the Pledge Agreement.

"Preferred Optionholders" shall mean those employees of the Borrower
designated as Preferred Optionholders on Annex X.

"Preferred Stock" shall mean collectively, the Series A Preferred
Stock and the Series B Preferred Stock.

"Prime Lending Rate" shall mean the rate which BTCo announces from
time to time as its prime lending rate, the Prime Lending Rate to change when
and as such prime lending rate changes. The Prime Lending Rate is a reference
rate and does not necessarily represent the lowest or best rate actually charged
to any customer. BTCo may make commercial loans or other loans at rates of
interest at, above or below the Prime Lending Rate.

"Projections" shall have the meaning set forth in Section 5.15.

"RCRA" shall mean the Resource Conservation and Recovery Act, as
amended, 42 U.S.C. Section 6901 et seq.

"Real Property" of any Person shall mean all of the right, title and
interest of such Person in and to land, improvements and fixtures, including
Leaseholds.

"Recapitalization Agreement" shall mean the Agreement and Plan of
Merger, dated November 8, 1996, by and among the Borrower, the Stockholders and
Merger Sub, as amended, restated or modified prior to the date hereof.

"Recovery Event" shall mean the receipt by the Borrower or any of its
Subsidiaries of any cash insurance proceeds or condemnation award payable (i) by
reason of theft, loss, physical destruction or damage or any other similar event
with respect to any property or asset of the Borrower or any of its
Subsidiaries, or (ii) by reason of any condemnation, taking, seizing or similar
event with respect to any property or asset of the Borrower or any of its
Subsidiaries.

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"Register" shall have the meaning provided in Section 12.16.

"Regulation D" shall mean Regulation D of the Board of Governors of
the Federal Reserve System as from time to time in effect and any successor to
all or a portion thereof establishing reserve requirements.

"Regulation G, T, U and X" shall mean Regulations G, T, U and X of the
Board of Governors of the Federal Reserve System as from time to time in effect
and any successor to all or a portion thereof establishing margin requirements.

"Reinvestment Assets" shall mean any assets to be employed in the
business of the Borrower and its Subsidiaries as described in Sections 3.03(c),
3.03(g) and 8.02(e).

"Reinvestment Election" shall have the meaning provided in Section
3.03(c).

"Reinvestment Notice" shall mean a written notice signed by an
Authorized Officer of the Borrower stating that the Borrower, in good faith,
intends and expects to use all or a specified portion of the Net Cash Proceeds
of an Asset Sale to purchase, construct or otherwise acquire Reinvestment
Assets.

"Reinvestment Prepayment Amount" shall mean, with respect to any
Reinvestment Election, the amount, if any, on the Reinvestment Prepayment Date
relating thereto by which (a) the Anticipated Reinvestment Amount in respect of
such Reinvestment Election exceeds (b) the aggregate amount thereof expended by
the Borrower and its Subsidiaries to acquire Reinvestment Assets.

"Reinvestment Prepayment Date" shall mean, with respect to any
Reinvestment Election, the earliest of (i) the date, if any, upon which the
Administrative Agent, on behalf of the Required Banks, shall have delivered a
written termination notice to the Borrower, provided that such notice may only
be given while an Event of Default exists, (ii) the date occurring one year
after such Reinvestment Election and (iii) the date on which the Borrower shall
have determined not to, or shall have otherwise ceased to, proceed with the
purchase, construction or other acquisition of Reinvestment Assets with the
related Anticipated Reinvestment Amount.

"Replaced Bank" shall have the meaning provided in Section 1.13.

"Replacement Bank" shall have the meaning provided in Section 1.13.

"Reportable Event" shall mean an event described in Section 4043(c) of
ERISA with respect to a Plan that is subject to Title IV of ERISA other than

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those events as to which the 30-day notice period is waived under subsection
.13, .14, .16, .18, .19 or .20 of PBGC Regulation Section 4043.

"Required Banks" shall mean Non-Defaulting Banks whose outstanding
Loans and Commitments (or, if after the Total Commitment has been terminated,
outstanding Loans and Adjusted Percentage of outstanding Swingline Loans and
Letter of Credit Outstandings) constitute greater than 50% of the sum of (i) the
total outstanding Loans of Non-Defaulting Banks and (ii) the Adjusted Total
Commitment (or, if after the Total Commitment has been terminated, the total
outstanding Loans of Non-Defaulting Banks and the aggregate Adjusted Percentages
of all Non-Defaulting Banks of the total outstanding Swingline Loans and Letter
of Credit Outstandings at such time).

"Restatement Effective Date" shall have the meaning provided in
Section 12.10.

"Revolving Loan" shall have the meaning provided in Section 1.01(a).

"Revolving Note" shall have the meaning provided in Section
1.05(a)(i).

"SEC" shall mean the Securities and Exchange Commission and any
successor thereto.

"SEC Regulation D" shall mean Regulation D as promulgated under the
Securities Act of 1933, as amended, as the same may be in effect from time to
time.

"Security Agreement" shall mean the Security Agreement defined in, and
delivered pursuant to, the Original Credit Agreement, as same may be amended,
modified or supplemented from time to time.

"Security Agreement Collateral" shall mean all "Collateral" as defined
in the Security Agreement.

"Security Documents" shall mean the Pledge Agreement, the Security
Agreement, and each Mortgage.

"Security Documents Acknowledgement" shall have the meaning provided
in Section 5.12(a).

"Senior Notes" shall mean the Borrower's unsecured 9.75% Notes due
December 16, 2004, as in effect on the Restatement Effective Date and as the
same may be amended, modified or supplemented pursuant to the terms hereof and
thereof.

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"Senior Notes Documents" shall mean the Senior Notes, and each of
the other documents and agreements relating to the issuance by the Borrower
of the Senior Notes, as in the effect of the Restatement Effective Date as
the same may be amended, modified or supplemented from time to time in
accordance with the terms hereof and thereof.

"Series A Preferred Stock" shall mean the Series A Preferred Stock of
the Borrower, par value $1.00 per share.

"Series B Preferred Stock" shall mean the Series B Preferred Stock of
the Borrower, par value $1.00 per share.

"Shareholders' Agreements" shall have the meaning provided in Section
5.06(iii).

"Standby Letter of Credit" shall have the meaning provided in Section
2.01(a).

"Stated Amount" of each Letter of Credit shall mean the maximum amount
available to be drawn thereunder (regardless of whether any conditions for
drawing could then be met).

"Stockholders" shall mean Coranda S.A., Gerarda D.E., Orleans--Borbon
and the Preferred Optionholders.

"Stockholders Agreement" shall mean the Shareholders Agreement, dated
as of December 10, 1996, by and among BRS, the BRS Investors, Farallon,
Canterbury Mezzanine Capital, the Management Investors and each other
shareholder of the Borrower party thereto as the same may be amended, modified
or supplemented pursuant to the terms hereof and thereof.

"Subsidiary" of any Person shall mean and include (i) any corporation
more than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person directly or
indirectly through Subsidiaries and (ii) any partnership, association, joint
venture or other entity in which such Person directly or indirectly through
Subsidiaries, has more than a 50% equity interest at the time. Unless otherwise
expressly provided, all references herein to "Subsidiary" shall mean a
Subsidiary of the Borrower.

"Subsidiary Guarantors" shall mean each Subsidiary of the Borrower
incorporated in the United States or any State thereof.

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"Subsidiary Guaranty" shall mean the Subsidiary Guaranty as defined
in, and delivered pursuant to, the Original Credit Agreement, as same may be
amended, modified or supplemented from time to time.

"Subsidiary Guaranty Acknowledgment" shall have the meaning provided
in Section 5.13.

"Swingline Expiry Date" shall mean the date which is five Business
Days prior to the Maturity Date.

"Swingline Loan" shall have the meaning provided in Section 1.01(b).

"Swingline Note" shall have the meaning provided in Section
1.05(a)(ii).

"Taxes" shall have the meaning provided in Section 4.04(a).

"Test Period" shall mean the four consecutive fiscal quarters of the
Borrower then last ended (taken as one accounting period).

"Total Commitment" shall mean the sum of the Commitments of each of
the Banks.

"Total Unutilized Commitment" shall mean, at any time, (i) the Total
Commitment at such time less (ii) the sum of the aggregate principal amount of
all Revolving Loans and Swingline Loans outstanding at such time plus the Letter
of Credit Outstandings at such time.

"Trade Letter of Credit" shall have the meaning provided in Section
2.01(a).

"Transaction" shall mean, collectively, (i) the repayment of all
Original Loans, (ii) the issuance of the Senior Notes and (iii) the
effectiveness of this Agreement on the Restatement Effective Date.

"Transaction Expenses" shall mean all fees and expenses incurred in
connection with, and payable prior to or in connection with the closing of, the
Recapitalization and the transactions contemplated in connection with the
Recapitalization Documents and the Transaction including the financing of the
Recapitalization, and including all fees paid to any of the Banks and the
Administrative Agent hereunder, fees paid to BRS or its Affiliates permitted
hereunder; attorney's fees, accountants' fees, placement agents' fees, discounts
and commissions and brokerage, and consultant fees. Transaction Expenses shall
include the amortization of any such fees and expenses that are capitalized and
not classified as an expense on the date incurred.

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"Type" shall mean any type of Loan determined with respect to the
interest option applicable thereto, i.e., a Base Rate Loan or Eurodollar Loan.

"UCC" shall mean the Uniform Commercial Code, as in effect from time
to time in the relevant jurisdiction.

"Unfunded Current Liability" of any Plan shall mean the amount, if
any, by which the actuarial present value of the accumulated plan benefits under
the Plan as of the close of its most recent plan year exceeds the fair market
value of the assets allocable thereto, each determined in accordance with
Statement of Financial Accounting Standards No. 87, based upon the actuarial
assumptions used by the Plan's actuary in the most recent annual valuation of
the Plan.

"Unpaid Drawing" shall have the meaning provided in Section 2.04(a).

"Unutilized Commitment" for any Bank at any time shall mean the excess
of (i) the Commitment of such Bank over (ii) the sum of (x) the aggregate
outstanding principal amount of Loans made by such Bank plus (y) an amount equal
to such Bank's Adjusted Percentage of the Letter of Credit Outstandings at such
time.

"Voting Stock" shall mean, with respect to any corporation, the
outstanding stock of all classes (or equivalent interests) which ordinarily, in
the absence of contingencies, entitles holders thereof to vote for the election
of directors (or Persons performing similar functions) of such corporation, even
though the right so to vote has been suspended by the happening of such a
contingency.

"Warrant" shall mean each warrant issued pursuant to the Warrant
Agreement.

"Warrant Agreement" shall mean the Warrant Agreement dated December
10, 1996, between the Borrower and Canterbury Mezzanine Capital as the same may
be amended, restated or modified from time to time.

"Wholly-Owned Domestic Subsidiary" shall mean each Wholly-Owned
Subsidiary of the Borrower that is incorporated under the laws of the United
States or any State thereof.

"Wholly-Owned Subsidiary" of any Person shall mean any Subsidiary of
such Person to the extent all of the capital stock or other ownership interests
in such Subsidiary, other than directors' qualifying shares, is owned directly
or indirectly by such Person.

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"Written" or "in writing" shall mean any form of written
communication or a communication by means of telex, facsimile transmission,
telegraph or cable.

SECTION 11. The Administrative Agent.

11.01 Appointment. The Banks hereby designate Bankers Trust
Company as Administrative Agent (for purposes of this Section 11, the term
"Administrative Agent" shall include BTCo in its capacity as Collateral Agent
pursuant to the Security Documents) to act as specified herein and in the
other Credit Documents. Each Bank hereby irrevocably authorizes, and each
holder of any Note by the acceptance of such Note shall be deemed irrevocably
to authorize, the Administrative Agent to take such action on its behalf
under the provisions of this Agreement, the other Credit Documents and any
other instruments and agreements referred to herein or therein and to
exercise such powers and to perform such duties hereunder and thereunder as
are specifically delegated to or required of the Administrative Agent by the
terms hereof and thereof and such other powers as are reasonably incidental
thereto. The Administrative Agent may perform any of its duties hereunder or
under the other Credit Documents by or through its respective officers,
directors, agents, employees or affiliates.

11.02 Nature of Duties. The Administrative Agent shall not have
any duties or responsibilities except those expressly set forth in this
Agreement and the Security Documents. Neither the Administrative Agent nor
any of its respective officers, directors, agents, employees or affiliates
shall be liable for any action taken or omitted by it or them hereunder or
under any other Credit Document or in connection herewith or therewith,
unless caused by its or their gross negligence or willful misconduct. The
duties of the Administrative Agent shall be mechanical and administrative in
nature; the Administrative Agent shall not have by reason of this Agreement
or any other Credit Document a fiduciary relationship in respect of any Bank
or the holder of any Note; and nothing in this Agreement or any other Credit
Document, expressed or implied, is intended to or shall be so construed as to
impose upon the Administrative Agent any obligations in respect of this
Agreement or any other Credit Document except as expressly set forth herein
or therein.

11.03 Lack of Reliance on the Administrative Agent. Independently
and without reliance upon the Administrative Agent, each Bank and the holder
of each Note, to the extent it deems appropriate, has made and shall continue
to make (i) its own independent investigation of the financial condition and
affairs of the Borrower and its Subsidiaries in connection with the making
and the continuance of the Loans and the taking or not taking of any action
in connection herewith and (ii) its own appraisal of the creditworthiness of
the Borrower and its Subsidiaries and, except as expressly provided in this
Agreement, the Administrative Agent shall not have any duty or
responsibility, either initially or on a continuing basis, to provide any
Bank or the holder of any Note with any credit or other information with
respect thereto, whether coming into its possession before the making of

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the Loans or at any time or times thereafter. The Administrative Agent shall
not be responsible to any Bank or the holder of any Note for any recitals,
statements, information, representations or warranties herein or in any
document, certificate or other writing delivered in connection herewith or
for the execution, effectiveness, genuineness, validity, enforceability,
perfection, collectability, priority or sufficiency of this Agreement or any
other Credit Document or the financial condition of the Borrower and its
Subsidiaries or be required to make any inquiry concerning either the
performance or observance of any of the terms, provisions or conditions of
this Agreement or any other Credit Document, or the financial condition of
the Borrower and its Subsidiaries or the existence or possible existence of
any Default or Event of Default.

11.04 Certain Rights of the Administrative Agent. If the
Administrative Agent shall request instructions from the Required Banks with
respect to any act or action (including failure to act) in connection with
this Agreement or any other Credit Document, the Administrative Agent shall
be entitled to refrain from such act or taking such action unless and until
the Administrative Agent shall have received instructions from the Required
Banks; and the Administrative Agent shall not incur liability to any Person
by reason of so refraining. Without limiting the foregoing, neither any Bank
nor the holder of any Note shall have any right of action whatsoever against
the Administrative Agent as a result of the Administrative Agent acting or
refraining from acting hereunder or under any other Credit Document in
accordance with the instructions of the Required Banks.

11.05 Reliance. The Administrative Agent shall be entitled to
rely, and shall be fully protected in relying, upon any note, writing,
resolution, notice, statement, certificate, telex, teletype or telecopier
message, cablegram, radiogram, order or other document or telephone message
signed, sent or made by any Person that the Administrative Agent believed to
be the proper Person, and, with respect to all legal matters pertaining to
this Agreement and any other Credit Document and its duties hereunder and
thereunder, upon advice of counsel selected by the Administrative Agent
(which may be counsel for the Borrower).

11.06 Indemnification. To the extent the Administrative Agent is
not reimbursed and indemnified by the Borrower or the Subsidiary Guarantors,
the Banks will reimburse and indemnify the Administrative Agent, in
proportion to their respective "percentages" as used in determining the
Required Banks, for and against any and all liabilities, obligations, losses,
damages, penalties, claims, actions, judgments, costs, expenses or
disbursements of whatsoever kind or nature which may be imposed on, asserted
against or incurred by the Administrative Agent in performing its respective
duties hereunder or under any other Credit Document, in any way relating to
or arising out of this Agreement or any other Credit Document; provided that
no Bank shall be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from the Administrative Agent's gross negligence or
willful misconduct.

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11.07 The Administrative Agent in Its Individual Capacity. With
respect to its obligation to make Loans under this Agreement, the
Administrative Agent shall have the rights and powers specified herein for a
"Bank" and may exercise the same rights and powers as though it were not
performing the duties specified herein; and the term "Banks," "Required
Banks," "holders of Notes" or any similar terms shall, unless the context
clearly otherwise indicates, include the Administrative Agent in its
individual capacity. The Administrative Agent may accept deposits from, lend
money to, and generally engage in any kind of banking, trust or other
business with any Credit Party or any Affiliate of any Credit Party as if it
were not performing the duties specified herein, and may accept fees and
other consideration from the Borrower or any other Credit Party for services
in connection with this Agreement and otherwise without having to account for
the same to the Banks.

11.08 Holders. The Administrative Agent may deem and treat the
payee of any Note as the owner thereof for all purposes hereof unless and
until a written notice of the assignment, transfer or endorsement thereof, as
the case may be, shall have been filed with the Administrative Agent. Any
request, authority or consent of any Person who, at the time of making such
request or giving such authority or consent, is the holder of any Note shall
be conclusive and binding on any subsequent holder, transferee, assignee or
indorsee, as the case may be, of such Note or of any Note or Notes issued in
exchange therefor.

11.09 Resignation by the Administrative Agent. (a) The
Administrative Agent may resign from the performance of all its functions and
duties hereunder and/or under the other Credit Documents at any time by
giving 30 Business Days' prior written notice to the Borrower and the Banks.
Such resignation shall take effect upon the appointment of a successor
Administrative Agent pursuant to clauses (b) and (c) below or as otherwise
provided below.

(b) Upon any such notice of resignation, the Required Banks shall
appoint a successor Administrative Agent hereunder or thereunder who shall be
a commercial bank or trust company reasonably acceptable to the Borrower.

(c) If a successor Administrative Agent shall not have been so
appointed within such 30 Business Day period, the Administrative Agent, with
the consent of the Borrower (which consent shall not be unreasonably
withheld), shall then appoint a successor Administrative Agent who shall
serve as Administrative Agent hereunder or thereunder until such time, if
any, as the Required Banks appoint a successor Administrative Agent as
provided above.

(d) If no successor Administrative Agent has been appointed
pursuant to clause (b) or (c) above by the 30th Business Day after the date
such notice of resignation was given by the Administrative Agent, the
Administrative Agent's resignation shall become effective and the Required
Banks shall thereafter perform all the duties of the Administrative

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Agent hereunder and/or under any other Credit Document until such time, if
any, as the Banks appoint a successor Administrative Agent as provided above.

SECTION 12. Miscellaneous.

12.01 Payment of Expenses, etc. The Borrower agrees to: (i)
whether or not the transactions herein contemplated are consummated, pay all
reasonable out-of-pocket costs and expenses of the Administrative Agent in
connection with the negotiation, preparation, execution and delivery of the
Credit Documents and the documents and instruments referred to therein and
any amendment, waiver or consent relating thereto (including, without
limitation, the reasonable fees and disbursements of White & Case) and of the
Administrative Agent and each of the Banks in connection with the enforcement
of the Credit Documents and the documents and instruments referred to therein
(including, without limitation, the reasonable fees and disbursements of
counsel for the Administrative Agent and one counsel (or in-house counsel)
for each of the Banks); (ii) pay and hold each of the Banks harmless from and
against any and all present and future stamp and other similar taxes with
respect to the foregoing matters and save each of the Banks harmless from and
against any and all liabilities with respect to or resulting from any delay
or omission (other than to the extent attributable to such Bank) to pay such
taxes; and (iii) indemnify each Bank (including in its capacity as the
Administrative Agent or a Letter of Credit Issuer), its officers, directors,
employees, representatives and agents from and hold each of them harmless
against any and all losses, liabilities, claims, damages or expenses incurred
by any of them (whether asserted by the Borrower or otherwise) as a result
of, or arising out of, or in any way related to, or by reason of, (a) any
investigation, litigation or other proceeding (whether or not any Bank is a
party thereto) related to the entering into and/or performance of any Credit
Document or the use of the proceeds of any Loans hereunder or the
Recapitalization or the consummation of any transactions contemplated in any
Credit Document, including, without limitation, the reasonable fees and
disbursements of counsel incurred in connection with any such investigation,
litigation or other proceeding (but excluding any such losses, liabilities,
claims, damages or expenses to the extent incurred by reason of the gross
negligence or willful misconduct of the Person to be indemnified) or (b) the
actual or alleged presence of Hazardous Materials in the air, surface water,
groundwater, surface or subsurface of any Real Property owned or at any time
operated by the Borrower or any of its Subsidiaries, the generation, storage,
transportation or disposal of Hazardous Materials at any location whether or
not owned or operated by the Borrower or any of its Subsidiaries, the
non-compliance of any Real Property owned or at any time operated by the
Borrower or any of its Subsidiaries with federal, state and local laws,
regulations, and ordinances (including applicable permits thereunder)
applicable to any such Real Property, or any Environmental Claim asserted
against the Borrower, any of its Subsidiaries, or any such Real Property,
including, in each case, without limitation, the reasonable fees and
disbursements of counsel and other consultants incurred in connection with
any such investigation, litigation or other proceeding (but excluding any
losses, liabilities, claims, damages or expenses to the extent incurred by

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reason of the gross negligence or willful misconduct of the Person to be
indemnified). To the extent that the undertaking to indemnify, pay or hold
harmless the Administrative Agent or any Bank set forth in the preceding
sentence may be unenforceable because it is violative of any law or public
policy, the Borrower shall make the maximum contribution to the payment and
satisfaction of each of the indemnified liabilities which is permissible
under applicable law.

12.02 Right of Setoff. In addition to any rights now or hereafter
granted under applicable law or otherwise, and not by way of limitation of
any such rights, if an Event of Default then exists, each Bank is hereby
authorized at any time or from time to time, without presentment, demand,
protest or other notice of any kind to any Credit Party or to any other
Person, any such notice being hereby expressly waived, to set off and to
appropriate and apply any and all deposits (general or special) and any other
Indebtedness at any time held or owing by such Bank (including without
limitation by branches and agencies of such Bank wherever located) to or for
the credit or the account of any Credit Party against and on account of the
Obligations and liabilities of such Credit Party to such Bank under this
Agreement or under any of the other Credit Documents, including, without
limitation, all interests in Obligations of such Credit Party purchased by
such Bank pursuant to Section 12.06(b), and all other claims of any nature or
description arising out of or connected with this Agreement or any other
Credit Document, irrespective of whether or not such Bank shall have made any
demand hereunder and although said Obligations, liabilities or claims, or any
of them, shall be contingent or unmatured.

12.03 Notices. (a) Except as otherwise expressly provided herein,
all notices and other communications provided for hereunder shall be in
writing (including telegraphic, telex, telecopier or cable communication) and
mailed, telegraphed, telexed, telecopied, cabled or delivered, if to a Credit
Party, at the address specified opposite its signature below or in the other
relevant Credit Documents, as the case may be, if to the Administrative
Agent, at its Notice Office; if to any Bank, at its address specified for
such Bank on Annex II; or, at such other address as shall be designated by
any party in a written notice to the other parties hereto. All such notices
and communications shall be mailed, telegraphed, telexed, telecopied, or
cabled or sent by overnight courier, and shall be effective when received.

(b) Without in any way limiting the obligation of the Borrower to
confirm in writing any telephonic notice permitted to be given hereunder, the
Administrative Agent or BTCo (in the case of a Borrowing of Swingline Loans)
or any Letter of Credit Issuer, as the case may be, may prior to receipt of
written confirmation act without liability upon the basis of such telephonic
notice, believed by the Administrative Agent or BTCo or any Letter of Credit
Issuer in good faith to be from an Authorized Officer of the Borrower. In
each such case, the Borrower hereby waives the right to dispute the
Administrative Agent's or BTCo's record of the terms of such telephonic
notice.

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12.04 Assignments; Participations; Etc. (a) This Agreement shall
be binding upon and inure to the benefit of and be enforceable by the
respective successors and assigns of the parties hereto, provided that the
Borrower may not assign or transfer any of its rights or obligations
hereunder without the prior written consent of the Banks. Each Bank may at
any time grant participations in any of its rights hereunder or under any of
the Notes to another financial institution, provided that in the case of any
such participation, the participant shall not have any rights under this
Agreement or any of the other Credit Documents (the participant's rights
against such Bank in respect of such participation to be those set forth in
the agreement executed by such Bank in favor of the participant relating
thereto) and all amounts payable by the Borrower hereunder shall be
determined as if such Bank had not sold such participation, except that the
participant shall be entitled to the benefits of Sections 1.10, 2.06 and 4.04
to the extent that such Bank would be entitled to such benefits if the
participation had not been entered into or sold, and, provided further that
no Bank shall transfer, grant or assign any participation under which the
participant shall have rights to approve any amendment to or waiver of this
Agreement or any other Credit Document except to the extent such amendment or
waiver would (i) extend the final scheduled maturity of any Loan or Note or
Letter of Credit (unless such Letter of Credit is not extended beyond the
Maturity Date) in which such participant is participating (it being
understood that any waiver of the application of any prepayment or the method
of any application of any prepayment to, the amortization of the Loans shall
not constitute an extension of the final maturity date), or reduce the rate
or extend the time of payment of interest or Fees thereon (except in
connection with a waiver of the applicability of any post-default increase in
interest rates), or reduce the principal amount thereof (it being understood
that any amendment or modification to the financial definitions in this
Agreement shall not constitute a reduction in the rate of interest for
purposes of this clause (i)), or increase such participant's participating
interest in any Commitment over the amount thereof then in effect (it being
understood that (x) a waiver of any Default or Event of Default or of a
mandatory reduction in the Total Commitment, or a mandatory prepayment, shall
not constitute a change in the terms of any Commitment and (y) an increase in
any Commitment or Loan shall be permitted without the consent of any
participant's participation is not increased as a result thereof), (ii)
release all or substantially all of the Collateral which support the Loans in
which such participant is participating (except as expressly permitted in any
Credit Document) or (iii) consent to the assignment or transfer by the
Borrower of any of its rights and obligations under this Agreement.

(b) Notwithstanding the foregoing, (x) any Bank may assign all or a
portion of its outstanding Loans and/or Commitment and its rights and
obligations hereunder to an Affiliate of such Bank or to another Bank, and
(y) with the consent of the Administrative Agent (which consent shall not be
unreasonably withheld), any Bank may assign all or a portion of its
outstanding Commitment and its rights and obligations hereunder to one or
more Eligible Transferees. No assignment pursuant to the immediately
preceding sentence shall to the extent such assignment represents an
assignment to an institution other than one

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<PAGE>

or more Banks hereunder, be in an aggregate amount less than $5,000,000
unless the entire Commitment and outstanding Loans of the assigning Bank is
so assigned. If any Bank so sells or assigns all or a part of its rights
hereunder or under the Notes, any reference in this Agreement or the Notes to
such assigning Bank shall thereafter refer to such Bank and to the respective
assignee to the extent of their respective interests and the respective
assignee shall have, to the extent of such assignment (unless otherwise
provided therein), the same rights and benefits as it would if it were such
assigning Bank. Each assignment pursuant to this Section 12.04(b) shall be
effected by the assigning Bank and the assignee Bank executing an Assignment
and Agreement (the "Assignment and Assumption Agreement") substantially in
the form of Exhibit L (appropriately completed). In the event of (and at the
time of) any such assignment, either the assigning or the assignee Bank shall
pay to the Administrative Agent a nonrefundable assignment fee of $3,500, and
at the time of any assignment pursuant to this Section 12.04(b), (i) Annex I
shall be deemed to be amended to reflect the Commitment of the respective
assignee (which shall result in a direct reduction to the Commitment of the
assigning Bank) and of the other Banks, and (ii) if any such assignment
occurs after the Restatement Effective Date, the Borrower will issue new
Notes to the respective assignee and to the assigning Bank in conformity with
the requirements of Section 1.05. No transfer or assignment under this
Section 12.04(b) will be effective until recorded by the Administrative Agent
on the Register pursuant to Section 12.16. To the extent of any assignment
pursuant to this Section 12.04(b), the assigning Bank shall be relieved of
its obligations hereunder with respect to its assigned Commitment. At the
time of each assignment pursuant to this Section 12.04(b) to a Person which
is not already a Bank hereunder and which is not a United States person (as
such term is defined in Section 7701(a)(30) of the Code) for Federal income
tax purposes, the respective assignee Bank shall provide to the Borrower and
the Administrative Agent the appropriate Internal Revenue Service Forms (and,
if applicable, a Section 4.04(b)(ii) Certificate) described in Section
4.04(b). To the extent that an assignment of all or any portion of a Bank's
Commitments and related outstanding Obligations pursuant to Section 1.13 or
this Section 12.04(b) would, at the time of such assignment, result in
increased costs under Section 1.10, 1.11, 2.06 or 4.04 which exceed those
being charged, if any, by the respective assigning Bank prior to such
assignment, then the Borrower shall not be obligated to pay such excess
increased costs (although the Borrower shall be obligated to pay any other
increased costs of the type described above resulting from changes giving
rise to such increased costs after the date of the respective assignment).
Each Bank and the Borrower agree to execute such documents (including without
limitation amendments to this Agreement and the other Credit Documents) as
shall be necessary to effect the foregoing.

(c) Nothing in this Agreement shall prevent or prohibit any Bank
from pledging its Notes or Loans to a Federal Reserve Bank in support of
borrowings made by such Bank from such Federal Reserve Bank.

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(d) Notwithstanding any other provisions of this Section 12.04, no
transfer or assignment of the interests or obligations of any Bank hereunder
or any grant of participation therein shall be permitted if such transfer,
assignment or grant would require the Borrower to file a registration
statement with the SEC or to qualify the Loans under the "Blue Sky" laws of
any State.

(e) Each Bank initially party to this Agreement hereby represents,
and each Person that became a Bank pursuant to an assignment permitted by
this Section 12 will, upon its becoming party to this Agreement, represent
that it is an Eligible Transferee which makes loans in the ordinary course of
its business and that it will make or acquire Loans for its own account in
the ordinary course of such business, provided that subject to the preceding
clauses (a) and (b), the disposition of any promissory notes or other
evidences of or interests in Indebtedness held by such Bank shall at all
times be within its exclusive control.

12.05 No Waiver; Remedies Cumulative. No failure or delay on the
part of the Administrative Agent or any Bank in exercising any right, power
or privilege hereunder or under any other Credit Document and no course of
dealing between any Credit Party and the Administrative Agent or any Bank
shall operate as a waiver thereof; nor shall any single or partial exercise
of any right, power or privilege hereunder or under any other Credit Document
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege hereunder or thereunder. The rights and remedies
herein expressly provided are cumulative and not exclusive of any rights or
remedies which the Administrative Agent or any Bank would otherwise have. No
notice to or demand on any Credit Party in any case shall entitle any Credit
Party to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the Administrative
Agent or the Banks to any other or further action in any circumstances
without notice or demand.

12.06 Payments Pro Rata. (a) The Administrative Agent agrees that
promptly after its receipt of each payment from or on behalf of any Credit
Party in respect of any Obligations of such Credit Party hereunder, it shall
distribute such payment to the Banks (other than any Bank that has expressly
waived its right to receive its pro rata share thereof) pro rata based upon
their respective shares, if any, of the Obligations with respect to which
such payment was received.

(b) Each of the Banks agrees that, if it should receive any amount
hereunder (whether by voluntary payment, by realization upon security, by the
exercise of the right of setoff or banker's lien, by counterclaim or cross
action, by the enforcement of any right under the Credit Documents, or
otherwise) which is applicable to the payment of the principal of, or
interest on, the Loans or Fees, of a sum which with respect to the related
sum or sums received by other Banks is in a greater proportion than the total
of such Obligation then owed and due to such Bank bears to the total of such
Obligation then owed and due to all of the Banks immediately prior to such
receipt, then such Bank receiving such excess payment

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<PAGE>

shall purchase for cash without recourse or warranty from the other Banks an
interest in the Obligations of the respective Credit Party to such Banks in
such amount as shall result in a proportional participation by all of the
Banks in such amount, provided that if all or any portion of such excess
amount is thereafter recovered from such Bank, such purchase shall be
rescinded and the purchase price restored to the extent of such recovery, but
without interest.

(c) Notwithstanding anything to the contrary contained herein, the
provisions of the preceding Sections 12.06(a) and (b) shall be subject to the
express provisions of this Agreement which require, or permit, differing
payments to be made to Non-Defaulting Banks as opposed to Defaulting Banks.

12.07 Calculations; Computations. (a) The financial statements to
be furnished to the Banks pursuant hereto shall be made and prepared in
accordance with GAAP consistently applied throughout the periods involved
(except as set forth in the notes thereto or as otherwise disclosed in
writing by the Borrower to the Banks), provided that (x) except as otherwise
specifically provided herein, all computations determining compliance with
Section 8, including definitions used therein, and in determining the amount
of Excess Cash Flow Ratio, shall utilize accounting principles and policies
in effect at the time of the preparation of, and in conformity with those
used to prepare, the May 31, 1996 historical financial statements of the
Borrower delivered to the Banks as described in Section 6.10(b) but shall not
give effect to purchase accounting adjustments arising in connection with the
Recapitalization, to the extent required or permitted by APB 16 and APB 17
and their interpretations and (y) that if at any time the computations
determining compliance with Section 8, including definitions used therein,
and in determining the amount of Excess Cash Flow utilize accounting
principles different from those utilized in the financial statements
furnished to the Banks, such financial statements shall be accompanied by
reconciliation work-sheets.

(b) All computations of interest and fees hereunder shall be made
on the actual number of days elapsed over a year of 360 days (except, in the
case of Base Rate Loans and Fees, 365/366 days).

12.08 Governing Law; Submission to Jurisdiction; Venue; Waiver of
Jury Trial. (a) This Agreement and the other Credit Documents and the
rights and obligations of the parties hereunder and thereunder shall be
construed in accordance with and be governed by the law of the state of New
York. Any legal action or proceeding with respect to this Agreement or any
other Credit Document may be brought in the courts of the State of New York
or of the United States for the Southern District of New York, and, by
execution and delivery of this Agreement, each Credit Party hereby
irrevocably accepts for itself and in respect of its property, generally and
unconditionally, the jurisdiction of the aforesaid courts. Each Credit Party
party to this Agreement hereby further irrevocably

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<PAGE>

waives any claim that any such courts lack jurisdiction over such Credit
Party, and agrees not to plead or claim, in any legal action or proceeding
with respect to this Agreement or any other Credit Document brought in any of
the aforesaid courts, that any such court lacks jurisdiction over such Credit
Party. Each Credit Party party to this Agreement further irrevocably
consents to the service of process out of any of the aforementioned courts in
any such action or proceeding by the mailing of copies thereof by registered
or certified mail, postage prepaid, to each Credit Party located outside New
York City and by hand delivery to each Credit Party located within New York
City, at its address for notices pursuant to Section 12.03, such service to
become effective 30 days after such mailing. Each Credit Party party to this
Agreement hereby irrevocably waives any objection to such service of process
and further irrevocably waives and agrees not to plead or claim in any action
or proceeding commenced hereunder or under any other Credit Document that
service of process was in any way invalid or ineffective. Nothing herein
shall affect the right of the Administrative Agent or any Bank to serve
process in any other manner permitted by law or to commence legal proceedings
or otherwise proceed against any Credit Party in any other jurisdiction.

(b) Each Credit Party hereby irrevocably waives any objection which
it may now or hereafter have to the laying of venue of any of the aforesaid
actions or proceedings arising out of or in connection with this Agreement or
any other Credit Document brought in the courts referred to in clause (a)
above and hereby further irrevocably waives and agrees not to plead or claim
in any such court that any such action or proceeding brought in any such
court has been brought in an inconvenient forum.

(c) Each of the parties to this Agreement hereby irrevocably waives
all right to a trial by jury in any action, proceeding or counterclaim
arising out of or relating to this Agreement, the other Credit Documents or
the transactions contemplated hereby or thereby.

12.09 Counterparts. This Agreement may be executed in any number
of counterparts and by the different parties hereto on separate counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument. A set of
counterparts executed by all the parties hereto shall be lodged with the
Borrower and the Administrative Agent.

12.10 Effectiveness. This Agreement shall become effective on the
date (the "Restatement Effective Date") on which (i) each of the Borrower,
each Agent and each Bank shall have signed a counterpart hereof (whether the
same or different counterparts) and shall have delivered (including by way of
facsimile device) the same to the Administrative Agent at its Notice Office
and (ii) the conditions precedent contained in Section 5 are met to the
satisfaction of the Administrative Agent and the Required Banks (determined
immediately after the occurrence of the Restatement Effective Date). Unless
the Administrative Agent has received actual notice from any Bank that the
conditions contained in Section 5 have not

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been met to its satisfaction, upon the satisfaction of the condition
described in clause (i) of the immediately preceding sentence and upon the
Administrative Agent's good faith determination that the conditions described
in clause (ii) of the immediately preceding sentence have been met, then the
Restatement Effective Date shall have been deemed to have occurred,
regardless of any subsequent determination that one or more of the conditions
thereto had not been met (although the occurrence of the Restatement
Effective Date shall not release the Borrower from any liability for failure
to satisfy one or more of the applicable conditions contained in Section 5).
The Administrative Agent will give the Borrower and each Bank prompt written
notice of the occurrence of the Restatement Effective Date.

12.11 Headings Descriptive. The headings of the several sections
and subsections of this Agreement are inserted for convenience only and shall
not in any way affect the meaning or construction of any provision of this
Agreement.

12.12 Amendment or Waiver. (a) Neither this Agreement nor any
other Credit Document nor any terms hereof or thereof may be changed, waived,
discharged or terminated unless such change, waiver, discharge or termination
is in writing signed by the Borrower and the Required Banks, provided that no
such change, waiver, discharge or termination shall, without the consent of
each Bank (other than a Defaulting Bank) (with Obligations being directly
affected thereby in the case of the following clause(i)), (i) extend the
Maturity Date, as the case may be (it being understood that any waiver of the
application of any prepayment of or the method of application of any
prepayment to the amortization of, the Loans shall not constitute any such
extension), or reduce the rate or extend the time of payment of interest
(other than as a result of waiving the applicability of any post-default
increase in interest rates) or Fees thereon, or reduce the principal amount
thereof (it being understood that any amendment or modification to the
financial definitions in this Agreement shall not constitute a reduction in
the rate of interest for purposes of this clause (i)), (ii) release all or
substantially all of the Collateral (in each case except as expressly
provided in the Credit Documents), (iii) amend, modify or waive any provision
of this Section 12.12(a), (iv) reduce the percentage specified in the
definition of Required Banks (it being understood that, with the consent of
the Required Banks, additional extensions of credit pursuant to this
Agreement may be included in the determination of the Required Banks on
substantially the same basis as the extensions of Revolving Loans pursuant to
the Commitments are included on the Restatement Effective Date) or (v)
consent to the assignment or transfer by the Borrower of any of its rights
and obligations under this Agreement; provided further, that no such change,
waiver, discharge or termination shall (v) increase the Commitment of any
Bank over the amount thereof then in effect without the consent of such Bank
(it being understood that waivers or modifications of conditions precedent,
covenants, Defaults or Events of Default or of a mandatory reduction in the
Total Commitment shall not constitute an increase of the Commitment of any
Bank, and that an increase in the available portion of any Commitment of any
Bank shall not constitute an increase in the Commitment of such Bank), (w)
without the consent of each Letter of Credit Issuer, amend, modify or waive
any

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provision of Section 2 or alter its rights or obligations with respect to
Letters of Credit, (x) without the consent of the Administrative Agent,
amend, modify or waive any provision of Section 11 as same applies to the
Administrative Agent or any other provision as same relates to the rights or
obligations of the Administrative Agent, (y) without the consent of the
Collateral Agent, amend, modify or waive any provision relating to the rights
or obligations of the Collateral Agent or (z) without the consent of BTCo,
alter its rights or obligations with respect to Swingline Loans.

(b) If, in connection with any proposed change, waiver, discharge
or termination to any of the provisions of this Agreement as contemplated by
clauses (a)(i) through (v), inclusive, of this Section 12.12, the consent of
the Required Banks is obtained but the consent of one or more of the other
Banks whose consent is required is not obtained, then the Borrower shall have
the right to replace each such non-consenting Bank or Banks (so long as all
non-consenting Banks are so replaced) with one or more Replacement Banks
pursuant to Section 1.13 so long as at the time of such replacement, each
such Replacement Bank consents to the proposed change, waiver, discharge or
termination, provided that the Borrower shall not have the right to replace a
Bank solely as a result of the exercise of such Bank's rights (and the
withholding of any required consent by such Bank) pursuant to the second
proviso of Section 12.12(a).

12.13 Survival. All indemnities set forth herein including,
without limitation, in Section 1.10, 1.11, 2.06, 4.04, 11.06 or 12.01 shall
survive the execution and delivery of this Agreement and the making and
repayment of the Loans.

12.14 Domicile of Loans. Each Bank may transfer and carry its
Loans at, to or for the account of any branch office, subsidiary or affiliate
of such Bank, provided that the Borrower shall not be responsible for costs
arising under Section 1.10, 2.06 or 4.04 resulting from any such transfer
(other than a transfer pursuant to Section 1.12) to the extent not otherwise
applicable to such Bank prior to such transfer.

12.15 Confidentiality. Subject to Section 12.04, the Banks shall
hold all non-public information obtained pursuant to the requirements of this
Agreement which has been identified as such by the Borrower in accordance
with its customary procedure for handling confidential information of this
nature and in accordance with safe and sound banking practices and in any
event may make disclosure reasonably required by any bona fide actual or
potential transferee or participant in connection with the contemplated
transfer of any Loans or participation therein or an Affiliate of such Bank
(including attorneys, legal advisors and consultants of such Bank) (so long
as such transferee, participant or Affiliate agrees to be bound by the
provisions of this Section 12.15) or as required or requested by any
governmental agency or representative thereof or pursuant to legal process,
provided that, unless specifically prohibited by applicable law or court
order, each Bank shall notify the Borrower of any request by any governmental
agency or representative thereof (other

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than any such request in connection with an examination of the financial
condition of such Bank by such governmental agency) for disclosure of any
such non-public information prior to disclosure of such information, and
provided further that in no event shall any Bank be obligated or required to
return any materials furnished by the Borrower or any Subsidiary.

12.16 Register. The Borrower hereby designates the Administrative
Agent to serve as the Borrower's agent, solely for purposes of this Section
12.16, to maintain a register (the "Register") on which it will record the
Commitment from time to time of each of the Banks, the Loans made by each of
the Banks and each repayment in respect of the principal amount of the Loans
of each Bank. Failure to make any such recordation, or any error in such
recordation shall not affect the Borrower's obligations in respect of such
Loans. With respect to any Bank, the transfer of the Commitment of such Bank
and the rights to the principal of, and interest on, any Loan made pursuant
to such Commitments shall not be effective until such transfer is recorded on
the Register maintained by the Administrative Agent with respect to ownership
of such Commitment and Loans and prior to such recordation all amounts owing
to the transferor with respect to such Commitments and Loans shall remain
owing to the transferor. The registration of assignment or transfer of all
or part of any Commitments and Loans shall be recorded by the Administrative
Agent on the Register only upon the acceptance by the Administrative Agent of
a properly executed and delivered Assignment and Assumption Agreement
pursuant to Section 12.04(b). Coincident with the delivery of such an
Assignment and Assumption Agreement to the Administrative Agent for
acceptance and registration of assignment or transfer of all or part of a
Loan, or as soon thereafter as practicable, the assigning or transferor Bank
shall surrender the Note evidencing such Loan, and thereupon one or more new
Notes in the same aggregate principal amount shall be issued to the assigning
or transferor Bank and/or the new Bank.

* * *

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<PAGE>

IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Agreement to be duly executed and delivered as of the
date first above written.

Address: TOWN SPORTS INTERNATIONAL, INC.

888 Seventh Avenue
Suite 1801
New York, New York 10106
Telephone: (212) 246-6700
Facsimile: (212) 246-8422
By
------------------------------------
Attention: Chief Financial Officer Title: Chief Financial Officer

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BANKERS TRUST COMPANY,
Individually and as Administrative Agent

By
-------------------------------------
Title: Vice President

<PAGE>

BANK OF SCOTLAND

By
-------------------------------------
Title:

<PAGE>

Exhibit 10.4

REGISTRATION RIGHTS AGREEMENT

REGISTRATION RIGHTS AGREEMENT, dated as of December 10, 1996, by and
among TOWN SPORTS INTERNATIONAL, INC., a New York corporation (the "Company"),
BRUCKMANN, ROSSER, SHERRILL & CO., L.P., a Delaware limited partnership ("BRS"),
the individuals and entities listed on the BRS Co-Investor Signature Pages
hereto (each, a "BRS Investor", and collectively, the "BRS Investors"), FARALLON
CAPITAL PARTNERS, L.P., a California limited partnership ("FCP"), FARALLON
CAPITAL INSTITUTIONAL PARTNERS, L.P., a California limited partnership ("FCIP"),
RR CAPITAL PARTNERS, L.P., a Delaware limited partnership ("RRC"), and FARALLON
CAPITAL INSTITUTIONAL PARTNERS II, L.P., a California limited partnership
(together with FCP, FCIP and RRC, "Farallon"), CANTERBURY MEZZANINE CAPITAL,
L.P., a Delaware limited partnership ("Canterbury"), and certain stockholders of
the Company listed on the Executive Signature Pages hereto (each, an
"Executive", collectively, the "Executives"). Capitalized terms used herein but
not otherwise defined shall have the meanings assigned to such terms in Section
1.

WHEREAS, BRS, the BRS Investors and Farallon have acquired shares of
the Company's Class A Common Stock, par value $.001 per share (the "Class A
Common"), and/or shares of the Company's Class B Common Stock, par value $.001
per share (the "Class B Common"), pursuant to Stock Purchase Agreements, dated
as of the date hereof, with the Company.

WHEREAS, the Executives hold shares of the Company's Class A Common
pursuant to Executive Stock Agreements, dated as of the date hereof, between the
Company and each of the Executives (in each case, as the same may be amended,
restated or modified from time to time, the "Executive Stock Agreements") and/or
have been granted options to purchase shares of Class A Common, pursuant to
Option Agreements, dated as of the date hereof, by and between the Company and
each of the Executives (in each case, as the same may be amended, restated or
modified from time to time, the "Option Agreements").

WHEREAS, Canterbury has acquired a warrant (together with all warrants
issued in substitution or replacement therefor, the "Warrant") exercisable for
shares of the Company's Common Stock, pursuant to the Warrant Agreement, dated
as of the date hereof, by and between Canterbury and the Company.

NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:

1. Definitions. As used herein, the following terms shall have the
following meanings.

"BRS Registrable Securities" means (i) any Common Stock issued or
issuable to BRS and the BRS Investors on the date hereof or acquired by BRS, the
BRS Investors or any of their

<PAGE>

respective affiliates or partners after the date hereof, and (ii) any shares of
capital stock of the Company issued or issuable with respect to the securities
referred to in clause (i) by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. For purposes of this Agreement, a Person will be
deemed to be a holder of BRS Registrable Securities whenever such Person has the
right to acquire directly or indirectly such BRS Registrable Securities (upon
conversion or exercise in connection with a transfer of securities or otherwise,
but disregarding any restrictions or limitations upon the exercise of such
right), whether or not such acquisition has actually been effected. Such
securities will cease to be BRS Registrable Securities when sold pursuant to
Rule 144 or any offering registered under the Securities Act.

"Canterbury Registrable Securities" means (i) any shares of Common
Stock issued or issuable, whether upon exercise of any portion of the Warrant or
otherwise, to Canterbury, its affiliates or partners on or after the date hereof
and (ii) any shares of capital stock of the Company issued or issuable with
respect to the securities referred to in clause (i) by way of a stock dividend
or stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization. For purposes of this Agreement,
a Person will be deemed to be a holder of Canterbury Registrable Securities
whenever such Person has the right to acquire directly or indirectly such
Canterbury Registrable Securities (upon conversion or exercise in connection
with a transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected. Such securities will cease to be Canterbury
Registrable Securities when sold pursuant to Rule 144 or any offering registered
under the Securities Act.

"Common Stock" means, collectively, the Class A Common, the Class B
Common, and any other class of Common Stock, or if such outstanding Common Stock
is hereafter changed into or exchanged for different securities of the Company,
such other securities.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Executive Registrable Securities" means (i) the Common Stock issued
or issuable to the Executives, whether upon exercise of the Options granted to
the Executives or otherwise, on the date hereof, or acquired by any Executive
after the date hereof, in each case to the extent vested pursuant to the terms
of the applicable Executive Stock Agreement and (ii) any shares of capital stock
of the Company issued or issuable with respect to the securities referred to in
clause (i) by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization. For purposes of this Agreement, a Person will be deemed to be a
holder of Executive Registrable Securities whenever such Person has the right to
acquire directly or indirectly such Executive Registrable Securities (upon
conversion or exercise in connection with a transfer of securities or otherwise,
but disregarding any restrictions or limitations upon the exercise of such
right), whether or not such acquisition has actually been effected. Such
securities will cease to be Executive Registrable Securities when sold pursuant
to Rule 144 or any offering registered under the Securities Act.

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<PAGE>

"Farallon Registrable Securities" means (i) the Common Stock issued
or issuable to Farallon on the date hereof or acquired by Farallon or its
affiliates after the date hereof, and (ii) any shares of capital stock of the
Company issued or issuable with respect to the securities referred to in clause
(i) by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger consolidation or other
reorganization. For purposes of this Agreement, a Person will be deemed to be a
holder of Farallon Registrable Securities whenever such Person has the right to
acquire directly or indirectly such Farallon Registrable Securities (upon
conversion or exercise in connection with a transfer of securities or otherwise,
but disregarding any restrictions or limitations upon the exercise of such
right), whether or not such acquisition has actually been effected. Such
securities will cease to be Farallon Registrable Securities when sold pursuant
to Rule 144 or any offering registered under the Securities Act.

"IPO" means the underwritten initial public offering of Common Stock
registered under the Securities Act.

"Options" means, collectively, the options to purchase Common Stock
granted pursuant to the Company's 1996 Stock Option Plan and the Option
Agreements.

"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization or other entity, or a governmental
entity (or any department, agency or political subdivision thereof).

"Qualified Public Offering" means the sale, in an underwritten primary
public offering of Common Stock requested under the Securities Act, of shares of
Common Stock which is expected to result in net cash proceeds to the Company in
an aggregate amount of not less than $30.0 million.

"Registrable Securities" means, the BRS Registrable Securities, the
Farallon Registrable Securities, the Canterbury Registrable Securities and the
Executive Registrable Securities.

"Registration Expenses" means all expenses incident to the Company's
performance of or compliance with this Agreement, including without limitation
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger and delivery expenses,
and fees and disbursements of counsel for the Company and all independent
certified public accountants, underwriters (excluding discounts and commissions)
and other Persons retained by the Company.

"Rule 144" means Rule 144 under the Securities Act (or any similar
rule then in force).

"Securities Act" means the Securities Act of 1933, as amended.

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<PAGE>

"Unit Offering Registration" means a registration by the Company of
any of its Common Stock in connection with a registration the primary purpose of
which is to register debt securities (i.e., in connection with a so-called
"equity kicker").

2. Demand Registrations.

(a) Requests for Registration. Subject to this Section 2, (i) the
holders of a majority of the BRS Registrable Securities may request registration
under the Securities Act of all or part of their Registrable Securities on
Form S-1 or any similar long-form registration ("Long-Form Registrations") or on
Form S-2 or S-3 or any similar short-form registration ("Short-Form
Registrations"), if available, (ii) the holders of a majority of the Farallon
Registrable Securities may request Long-Form Registrations and Short-Form
Registrations, if available, and (iii) the holders of a majority of Canterbury
Registrable Securities may request Short-Form Registrations, if available.
Each request for a Demand Registration (as defined in Section 2(c)) shall
specify the approximate number of Registrable Securities requested to be
registered and the anticipated per share price range for such offering. Within
ten days after receipt of any such request, the Company will give written notice
of such requested registration to all other holders of Registrable Securities
and will include (subject to the provisions of this Agreement) in such
registration, all Registrable Securities with respect to which the Company has
received written requests for inclusion therein within 20 days after the receipt
of the Company's notice.

(b) Long-Form Registrations. The holders of a majority of BRS
Registrable Securities will be entitled to request, at any time and from time to
time, three (3) Long-Form Registrations in which the Company will pay all
Registration Expenses. In addition, the holders of a majority of the Farallon
Registrable Securities will be entitled to request one (1) Long Form
Registration, if and only if, after the end of the fourth fiscal quarter
following the date on which the Company consummates an IPO, the Company is not
permitted under the Securities Act to use any applicable Short-Form
Registration. A registration will not count as the permitted Long-Form
Registration until it has become effective and unless the holders of Registrable
Securities are able to register and sell at least 90% of the Registrable
Securities requested to be included in such registration; it being understood
and agreed that the requisite holders of Registrable Securities making a request
for a Demand Regulation hereunder may withdraw from such registration at any
time prior to the effective date of such Demand Registration, in which case such
request will not count as one of the permitted Demand Registrations for such
holders, irrespective of whether or not such registration is effected.

(c) Short-Form Registrations. In addition to the Long-Form
Registrations provided pursuant to Section 2(b), (i) the holders of BRS
Registrable Securities will be entitled to request an unlimited number of
Short-Form Registrations, (ii) the holders of Farallon Registrable Securities
will be entitled to request up to three (3) Short-Form Registrations and (iii)
the holders of Canterbury Registrable Securities will be entitled to request up
to two (2) Short-Form Registrations, in each case, in which the Company will pay
all Registration Expenses. A registration will not count as the permitted Short
Form Registration until it has become effective and unless the holder of
Registrable Securities are able to register and sell 90% of the Registrable
Securities

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<PAGE>

requested to be included in such registration; it being understood and agreed
that the requisite holders of Registrable Securities making a request for a
Demand Regulation hereunder may withdraw from such registration at any time
prior to the effective date of such Demand Registration, in which case such
request will not count as one of the permitted Demand Registrations for such
holders, irrespective of whether or not such registration is effected. Demand
Registrations will be Short-Form Registrations whenever the Company is permitted
to use any applicable short form. After the Company has become subject to the
reporting requirements of the Exchange Act, the Company will use its best
efforts to make Short-Form Registrations available for the sale of Registrable
Securities. All registrations requested pursuant to Sections 2(b) and 2(c) are
referred to herein as "Demand Registrations."

(d) Priority on Demand Registrations. The Company will not include
in any Demand Registration any securities which are not Registrable Securities
without the prior written consent of the holders of at least a majority of the
Registrable Securities included in such registration. If a Demand Registration
is an underwritten offering and the managing underwriters advise the Company in
writing that in their opinion the number of Registrable Securities and, if
permitted hereunder, other securities requested to be included in such offering
exceeds the number of Registrable Securities and other securities, if any, which
can be sold therein without adversely affecting the marketability of the
offering, the Company will include in such registration, (i) first, the number
of Registrable Securities requested to be included in such registration pro
rata, if necessary, among the holders of Registrable Securities based on the
number of shares of Registrable Securities requested to be included therein by
each such holder and (ii) second, any other securities of the Company requested
to be included in such registration pro rata, if necessary, on the basis of the
number of shares of such other securities requested to be included therein by
each such holder. Any Persons other than holders of Registrable Securities who
participate in Demand Registrations which are not at the Company's expense must
pay their share of the Registration Expenses as provided in Section 6 hereof.

(e) Restrictions on Demand Registrations. The Company will not be
obligated to effect any Demand Registration within six months after the
effective date of a previous Demand Registration.

(f) Selection of Underwriters. In the case of a Demand Registration,
the holders of a majority of the Registrable Securities to be included in such
Demand Registration will have the right to select the investment banker(s) and
manager(s) to administer the offering, which investment banker(s) and manager(s)
will be nationally recognized, subject to the Company's approval which will not
be unreasonably withheld.

(g) Other Registration Rights. Except as provided in this Agreement,
the Company will not grant to any Persons the right to request the Company to
register any equity securities of the Company, or any securities convertible or
exchangeable into or exercisable for such securities, whether on a "demand" or
"piggyback" basis, without the prior written consent of the holders of a
majority of the BRS Registrable Securities; PROVIDED, that no such registration
rights which are senior to those granted to the holders of the Farallon
Registrable Securities, the holders

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<PAGE>

of the Canterbury Registrable Securities or the holders of the Executive
Registrable Securities may be granted without the prior written consent of (i) a
majority of the holders of the Farallon Registrable Securities in the case of
the holders of Farallon Registrable Securities, (ii) a majority of the holders
of Canterbury Registrable Securities in the case of the holders of Canterbury
Registrable Securities, or (iii) a majority of the holders of Executive
Registrable Securities in the case of the holders of Executive Registrable
Securities, respectively. For the avoidance of doubt, the granting of
registration rights pari passu within any other registration rights shall not be
considered "senior."

3. PIGGYBACK REGISTRATIONS.

(a) Right to Piggyback. Whenever the Company proposes to register
any of its Common Stock under the Securities Act other than pursuant to a Demand
Registration, and other than a pursuant to a registration statement on Form S-8
or S-4 or any similar or successor form or in connection with a Unit Offering
Registration and the registration form to be used may be used for the
registration of Registrable Securities (a "Piggyback Registration"), the Company
will give prompt written notice to all holders of Registrable Securities of its
intention to effect such a registration and will include in such registration
all Registrable Securities with respect to which the Company has received
written requests for inclusion therein within 20 days after the receipt of the
Company's notice. Notwithstanding the foregoing, in connection only with an IPO
which is not a Qualified Public Offering, no Registrable Securities shall be
included in such registration without the prior written consent of the Company
(provided that any such consent shall permit all holders of Registrable
Securities to be included in such registration in a manner consistent with
Section 3(c)(ii) below).

(b) Piggyback Expenses. The Registration Expenses of the holders of
Registrable Securities will be paid by the Company in all Piggyback
Registrations.

(c) Priority on Primary Registrations. If a Piggyback Registration
is an underwritten primary registration on behalf of the Company, the Company
will include in such registration all securities requested to be included in
such registration; provided, that if the managing underwriters advise the
Company in writing that in their opinion the number of securities requested to
be included in such registration exceeds the number which can be sold in such
offering without adversely affecting the marketability of the offering, the
Company will include in such registration first, the securities the Company
proposes to sell, and then (i) in the case of an IPO which is a Qualified Public
Offering (x) second, the Canterbury Registrable Securities requested to be
included in such registration, (y) third the other Registrable Securities
requested to be included in such registration pro rata among the holders of such
Registrable Securities on the basis of the number of shares requested to be
included therein by each such holder, and (z) fourth, other securities, if any,
requested to be included is such registration, or (ii) in all other instances,
(x) second, the Registrable Securities requested to be included in such
registration, pro rata among the holders of such Registrable Securities on the
basis of the number of shares of Registrable Securities requested to be included
therein by each such holder, and (y) third, other securities, if any, requested
to be included in such registration.

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<PAGE>

(d) Priority on Secondary Registrations. If a Piggyback Registration
is an underwritten secondary registration on behalf of holders of the Company's
securities (which registration was consented to pursuant to Section 2(g) above),
the Company will include in such registration all securities requested to be
included in such registration; provided, that if the managing underwriters
advise the Company in writing that in their opinion the number of securities
requested to be included in such registration exceeds the number which can be
sold in such offering without adversely affecting the marketability of the
offering, the Company will include in such registration (i) first, the
securities (other than Registrable Securities) requested to be included therein
by the holders requesting such registration, (ii) second, the Registrable
Securities requested to be included in such registration, pro rata among the
holders of such Registrable Securities on the basis of the number of shares of
Registrable Securities requested to be included therein by each such holder, and
(iii) third, other securities requested to be included in such registration.

(e) Selection of Underwriters. If any Piggyback Registration is an
underwritten offering, the investment banker(s) and manager(s) for the offering
will be selected by the Company.

(f) Other Registrations. If the Company has previously filed a
registration statement with respect to Registrable Securities pursuant to this
Section 3, and if such previous registration has not been withdrawn or
abandoned, the Company will not file or cause to be effected any other
registration of any of its equity securities or securities convertible or
exchangeable into or exercisable for its equity securities under the Securities
Act (except on Forms S-4 or S-8 or any similar or successor forms or in
connection with a Unit Offering Registration), whether on its own behalf or at
the request of any holder or holders of such securities, until a period of at
least six months has elapsed from the effective date of such previous
registration.

(g) If requested by a majority of the holders of Executive
Registrable Securities, the Company hereby agrees that, in connection with an
IPO, it shall use its commercially reasonable efforts to prepare and file a
registration statement on Form S-8 or any successor form (and any required
reoffer prospectus in connection therewith) covering the Executive Registrable
Securities eligible to be registered on such form, and use its commercially
reasonable efforts to maintain the effectiveness of such registration statement.

4. HOLDBACK AGREEMENTS.

(a) Each holder of Registrable Securities (other than the BRS
Investors) agrees not to effect any public sale or distribution (including sales
pursuant to Rule 144) of equity securities of the Company, or any securities
convertible into or exchangeable or exercisable for such securities, during the
seven days prior to and the 90-day period beginning on the effective date of any
Demand Registration or Piggyback Registration for a public offering to be
underwritten on a firm commitment basis in which Registrable Securities are
included (except as part of such underwritten registration), unless the
underwriters managing the registered public offering request otherwise, in which
case, each holder of Registrable Securities (other than the BRS Investors)
agrees to be bound by a holdback of up to a 180 day period beginning the
effective date of any such Demand Registration or Piggyback Registration.

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<PAGE>

(b) The Company agrees (i) not to effect any public sale or
distribution of its equity securities, or any securities convertible into or
exchangeable or exercisable for such securities, during the seven days prior to
and during the 180-day period beginning on the effective date of any
underwritten Demand Registration or Piggyback Registration (except as part of
such underwritten registration, or pursuant to registrations on Forms S-4 or S-8
or any similar or successor forms or in connection with a Unit Offering
Registration), unless the underwriters managing the registered public offering
otherwise agree, and (ii) to cause each holder of at least 5% (on a fully
diluted basis) of its Common Stock, or any securities convertible into or
exchangeable or exercisable for Common Stock, purchased from the Company at any
time after the date of this Agreement (other than in a registered public
offering) to agree not to effect any public sale or distribution (including
sales pursuant to Rule 144) of any such securities during such period (except as
part of such underwritten registration, if otherwise permitted), unless the
underwriters managing the registered public offering otherwise agree.

5. REGISTRATION PROCEDURES. Whenever the holders of Registrable
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company will use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Company will as
expeditiously as possible:

(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become effective (provided
that before filing a registration statement or prospectus or any amendments or
supplements thereto, the Company will furnish to the counsel selected by the
holders of a majority of the Registrable Securities covered by such registration
statement copies of all such documents proposed to be filed);

(b) prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for a period of not less than nine months and comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such registration statement;

(c) if requested by the holders of a majority of the BRS Registrable
Securities in connection with any Demand Registration requested by such holders,
use its commercially reasonable efforts to cause to be included in such
registration Common Stock having an aggregate value (based on the mid-point of
the proposed offering price range specified in the registration statement used
to offer such securities) of up to $30 million, to be offered in a primary
offering of the Company's securities contemporaneously with such offering of
Registrable Securities;

(d) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such

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<PAGE>

seller may reasonably request in order to facilitate the disposition of the
Registrable Securities owned by such seller;

(e) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller (provided that the Company will not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this subsection, (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process (i.e., service of
process which is not limited solely to securities law violations) in any such
jurisdiction);

(f) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company will
promptly prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Registrable Securities, such
prospectus will not contain an untrue statement of a material fact or omit to
state any fact necessary to make the statements therein not misleading;

(g) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the National Association of
Securities Dealers Automated Quotations National Market System ("NASDAQ") and,
if listed on the NASDAQ, use its best efforts to secure designation of all such
Registrable Securities covered by such registration statement as a NASDAQ
"national market system security" within the meaning of Rule 11Aa2-1 of the
Securities and Exchange Commission or, failing that, to secure NASDAQ
authorization for such Registrable Securities and, without limiting the
generality of the foregoing, to arrange for at least two market makers to
register as such with respect to such Registrable Securities with the National
Association of Securities Dealers;

(h) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;

(i) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
a majority of the Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities (including, without limitation, effecting a stock split
or a combination of shares);

(j) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers,

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<PAGE>

directors, employees and independent accountants to supply all information
reasonably requested by any such seller, underwriter, attorney, accountant or
agent in connection with such registration statement;

(k) otherwise use its best efforts to comply with all applicable
rules and regulations of the Securities and Exchange Commission, and make
available to its security holders, as soon as reasonably practicable, an earning
statement covering the period of at least twelve months beginning with the first
day of the Company's first full calendar quarter after the effective date of the
registration statement, which earning statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;

(l) permit any holder of Registrable Securities which holder, in its
sole and exclusive judgment, might be deemed to be an underwriter or a
controlling person of the Company, to participate in the preparation of such
registration or comparable statement and to require the insertion therein of
material, furnished to the Company in writing, which in the reasonable judgment
of such holder and its counsel should be included;

(m) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company will use its reasonable best efforts promptly to
obtain the withdrawal of such order;

(n) use its best efforts to cause such Registrable Securities covered
by such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the sellers
thereof to consummate the disposition of such Registrable Securities; and

(o) obtain a "cold comfort" letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by "cold comfort" letters as the holders of a majority of
the Registrable Securities being sold reasonably request.

If any such registration or comparable statement refers to any holder by name or
otherwise as the holder of any securities of the Company and if, in its sole and
exclusive judgment, such holder is or might be deemed to be a controlling person
of the Company, such holder shall have the right to require (i) the insertion
therein of language, in form and substance satisfactory to such holder and
presented to the Company in writing, to the effect that the holding by such
holder of such securities is not to be construed as a recommendation by such
holder of the investment quality of the Company's securities covered thereby and
that such holding does not imply that such holder will assist in meeting any
future financial requirements of the Company, or (ii) in the event that such
reference to such holder by name or otherwise is not required by the Securities
Act or any similar Federal statute then in force, the deletion of the reference
to such holder; PROVIDED, that with respect

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<PAGE>

to this clause (ii) such holder shall furnish to the Company an opinion of
counsel to such effect, which opinion and counsel shall be reasonably
satisfactory to the Company.

6. REGISTRATION EXPENSES.

(a) All Registration Expenses will be borne by the Company.

(b) Unless otherwise agreed to in writing by the Company, in
connection with each Demand Registration and each Piggyback Registration, the
Company will reimburse the holders of Registrable Securities covered by such
registration for the reasonable fees and disbursements of one counsel chosen by
the holders of a majority of the Registrable Securities.

7. INDEMNIFICATION.

(a) The Company agrees to indemnify, to the extent permitted by law,
each holder of Registrable Securities, its partners, members, officers and
directors and each Person who controls such holder (within the meaning of the
Securities Act) against all losses, claims, damages, liabilities and expenses
arising out of or based upon any untrue or alleged untrue statement of material
fact contained in any registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, and shall reimburse such holder,
partners, members, director, officer or controlling person for any legal or
other expenses reasonably incurred by such holder, partner, member, director,
officer or controlling person in connection with the investigation or defense of
such loss, claim, damage, liability or expense, except insofar as the same are
caused by or contained in any information furnished in writing to the Company by
such holder expressly for use therein or by such holder's failure to deliver a
copy of the registration statement or prospectus or any amendments or
supplements thereto after the Company has furnished such holder with a
sufficient number of copies of the same. In connection with an underwritten
offering, the Company will indemnify such underwriters, their officers and
directors and each Person who controls such underwriters (within the meaning of
the Securities Act) to the same extent as provided above with respect to the
indemnification of the holders of Registrable Securities.

(b) In connection with any registration statement in which a holder
of Registrable Securities is participating, each such holder will furnish to the
Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law, will indemnify the Company, its
directors and officers and each Person who controls the Company (within the
meaning of the Securities Act) against any losses, claims, damages, liabilities
and expenses resulting from any untrue or alleged untrue statement of material
fact relating to such holder and provided by such holder to the Company or the
Company's agent contained in the registration statement, prospectus or
preliminary prospectus or any amendment thereof or supplement thereto or any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only to the extent
that such untrue statement or omission is contained in

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<PAGE>

any information or affidavit so furnished in writing by such holder; provided,
that the obligation to indemnify will be individual to each holder and will be
limited to the net amount of proceeds received by such holder from the sale of
Registrable Securities pursuant to such registration statement.

(c) Any Person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (provided that failure to give such notice shall
not affect the right of such Person to indemnification hereunder) and
(ii) unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified and indemnifying parties may exist with
respect to such claim, permit such indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to the indemnified party. If
such defense is assumed, the indemnifying party will not be subject to any
liability for any settlement made by the indemnified party without its consent
(but such consent will not be unreasonably withheld). An indemnifying party who
is not entitled to, or elects not to, assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim.

(d) The indemnification provided for under this Agreement will remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling Person of such
indemnified party and will survive the transfer of securities. The Company also
agrees to make such provisions, as are reasonably requested by any indemnified
party, for contribution to such party in the event the Company's indemnification
is unavailable for any reason.

8. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may
participate in any registration hereunder which is underwritten unless such
Person (a) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (b) completes and executes all customary
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements; provided, that no holder of Registrable Securities included in any
underwritten registration shall be required to make any representations or
warranties to the Company or the underwriters other than representations and
warranties regarding such holder and such holder's intended method of
distribution.

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<PAGE>

9. RULE 144 REPORTING. With a view to making available to the
holders of Registrable Securities the benefits of certain rules and regulations
of the Securities and Exchange Commission which may permit the sale of the
Registrable Securities to the public without registration, the Company agrees to
use its best efforts to:

(a) make and keep current public information available, within the
meaning of Rule 144 or any similar or analogous rule promulgated under the
Securities Act, at all times after it has become subject to the reporting
requirements of the Exchange Act;

(b) file with the Securities and Exchange Commission, in a timely
manner, all reports and other documents required of the Company under the
Securities Act and Exchange Act (after it has become subject to such reporting
requirements); and

(c) so long as any party hereto owns any Registrable Securities,
furnish to such Person forthwith upon request, a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time commencing 90 days after the effective date of the first
registration filed by the Company for an offering of its securities to the
general public), the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements); a copy of the most recent
annual or quarterly report of the Company; and such other reports and documents
as such Person may reasonably request in availing itself of any rule or
regulation of the Securities and Exchange Commission allowing it to sell any
such securities without registration.

10. NOTICES. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement will
be in writing and will be deemed to have been given when delivered personally,
mailed by certified or registered mail, return receipt requested and postage
prepaid, or sent via a nationally recognized overnight courier, or sent via
facsimile to the recipient. Such notices, demands and other communications will
be sent to the address indicated below:

To the Company:

Town Sports International, Inc.
888 Seventh Avenue, Suite 1801
New York, New York 10106
Attention: Alex Alimanestianu
Facsimile No.: (212) 246-8422

With copies to:

Bruckmann, Rosser, Sherrill & Co., Inc.
126 East 56th Street, 29th Floor
New York, New York 10022
Attention: Stephen Edwards
Facsimile No.: (212) 521-3799

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<PAGE>

Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Attention: Kirk A. Radke, Esq.
Facsimile No.: (212) 446-4900

To BRS or any BRS Investor:

Bruckmann, Rosser, Sherrill & Co., Inc.
126 East 56th Street, 29th Floor
New York, New York 10022
Attention: Stephen Edwards
Facsimile No.: (212) 521-3799

With a copy to:

Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Attention: Kirk A. Radke, Esq.
Facsimile No.: (212) 446-4900

To Farallon:

c/o Farallon Capital Management, L.L.C.
One Maritime Plaza, Suite 1325
San Francisco, California 94111
Attention: Jason M. Fish
Facsimile No.: (415) 421-2133

With a copy to:

Richards, Spears, Kibbe & Orbe
One Chase Manhattan Plaza, 57th Floor
New York, New York 10005
Attention: William Q. Orbe, Esq.
Facsimile No.: (212) 530-1801

To Canterbury:

Canterbury Mezzanine Capital, L.P.
600 Fifth Avenue, 23rd Floor
New York, New York 10020
Attention: Patrick N.W. Turner
Facsimile No.: (212) 332-1584

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With a copy to:

Cravath Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019-7475
Attention: Mayme Greer, Esq.
Facsimile No.: (212) 474-3700

To any of the Executives:

[EXECUTIVE'S NAME]
c/o Town Sports International, Inc.
888 Seventh Avenue, Suite 1801
New York, New York 10106
Facsimile No.: (212) 246-8422

or such other address or to the attention of such other Person as the recipient
party shall have specified by prior written notice to the sending party.

11. MISCELLANEOUS.

(a) NO INCONSISTENT AGREEMENTS. The Company will not enter into any
agreement which is inconsistent with or violates the rights granted to the
holders of Registrable Securities in this Agreement.

(b) REMEDIES. Any Person having rights under any provision of this
Agreement will be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.

(c) AMENDMENTS AND WAIVERS. Except as otherwise provided herein, the
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and holders of at least 70% of the Registrable
Securities; provided, no amendment or waiver which materially and adversely
affects the holders of (i) BRS Registrable Securities, (ii) Farallon Registrable
Securities, (iii) Canterbury Registrable Securities or (iv) Executive
Registrable Securities, shall be effective against such holders of (i) BRS
Registrable Securities, (ii) Farallon Registrable Securities, (iii) Canterbury
Registrable Securities or (iv) Executive Registrable Securities unless such
amendment is approved by the holders of a majority of (i) BRS Registrable
Securities, (ii) Farallon Registrable Securities, (iii) Canterbury Registrable
Securities or (iv) Executive Registrable Securities, respectively, so affected.
The amendment of this Agreement to add a party hereto and to grant such party
registration rights PRO RATA with the existing parties to this

-15-
<PAGE>

Agreement shall not be deemed an amendment that "materially and adversely
affects" any class of Registrable Securities.

(d) SUCCESSORS AND ASSIGNS. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities.

(e) SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.

(f) COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute
one and the same Agreement.

(g) WAIVER OF JURY TRIAL. Each of the parties hereto waives any
right it may have to trial by jury in respect of any litigation based on,
arising out of, under or in connection with this Agreement or any course of
conduct, course of dealing, verbal or written statement or action of any party
hereto.

(h) GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF
THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.

(i) TIME IS OF THE ESSENCE; COMPUTATION OF TIME. Time is of the
essence for each and every provision of this Agreement. Whenever the last day
for the exercise of any privilege or the discharge of any duty hereunder shall
fall upon a Saturday, Sunday, or any date on which banks in New York, New York
are authorized to be closed, the party having such privilege or duty may
exercise such privilege or discharge such duty on the next succeeding day which
is a regular business day.

(j) DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.

* * * * *

-16-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

TOWN SPORTS INTERNATIONAL, INC.

By: /s/ Alex Alimanestianu
---------------------------
Name: Alex Alimanestianu
Title: VP

BRUCKMANN, ROSSER, SHERRILL & CO., L.P.

By: BRS Partners, Limited Partnership
Its: General Partner

By: /s/ Stephen Edwards
---------------------------
Name: Stephen Edwards
Title: Vice President

CANTERBURY MEZZANINE CAPITAL, L.P.

By: Canterbury Capital, LLC
Its: General Partner

By: /s/ Nicholas B. Dunphy
---------------------------
Name: Nicholas b. Dunphy
Title: Member

By: /s/ Illegible
---------------------------
Name:
Title: Member

<PAGE>

FARALLON CAPITAL PARTNERS, L.P.

By: Farallon Partners, L.L.C.
Its: General Partner

By: /s/ David I. Cohen
---------------------------
Name: David I. Cohen
Title: Managing Member

FARALLON CAPITAL INSTITUTIONAL
PARTNERS, L.P.

By: Farallon Partners, L.L.C.
Its: General Partner

By: /s/ David I. Cohen
---------------------------
Name: David I. Cohen
Title: Managing Member

RR CAPITAL PARTNERS, L.P.

By: Farallon Partners, L.L.C.
Its: General Partner

By: /s/ David I. Cohen
---------------------------
Name: David I. Cohen
Title: Managing Member

FARALLON CAPITAL INSTITUTIONAL
PARTNERS II, L.P.

By: Farallon Partners, L.L.C.
Its: General Partner

By: /s/ David I. Cohen
---------------------------
Name: David I. Cohen
Title: Managing Member

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ HEINZ RITSCUARD
- -----------------------------
EXECUTIVE

Name (Print): TOWN SPORTS INTERNATIONAL
HEINZ RITSCUARD
ST. JOHANNS-VORSTADT 41
CH 4056 BASEL
SWITZERLAND

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Peter J. Bazzel
- -----------------------------
EXECUTIVE

Name (Print): Peter J. Bazzel
----------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Karl M. Derleth
- -----------------------------
EXECUTIVE

Name (Print): Karl M. Derleth
----------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Raymond Dewhirst
- -----------------------------
EXECUTIVE

Name (Print): Raymond Dewhirst
----------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Margaret R. Stevens
- -----------------------------
EXECUTIVE

Name (Print): Margaret R. Stevens
----------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Bob Calvo
- -----------------------------
EXECUTIVE

Name (Print): Bob Calvo
----------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Mona N. Guzman
- -----------------------------
EXECUTIVE

Name (Print): Mona N. Guzman
----------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Carol Cornbill
- -----------------------------
EXECUTIVE

Name (Print): Carol Cornbill
----------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Nina Duchaise
- -----------------------------
EXECUTIVE

Name (Print): Nina Duchaise
----------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Edward Trainor
- -----------------------------
EXECUTIVE

Name (Print): Edward Trainor
----------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Leslie Kimerly
- -----------------------------
EXECUTIVE

Name (Print): Leslie Kimerly
----------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ D. A. Smith
- -----------------------------
EXECUTIVE

Name (Print): D. A. Smith (Debbie)
----------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ R. G. Pyle
- -----------------------------
EXECUTIVE

Name (Print): R. G. Pyle
----------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Alexander Alimanestianu
- -----------------------------
EXECUTIVE

Name (Print): /s/ Alexander Alimanestianu
-------------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Illegible
- -----------------------------
EXECUTIVE

Name (Print): Robert [Illegible]
----------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Mark Smith
- -----------------------------
EXECUTIVE

Name (Print): Mark Smith
----------------------------

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Bruce Bruckmann
- ---------------------------------
BRS INVESTOR

Name (Print): Bruce Bruckmann
--------------------------

Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Donald Bruckmann
- ---------------------------------
BRS INVESTOR

Name (Print): Donald Bruckmann
--------------------------

Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Illegible
- ---------------------------------
BRS INVESTOR

Name (Print): BCB Partnership
--------------------------

Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Illegible
- ---------------------------------
BRS INVESTOR

Name (Print): NAZ Partnership
--------------------------

Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Harold O. Rosser
- ---------------------------------
BRS INVESTOR

Name (Print): Harold O. Rosser
--------------------------

Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Vergil Sherrill
- ---------------------------------
BRS INVESTOR

Name (Print): Virgil Sherrill
--------------------------

Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Stephen Sherrill
- ---------------------------------
BRS INVESTOR

Name (Print): Stephen Sherrill
--------------------------

Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Nancy Zweng
- ---------------------------------
BRS INVESTOR

Name (Print): Nancy Zweng
--------------------------

Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Paul D. Kaminski
- ---------------------------------
BRS INVESTOR

Name (Print): Paul D. Kaminski
--------------------------

Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Illegible
- ---------------------------------
BRS INVESTOR

Name (Print): Merrill Lynch Pearce Fenner & Smith
Custodian for the benefit of
Paul D. Kaminski IRA

Title (if any): Attorney-in-fact

<PAGE>

Exhibit 10.5

SHAREHOLDERS AGREEMENT

SHAREHOLDERS AGREEMENT ("AGREEMENT"), dated as of December 10, 1996,
by and among TOWN SPORTS INTERNATIONAL, INC., a New York corporation (the
"COMPANY"), BRUCKMANN, ROSSER, SHERRILL & CO., L.P., a Delaware limited
partnership ("BRS"), the individuals and entities listed on the BRS Investor
Signature Pages hereto (each, a "BRS INVESTOR", and collectively, the "BRS
INVESTORS"), FARALLON CAPITAL PARTNERS, L.P., a California limited partnership
("FCP"), FARALLON CAPITAL INSTITUTIONAL PARTNERS, L.P., a California limited
partnership ("FCIP"), RR CAPITAL PARTNERS, L.P., a Delaware limited partnership
("RRC"), and FARALLON CAPITAL INSTITUTIONAL PARTNERS II, L.P., a California
limited partnership (together with FCP, FCIP and RRC, the "FARALLON INVESTORS",
and individually, a "FARALLON INVESTOR"), CANTERBURY MEZZANINE CAPITAL, L.P., a
Delaware limited partnership ("CANTERBURY"), and certain shareholders of the
Company listed on the Executive Signature Page hereto (each, an "EXECUTIVE",
collectively, the "EXECUTIVES") (BRS, the BRS Investors, Farallon, Canterbury
and the Executives are referred to collectively herein, together with each of
their respective Permitted Transferees (as defined herein), as the
"Shareholders"). Capitalized terms used herein but not otherwise defined shall
have the meanings assigned to such terms in Section 1.

WHEREAS, BRS, the BRS Investors and the Farallon Investors have
acquired shares of the Company's Class A Common Stock, par value $.001 per share
(the "CLASS A COMMON"), and shares of the Company's Series A Preferred Stock,
par value $1.00 per share (the "SERIES A PREFERRED"), pursuant to Stock Purchase
Agreements, dated as of the date hereof, with the Company (in each case, as the
same may be amended, restated or modified from time to time, the "INVESTOR
AGREEMENTS").

WHEREAS, the Executives hold shares of the Company's Class A Common
pursuant to Executive Stock Agreements, dated as of the date hereof, with the
Company (in each case, as the same may be amended, restated or modified from
time to time, the "EXECUTIVE AGREEMENTS") and/or have been granted options to
purchase shares of the Class A Common, pursuant to Common Stock Option
Agreements, dated as of the date hereof, by and between the Company and each of
the Executives (in each case, as the same may be amended, restated or modified
from time to time, the "COMMON OPTION AGREEMENTS").

WHEREAS, certain of the Executives have acquired shares of the
Company's Series B Preferred Stock, par value $1.00 per share (the "SERIES B
PREFERRED"), pursuant to the Executive Agreements and/or have been granted
options to purchase shares of the Series B Preferred pursuant to Preferred Stock
Option Agreements, dated as of the date hereof, by and between the Company and
each such Executive (as the same may be amended, restated or modified from time
to time, the "PREFERRED OPTION AGREEMENTS").

WHEREAS, Canterbury has acquired a warrant (together with all warrants
issued in substitution or replacement therefor, the "WARRANT") exercisable for
shares of Class A Common pursuant to the Warrant Agreement, dated as of the date
hereof, by and between Canterbury and the

<PAGE>

Company (as the same may be amended, restated or modified from time to time, the
"WARRANT AGREEMENT").

WHEREAS, the Company and the Shareholders desire to enter into this
Agreement for the purposes, among others, of (i) establishing the composition of
the Company's Board of Directors (as in effect from time to time, the "BOARD"),
(ii) assuring continuity in the management and ownership of the Company and
(iii) limiting the manner and terms by which the Shareholder Shares may be
transferred.

1. DEFINITIONS. As used herein, the following terms shall have
the following meanings:

"AFFILIATE" shall mean, as to any Person, any other Person which
directly or indirectly controls, or is under common control with, or is
controlled by, such Person. As used in this definition, "control" (including,
with its correlative meanings, "controlled by" and "under common control with")
shall mean possession, directly or indirectly, of power to direct or cause the
direction of management or policies (whether through ownership of securities or
partnership or other ownership interests, by contract or otherwise).

"APPROVED SALE" means the sale of the Company, in a single transaction
or a series of related transactions, to an Unaffiliated Third Party (a) pursuant
to which such Unaffiliated Third Party proposes to acquire all of the
outstanding Common Stock (whether by merger, consolidation, recapitalization,
reorganization, purchase of the outstanding Common Stock or otherwise) or all or
substantially all of the consolidated assets of the Company, (b) which has been
approved by the Board and holders of a majority of the outstanding BRS Shares,
voting together as a single class, and (c) pursuant to which all holders of
Shareholder Shares and Preferred Shares receive at the same time (whether in
such transaction or, with respect to an asset sale, upon a subsequent
liquidation) the same form and amount of consideration (x) per share of Common
Stock (as adjusted for any consideration payable by such holders in connection
with the exercise of any Warrants or Options) with respect to holders of
Shareholder Shares, and (y) per share of Preferred Stock (which shall in no
event be less than the Liquidation Value (plus accrued and unpaid dividends) as
adjusted for any consideration payable by, or special accrual payable to, such
holders in connection with the exercise of any Preferred Options) with respect
to holders of Preferred Shares, or if any holders of Shareholder Shares or
Preferred Shares are given an option as to the form and amount of consideration
received, all such holders of Shareholder Shares or Preferred Shares, as the
case may be, are given the same option; PROVIDED, that such consideration shall
be deemed to include any other consideration paid or payable by such
Unaffiliated Third Party to any holder of Stockholder Shares in connection with
such transaction, or otherwise directly or indirectly related to such
transaction, which is not in exchange for or attributable to securities of the
Company held by such holder.

-2-

<PAGE>

"BRS SHARES" means Shareholder Shares owned by BRS and the BRS
Investors, or any of their respective Permitted Transferees.

"COMMON OPTIONS" means, collectively, the options to purchase Class A
Common granted to certain Executives pursuant to the Town Sports International,
Inc. 1996 Stock Option Plan and the Common Option Agreements.

"COMMON STOCK" means, collectively, the Class A Common, the Class B
Common, and any other class of common stock of the Company, or if such
outstanding Common Stock is hereafter changed into or exchanged for different
securities of the Company, such other securities.

"EXECUTIVE SHARES" means Shareholder Shares owned by the Executives or
any of their respective Permitted Transferees.

"FAMILY GROUP" means, with respect to an individual Shareholder, such
Shareholder's spouse and descendants (whether natural or adopted) and any trust
solely for the benefit of such Shareholder and/or such Shareholder's spouse,
their respective ancestors and/or descendants.

"FARALLON SHARES" means Shareholder Shares owned by the Farallon
Investors or their respective Permitted Transferees.

"INITIAL PUBLIC OFFERING" means the sale, in the initial underwritten
public offering registered under the Securities Act, of shares of the Company's
Common Stock where, after such offering, the Common Stock sold in such offering
is subject to being traded on the NASDAQ National Market or a national
securities exchange.

"INVESTORS" means, collectively, BRS and the Farallon Investors.

"LIQUIDATION VALUE" means, with respect to any share of any series of
Preferred Stock, the "Liquidation Value" for such series as defined and
determined in accordance with the Company's Certificate of Incorporation, as in
effect from time to time.

"OTHER SHAREHOLDERS" means, with respect to a Shareholder, all
Shareholders other than such Shareholder.

"OWNERSHIP RATIO" means, as to a Shareholder at the time of
determination, the percentage obtained by dividing the amount of shares of
Common Stock held by such Shareholder on a fully diluted basis at such time by
the aggregate amount of shares of Common Stock outstanding on a fully diluted
basis at such time.

"PERMITTED TRANSFEREES" has the meaning set forth in Section 4(c).

"PERSON" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated

-3-

<PAGE>

organization, any other entity or a governmental entity (or any department,
agency or political subdivision thereof).

"PREFERRED OPTIONS" means, collectively, the options to purchase
Series B Preferred granted to certain Executives pursuant to the Preferred
Option Agreements.

"PREFERRED SHARES" means,(i) any Preferred Stock now held or
hereafter acquired by the Shareholders, (ii) any Preferred Stock issued or
issuable upon exercise of the Preferred Options, and (iii) any securities issued
or issuable directly or indirectly with respect to the securities described in
clauses (i) and (ii) above by way of stock dividend, stock split, or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular Shares constituting Preferred
Shares, such shares will cease to be Preferred Shares when they have been sold
in an Approved Sale, transferred pursuant to Section 4(a) or 4(b) hereof, or
upon the consummation of an Initial Public Offering. For purposes of this
Agreement, a Person will be deemed a holder of Preferred Shares whenever such
Person has the rights to acquire directly or indirectly such Preferred Shares
(upon conversion or exercise in connection with a transfer of securities or
otherwise, but disregarding any restrictions or limitations upon the exercise of
such right), whether or not such acquisition has actually been effected.

"PREFERRED STOCK" means, collectively, the Series A Preferred, the
Series B Preferred and any other class of preferred stock of the Company, or if
such outstanding Preferred Stock is hereafter changed into or exchanged for
different securities of the Company, such other securities.

"PUBLIC SALE" means any sale of Shareholder Shares to the public
pursuant to an offering registered under the Securities Act or to the public
effected through a broker, dealer or market maker pursuant to the provisions of
Rule 144 under the Securities Act.

"SECURITIES ACT" means the Securities Act of 1933, as amended from
time to time.

"SHAREHOLDER SHARES" means (i) any Common Stock now held or hereafter
acquired by the Shareholders, (ii) any Common Stock issued or issuable upon
exercise of the Warrant, (iii) Common Stock issued or issuable upon exercise of
the Common Options, and (iv) any equity securities issued or issuable directly
or indirectly with respect to the securities referred to in clauses (i), (ii),
and (iii) above by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization. As to any particular shares constituting Shareholder Shares,
such shares will cease to be Shareholder Shares when they have been sold or
acquired in a Public Sale or in an Approved Sale, transferred pursuant to
Section 4(a) or 4(b) hereof or upon the consummation of an Initial Public
Offering. For purposes of this Agreement, a Person will be deemed to be a
holder of Shareholder Shares whenever such Person has the right to acquire
directly or indirectly such Shareholder Shares (upon conversion or exercise in
connection with a transfer of securities or otherwise, but disregarding any
restrictions or limitations upon the exercise of such right), whether or not
such acquisition has actually been effected.

"SUBSIDIARY" means, with respect to any Person, any corporation,
partnership, association or other business entity of which (i) if a corporation,
a majority of the total voting power

-4-

<PAGE>

of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a partnership, association or other business entity, a majority of
the partnership or other similar ownership interest thereof is at the time owned
or controlled, directly or indirectly, by any Person or one or more Subsidiaries
of that Person or a combination thereof. For purposes hereof, a Person or
Persons shall be deemed to have a majority ownership interest in a partnership,
association or other business entity if such Person or Persons shall be
allocated a majority of partnership, association or other business entity gains
or losses or shall be or control the managing director or a general partner of
such partnership, association or other business entity.

"TRANSACTION DOCUMENTS" means, collectively, (i) this Agreement, (ii)
the Registration Rights Agreement, dated as of the date hereof, by and among the
parties hereto, (iii) the Investor Agreements, (iv) the Warrant Agreement, (v)
the Executive Agreements, (vi) the Common Option Agreements and (vii) the
Preferred Option Agreements, in each case, as the same may be amended, restated
or modified from time to time.

"UNAFFILIATED THIRD PARTY" means any Person who, immediately prior to
the contemplated transaction (i) does not own in excess of 5% of the Common
Stock on a fully diluted basis (a "5% OWNER"), (ii) is not controlling,
controlled by or under common control with any such 5% Owner and (iii) is not
the spouse or descendent (by birth or adoption) of any such 5% Owner or a trust
for the benefit of such 5% Owner and/or such other Persons.

2. BOARD OF DIRECTORS.

(a) Until the provisions of this Section 2 cease to be effective,
to the extent permitted by law, each Shareholder shall vote all voting
securities of the Company over which such Shareholder has voting control, and
shall take all other necessary or desirable actions within such Shareholder's
control (whether in such Shareholder's capacity as a Shareholder, director,
member of a board committee or officer of the Company or otherwise, and
including, without limitation, attendance at meetings in Person or by proxy for
purposes of obtaining a quorum and execution of written consents in lieu of
meetings), and the Company shall take all necessary and desirable actions within
its control (including, without limitation, calling special board and
Shareholder meetings), so that:

(i) the authorized number of directors on the Board shall be
established at six directors;

(ii) the following Persons shall be elected to the Board:

(A) for so long as BRS holds at least 10% of the Shareholder
Shares held by it as of the date hereof, two (2) representatives
designated by BRS determined by a vote or consent of the holders of a
majority of the BRS Shares (the "BRS DIRECTORS");

-5-

<PAGE>

(B) Mark Smith, for so long as he is then acting and duly
elected Chief Executive Officer of the Company and willing and capable
to serve as a director, and after such time, one individual determined
by the vote or consent of Shareholders owning a majority of the
Executive Shares, voting together as a single class (the "EXECUTIVE
DIRECTOR");

(C) for so long as the Farallon Investors hold, in the
aggregate, at least 10% of the aggregate number of Shareholder Shares
held by them as of the date hereof, one (1) representative designated
by the Farallon Investors determined by a vote or consent of the
holders of a majority of the Farallon Shares (the "FARALLON
DIRECTOR");

(D) two (2) representatives designated by the holders of the
Class A Common, determined by the vote or consent of the holders of a
majority of the Class A Common, who shall initially be Paul N. Arnold
and Charles T. May (each, an "INDEPENDENT DIRECTOR").

(iii) the composition of the board of directors of each of the
Company's Subsidiaries (a "SUB BOARD") shall be as determined by the Board;

(iv) the Board shall create a Compensation Committee, which shall
consist of two BRS Directors and the Executive Director, which shall have
the duties and functions set forth in the Company's by-laws;

(v) any committees of the Board or a Sub Board (other than the
Compensation Committee) shall be created only upon the approval of a
majority of the members of the Board and the composition of each such
committee (if any) shall consist of at least one BRS Director;

(vi) any BRS Director, Executive Director, Farallon Director or
Independent Director shall be removed from the Board, a Sub Board or any
committee thereof (with or without cause) at the written request of the
Shareholder or Shareholders which have the right to designate such director
hereunder, but only upon such written request and under no other
circumstances (in each case, determined on the basis of a vote or consent
of the Shareholders referred to in clause (ii)(A), (ii)(B), (ii)(C) or
(ii)(D) as the case may be);

(vii) in the event that any representative designated hereunder for
any reason ceases to serve as a member of the Board or a Sub Board or any
committee thereof during such representative's term of office, the
resulting vacancy on the Board or such Sub Board or committee shall be
filled by a representative designated by the Shareholders referred to in
clause (ii)(A), (ii)(B), (ii)(C), or (ii)(D), as the case may be; and

(b) The Company shall pay the reasonable out-of-pocket expenses
incurred by each director or observer in connection with attending the meetings
of the Board or any Sub Board and any committee thereof. In addition, the
Company shall pay such additional compensation to

-6-

<PAGE>

directors who are not employees of the Company or any of its Subsidiaries as the
Board so determines.

(c) The provisions of this Section 2 shall terminate automatically
and be of no further force and effect upon the consummation of an Initial Public
Offering.

(d) If any party fails to designate a representative to fill a
directorship pursuant to the terms of this Section 2, the election of a Person
to such directorship shall be accomplished in accordance with the Company's
bylaws and applicable law (provided that such party may subsequently remove and
replace such Person). In the event that any provision of the Company's bylaws
or articles of incorporation is inconsistent with any provision of this Section
2, the Shareholders shall take such action as may be necessary to amend any such
provision in the Company's bylaws or certificate of incorporation to remedy such
inconsistency.

(e) So long as Robert Giardina, Alexander Alimanestianu, and
Richard Pyle (all of whom are Executives, each, an "OBSERVER") each owns at
least 10% of the Stockholder Shares held by him as of the date hereof, the
Company shall give each Observer written notice of each meeting of the Board,
at the same time and in the same manner as notice is given to the directors, and
the Company shall permit each Observer to attend, as an observer, all such
meetings unless attendance at such meeting, in the Board's reasonable judgment,
would create a conflict of interest for such Observer; PROVIDED, that in the
case of telephonic meetings, such Observer need receive only actual notice
thereof at the same time and in the same manner as notice is given to the
directors, and such Observer shall be given the opportunity to listen to such
telephonic meetings. Each Observer shall be entitled to receive all written
materials and other information (including, without limitation, copies of
meeting minutes) given to directors of the Company in connection with such
meetings at the same time such materials and information are given to such
directors unless, in the Board's reasonable judgment, receipt of such materials
would create a conflict of interest by such Observer. The Company shall give
written notice of any action by written consent in lieu of a meeting of
directors to such Observer prior to the effective date of such consent
describing in reasonable detail the nature and substance of such action.

3. REPRESENTATIONS AND WARRANTIES. Each Shareholder represents
and warrants that (a) effective as of the date hereof such Shareholder is the
record owner of the number of Shareholder Shares and Preferred Shares set forth
opposite its name on SCHEDULE A attached hereto (assuming all such shares and
options therefor have become fully vested), (b) this Agreement has been duly
authorized, executed and delivered by such Shareholder and constitutes the valid
and binding obligation of such Shareholder, enforceable in accordance with its
terms, and (c) such Shareholder has not granted and is not a party to any proxy,
voting trust or other agreement which is inconsistent with, conflicts with or
violates any provision of this Agreement. No holder of Shareholder Shares shall
grant any such proxy or become party to any such voting trust or other agreement
which is inconsistent with, conflicts with or violates any provision of this
Agreement.

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<PAGE>

4. RESTRICTIONS ON TRANSFER.

(a) TAG ALONG RIGHTS. Subject to Sections 4(c) and 4(d) and other
than in connection with a Public Sale or Approved Sale, at least 30 days prior
to any sale, transfer, assignment, pledge or other disposal (a "TRANSFER") of
Shareholder Shares or Preferred Shares by BRS, BRS shall deliver a written
notice (the "SALE NOTICE") to the Company and the Other Shareholders, specifying
in reasonable detail the identity of the prospective transferee(s) and the terms
and conditions of the Transfer. The Other Shareholders may elect to participate
in the contemplated Transfer by delivering written notice to BRS within 15 days
after delivery of the Sale Notice. If any Other Shareholders have elected to
participate in such Transfer, BRS and such Other Shareholders shall be entitled
to sell in the contemplated Transfer, at the same price and on the same terms,
(x), with respect to Shareholder Shares, a number of Shareholder Shares equal to
the product of (i) the quotient determined by dividing the number of Shareholder
Shares owned by such Person by the aggregate number of Shareholder Shares owned
by all Shareholders participating in such Transfer and (ii) the aggregate number
of Shareholder Shares to be sold in the contemplated Transfer and (y), with
respect to Preferred Shares, a number of Preferred Shares equal to the product
of (i) the quotient determined by dividing the number of Preferred Shares owned
by such Person by the aggregate number of Preferred Shares owned by all
Shareholders participating in such Transfer and (ii) the aggregate number of
Preferred Shares to be sold in the contemplated Transfer; PROVIDED, that if the
Sale Notice includes a Transfer of both Shareholder Shares and Preferred Shares,
and any Other Shareholder elects to participate in such Transfer, such Other
Shareholder must sell the number of Preferred Shares calculated in accordance
with clause (y) (or if such Shareholder holds a lesser number of Preferred
Shares, all Preferred Shares held by such Shareholder).

FOR EXAMPLE, if the Sale Notice contemplates a sale of 100 Shareholder
Shares and 100 Preferred Shares by BRS, and if BRS at such time owns
30% of all Shareholder Shares and Preferred Shares and if one Other
Shareholder elects to participate and owns 20% of all Shareholder
Shares and Preferred Shares, BRS would be entitled to sell 60
Shareholder Shares (30% DIVIDED BY 50% x 100 shares) and 60 Preferred
Shares (30% DIVIDED BY 50% x 100 shares) and the Other Shareholder
would be entitled to sell 40 Shareholder Shares (20% DIVIDED BY 50% x
100 shares) and would be entitled and obligated to sell 40 Preferred
Shares (20% DIVIDED BY 50% x 100 shares).

(b) FIRST OFFER RIGHTS.

(i) Subject to Sections 4(c) and 4(d) and other than in
connection with a Public Sale or Approved Sale, at least thirty (30) days prior
to any Transfer of Shareholder Shares by any Shareholder (other than holders of
BRS Shares or Farallon Shares), the Shareholder making such Transfer (the
"TRANSFERRING SHAREHOLDER") shall deliver a written notice (the "TRANSFER
NOTICE") to the Company and the Investors specifying in reasonable detail the
number of shares proposed to be transferred (the "TRANSFER SHARES"), the
proposed purchase price and the other terms and conditions of the Transfer. The
Company may elect to purchase all (but not less than all) of the Transfer Shares
upon the same terms and conditions as those set forth in the Transfer Notice, by
delivering a written notice of such election to the Transferring Shareholder
within fifteen (15) days after the Transfer Notice has been delivered to the
Company. If the Company has not elected to purchase all

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<PAGE>

of the Transfer Shares, the Investors (or their designees) may elect to purchase
all (but not less than all) of the Transfer Shares, upon the same terms and
conditions as those set forth in the Transfer Notice, by giving written notice
of such election to the Transferring Shareholder within 15 days after the
Transfer Notice has been given to the Investors. If each of the Investors
elects to purchase the Transfer Shares, the Transfer Shares to be purchased by
each Investor shall be allocated among the Investors based upon the relative
number of Shareholder Shares then held by each such Investor unless otherwise
agreed upon by the Investors. If neither the Company nor the Investors elects
to purchase all of the Transfer Shares specified in the Transfer Notice, then
the Transferring Shareholder may transfer the Transfer Shares specified in the
Transfer Notice at a price and on terms in the aggregate not materially more
favorable to the transferee(s) thereof than specified in the Transfer Notice
during the 90-day period immediately following the date on which the Transfer
Notice has been given to the Company and the Investors. Any Transfer Shares not
transferred within such 90-day period will continue to be subject to the
provisions of this Section 4(b)(i) upon any subsequent proposed Transfer.

(ii) Subject to Sections 4(c) and 4(d) and other than in
connection with a Public Sale or Approved Sale, at least thirty (30) days prior
to Transfer of any Shareholder Shares by any Farallon Investor, such Farallon
Investor shall deliver written notice (the "FARALLON SALE NOTICE") to BRS
specifying in reasonable detail the number of shares proposed to be transferred
(the "PROPOSED SHARES"). Upon receipt of the Farallon Sale Notice, BRS shall
within thirty (30) days deliver a written offer to such Farallon Investor to
purchase the Proposed Shares specifying in reasonable detail the amount and type
of consideration to be offered for the Proposed Shares and the other terms and
conditions of such offer (the "BRS REPURCHASE NOTICE"). Upon receipt of the BRS
Repurchase Notice, such Farallon Investor shall within ten (10) days deliver to
BRS a written acceptance or rejection of the offer contained in the Repurchase
Notice. If such Farallon Investor rejects the offer contained in the BRS
Repurchase Notice, such Farallon Investor may transfer the Proposed Shares
specified in the Farallon Sale Notice at a price and on terms in the aggregate
materially not more favorable to the transferee(s) thereof than specified in the
BRS Repurchase Notice during the 90-day period immediately following the date on
which the Farallon Sale Notice has been given to BRS. Any Proposed Shares not
transferred within such 90-day period will continue to be subject to the
provisions of this Section 4(b)(ii) upon any subsequent proposed Transfer.

(iii) Any purchase by the Company and/or the Investors
pursuant to this Section 4(b) shall be closed at the Company's executive offices
within (x) 45 days after the Transfer Notice (in the case of purchase pursuant
to Section 4(b)(i)) or (y) 30 days after the acceptance by the applicable
Farallon Investor of the offer set forth in the BRS Repurchase Notice pursuant
to Section 4(b)(ii). At the closing, the purchaser or purchasers shall pay the
purchase price by certified check or wire transfer of immediately available
funds, and the seller or sellers shall deliver the certificate or certificates
(or duly executed affidavits of lost certificates in accordance with the
Certificate of Incorporation) representing the Shareholder Shares and/or
Preferred Shares, as the case may be, to such purchaser or purchaser or their
nominees, accompanied by duly executed stock powers.

-9-

<PAGE>

(c) PERMITTED TRANSFERS. The restrictions contained in this
Section 4 shall not apply with respect to any Transfer of Shareholder Shares (or
Preferred Shares, to the extent this Section 4 applies to Preferred Shares) by
any Shareholder (i) in the case of an individual Shareholder, pursuant to
applicable laws of descent and distribution or among such Shareholder's Family
Group, (ii) in the case of holders of the BRS Shares and its Permitted
Transferees, (A) among their Affiliates, partners and employees (provided that
in the case of a distribution to BRS' partners, such distribution shall be made
PRO RATA to all such partners in accordance with the terms of its agreement of
limited partnership), (B) to any employee, prospective employee, director or
prospective director of the Company or any Subsidiary of the Company as
incentive compensation, (C) to any former or prospective employee, director or
prospective director of BRS or any Affiliate of BRS or (D) to any BRS Investor
or BRS, (iii) in the case of Canterbury, any Farallon Investor and their
respective Permitted Transferees, (A) among their respective Affiliates, members
and partners (provided that in the case of a distribution to Farallon's or
Canterbury's members or partners, such distribution shall be made PRO RATA to
all such partners in accordance with the terms of their respective agreements of
limited partnership) and (B) to any employee, director or prospective director
of the Company or any Subsidiary of the Company as incentive compensation, (iv)
in the case of Canterbury, to any assignee or participant in the subordinated
loan provided to the Company by Canterbury pursuant to the Subordinated Loan
Agreement, dated as of the date hereof, by and among the Company, Canterbury and
the other lenders named therein (as amended, restated, modified from time to
time, the "SUBORDINATED LOAN AGREEMENT") only if Canterbury is required to do so
pursuant to its agreement of limited partnership or in connection with any
dissolution of Canterbury pursuant to its agreement of limited partnership
agreement, or (v) in the case of any Farallon Investor, to another Farallon
Investor; PROVIDED, that the rights and restrictions contained in this Section 4
shall continue to be applicable to such Shareholder Shares or Preferred Shares,
as the case may be, after any such Transfer as if such Shareholder Shares or
Preferred Shares, as the case may be, were held by the transferor; and PROVIDED
FURTHER, that the transferees of such Shareholder Shares or Preferred Shares, as
the case may be, shall have agreed in writing to be bound by the provisions of
this Agreement which affect the Shareholder Shares or Preferred Shares, as the
case may be, so transferred by executing a joinder in substantially the form
attached hereto as EXHIBIT A. All transferees permitted under this Section 4(c)
are collectively referred to herein as "PERMITTED TRANSFEREES."

(d) TERMINATION OF RESTRICTIONS. The restrictions set forth in
this Section 4 shall continue with respect to each Shareholder Share or
Preferred Share until the earlier of (i) the Transfer of such Shareholder Share
or Preferred Share in a Public Sale or an Approved Sale, (ii) the consummation
of a an Initial Public Offering or (iii) the Transfer of such Shareholder Share
or Preferred Share (other than to another Shareholder or the Company) pursuant
to Section 4(a) or 4(b) hereof. In addition, the provisions of this Section 4
shall terminate on the date on which BRS holds less than 10% of the Shareholder
Shares held by it as of the date hereof

5. SALE OF THE COMPANY.

(a) In the event of an Approved Sale, each Shareholder will
(i) consent to and raise no objections against the Approved Sale or the process
pursuant to which the Approved Sale was arranged, (ii) waive any dissenter's
rights and other similar rights, and (iii) if the Approved Sale

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<PAGE>

is structured as a sale of stock, each Shareholder will agree to sell its
Shareholder Shares and Preferred Shares on the terms and conditions of the
Approved Sale. Each Shareholder will take all reasonably necessary and
desirable actions as directed by the Board and the holders of a majority of the
BRS Shares in connection with the consummation of any Approved Sale, including,
without limitation, executing the applicable purchase agreements, which shall
include customary and reasonable representations, warranties, indemnities and
contribution rights (provided that any such indemnification or contribution
obligations of any Shareholder shall be limited to the total consideration
received by such Shareholder in connection with such Approved Sale).

(b) If the Company or the holders of the Company's securities enter
into any negotiation or transaction for which Rule 506 (or any similar rule then
in effect) under the Securities Act may be available with respect to such
negotiation or transaction (including a merger, consolidation or other
reorganization), the Other Shareholders (other than Canterbury and Farallon, who
shall act on their own behalf) will, at the request of the Company, appoint a
purchaser representative (as such term is defined in Rule 501) reasonably
acceptable to the Company. If any Other Shareholder appoints a purchaser
representative designated by the Company, the Company will pay the fees of such
purchaser representative, but if any Other Shareholder declines to appoint the
purchaser representative designated by the Company such holder will appoint
another purchaser representative (reasonably acceptable to the Company), and
such holder will be responsible for the fees of the purchaser representative so
appointed.

(c) All Shareholders will bear their PRO RATA share (based upon the
number of shares sold) of the reasonable costs of any sale of Shareholder Shares
and Preferred Shares pursuant to an Approved Sale to the extent such costs are
incurred for the benefit of all selling Shareholders and are not otherwise paid
by the Company or the acquiring party. Costs incurred by any Shareholder on its
own behalf will not be considered costs of the transaction hereunder.

(d) This Section 5 shall automatically terminate upon the earlier
of (i) the consummation of a Initial Public Offering or (ii) the date on which
BRS hold less than 20% of the Common Stock on a fully diluted basis.

6. PREEMPTIVE RIGHTS. If the Company issues any equity securities
or any securities containing options or rights to acquire any equity securities
or any securities convertible or exchangeable for equity securities in each
case, after the date hereof to any Person (other than the Executives) (the
"OFFEREE"), the Company will offer to sell to each Shareholder, a number of such
securities ("OFFERED SHARES") so that the Ownership Ratio immediately after the
issuance of such securities for each Shareholder would be equal to the Ownership
Ratio for such Shareholder immediately prior to such issuance of securities;
PROVIDED, that if the antidilution provisions set forth in Section 12 of the
Warrant Agreement adjust the terms of the Warrants as a result of such issuance,
the Company shall not be required to offer Canterbury the Offered Shares with
respect to the Shareholder Shares attributable to the Warrant. The Company
shall give each Shareholder at least 30 days prior written notice of any
proposed issuance, which notice shall disclose in reasonable detail the proposed
terms and conditions of such issuance (the "ISSUANCE NOTICE"). Each Shareholder
will be entitled to purchase such securities at the same price, on the same
terms, and at the same time as the securities are issued to the Offeree by
delivery of written notice to the Company of such

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<PAGE>

election within 15 days after delivery of the Issuance Notice (the "ELECTION
NOTICE"); PROVIDED, that if more than one type of security was issued, each
Shareholder shall, if it exercises its rights pursuant to this Section 6,
purchase such securities in the same ratio as issued. If any of the Shareholders
have elected to purchase any Offered Shares, the sale of such shares shall be
consummated as soon as practical (but in any event within 10 days) after the
delivery of the Election Notice. In the event any Shareholder elects not to
exercise its rights pursuant to this Section 6, no other Shareholder shall have
the right to purchase the securities offered to such Shareholder. This Section
6 will terminate automatically, and be of no further force and effect, upon the
consummation of a Initial Public Offering.

7. LEGEND. In addition to any legend required by any other
Transaction Document, each certificate evidencing Shareholder Shares or
Preferred Shares and each certificate issued in exchange for or upon the
transfer of any Shareholder Shares or Preferred Shares (if such shares remain
Shareholder Shares or Preferred Shares, as the case may be, as defined herein
after such transfer) shall be stamped or otherwise imprinted with a legend in
substantially the following form:

"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE
ORIGINALLY ISSUED ON DECEMBER 10, 1996, AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
THE SECURITIES REPRE-SENTED BY THIS CERTIFICATE ARE SUBJECT
TO A SHAREHOLDERS AGREEMENT DATED AS OF DECEMBER 10, 1996 BY
AND AMONG THE ISSUER OF SUCH SECURITIES (THE "COMPANY") AND
CERTAIN OF THE COMPANY'S SHAREHOLDERS. A COPY OF SUCH
SHAREHOLDERS AGREEMENT WILL BE FURNISHED WITHOUT CHARGE BY
THE COMPANY TO THE HOLDER HEREOF UPON WRITTEN REQUEST."

The Company shall imprint such legend on certificates evidencing Shareholder
Shares or Preferred Shares outstanding prior to the date hereof. The legend set
forth above shall be removed from the certificates evidencing any shares which
cease to be Shareholder Shares or Preferred Shares, as the case may be.

8. TRANSFERS IN VIOLATION OF AGREEMENT. Any Transfer or attempted
Transfer of any Shareholder Shares in violation of any provision of this
Agreement shall be null and void, and the Company shall not record such Transfer
on its books or treat any purported transferee of such Shareholder Shares as the
owner of such shares for any purpose.

9. TRANSFER OF SHAREHOLDER SHARES.

(a) Shareholder Shares are transferable only pursuant to (i) public
offerings registered under the Securities Act, (ii) subject to the provisions of
Section 4 above, Rule 144, Rule 144A or Rule 701 (or any similar rule or rules
then in effect) of the Securities and Exchange

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<PAGE>

Commission if such rule is available, (iii) Section 4(c), and (iv) subject to
Section 4 and Section 9(b) below, any other legally available means of Transfer.

(b) In connection with the Transfer of any Shareholder Shares other
than a Transfer described in clause (i) or (ii) of Section 9(a) above, the
holder thereof shall deliver written notice to the Company describing in
reasonable detail the Transfer or proposed Transfer, together with an opinion of
counsel reasonably acceptable to the Company to the effect that such Transfer of
Shareholder Shares may be effected without registration of such Shareholder
Shares under the Securities Act. In addition, if the holder of the Shareholder
Shares delivers to the Company an opinion of counsel that no subsequent Transfer
of such Shareholder Shares shall require registration under the Securities Act,
the Company shall promptly upon such contemplated Transfer deliver new
certificates for such Shareholder Shares which do not bear the legend set forth
in Section 6 above. If the Company is not required to deliver new certificates
for such Shareholder Shares not bearing such legend, the holder thereof shall
not Transfer the same until the prospective transferee has confirmed to the
Company in writing its agreement to be bound by the conditions contained in this
Section 9 and Section 7 above.

(c) Upon the request of a holder of Shareholder Shares, the Company
shall promptly supply to such Person or its prospective transferees all
information regarding the Company required to be delivered in connection with a
Transfer pursuant to Rule 144A (or any similar rule or rules then in effect) of
the Securities and Exchange Commission.

(d) Upon the request of any holder of Shareholder Shares, the
Company shall remove the legend set forth in Section 7 above from the
certificates for such holder's Shareholder Shares (or the eligible portion
thereof); PROVIDED, that such Shareholder Shares have been either registered
under the Securities Act or are eligible for sale pursuant to Rule 144 (or any
similar rule or rules then in effect) of the Securities and Exchange Commission.

10. AMENDMENT AND WAIVER. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement shall be
effective against the Company or the Shareholders unless such modification,
amendment or waiver is approved in writing by the Company or the holders of not
less than 70% of the Shareholder Shares, respectively; PROVIDED, that no such
amendment or action which materially adversely affects any one or more
Shareholder(s) shall be effective against such Shareholder(s) without the prior
written consent of each such Shareholder. For avoidance of doubt, an amendment
to add another party to this Agreement is not an action which, in and of itself,
affects any Shareholder materially adversely. The failure of any party to
enforce any of the provisions of this Agreement shall in no way be construed as
a waiver of such provisions and shall not affect the right of such party
thereafter to enforce each and every provision of this Agreement in accordance
with its terms.

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<PAGE>

11. AFFILIATE TRANSACTIONS. The Company will not, and will not
permit any of its Subsidiaries, to enter into any transaction or series of
transactions after the date hereof, whether or not in the ordinary course of
business with any Affiliate or 5% Owner (or any Affiliate of such 5% Owner);
PROVIDED, that the foregoing shall not apply to (i) the declaration and payment
of dividends approved by the Board, (ii) employment arrangements with any
Executive or employees of the Company entered into in the ordinary course of
business, (iii) any transactions expressly permitted or contemplated by this
Agreement, the Registration Rights Agreement, the Investor Agreements, the
Executive Agreements, the Common Option Agreements, the Preferred Option
Agreements, the Warrant Agreement, the Subordinated Loan Agreement (and all
documents entered into in connection therewith), and the Professional Services
Agreement date as of the date hereof by and among the Company and an Affiliate
of BRS, or (iv) any transaction consented to by not less than 70% of the
Shareholder Shares excluding for purposes of this clause (iv) Shareholder Shares
held by such Affiliate or 5% Owner).

12. MISCELLANEOUS.

(a) SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.

(b) ENTIRE AGREEMENT. Except as otherwise expressly set forth
herein, this Agreement and the other Transaction Documents embody the complete
agreement and understanding among the parties hereto with respect to the subject
matter hereof and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way; it being understood and agreed that
nothing herein is intended to impair or affect in any way Canterbury's rights in
its capacity as a lender or agent under the Subordinated Loan Agreement.

(c) SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
this Agreement shall bind and inure to the benefit of and be enforceable by the
Company and its successors and assigns and the Shareholders and any subsequent
holders of Shareholder Shares and the respective successors and assigns of each
of them, so long as they hold Shareholder Shares; it being understood that any
transferee of Shareholder Shares or Preferred Shares pursuant to Section 4(a) or
4(b) (other than Shareholders) shall not succeed to the rights or obligations of
the transferor hereunder.

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<PAGE>

(d) COUNTERPARTS. This Agreement may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.

(e) REMEDIES. The parties hereto shall be entitled to enforce
their rights under this Agreement specifically to recover damages by reason of
any breach of any provision of this Agreement and to exercise all other rights
existing in their favor. The parties hereto agree and acknowledge that money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and that the Company, BRS, the BRS Investors, Farallon, Canterbury and
any Executive may in its sole discretion apply to any court of law or equity of
competent jurisdiction for specific performance and/or injunctive relief
(without posting a bond or other security) in order to enforce or prevent any
violation of the provisions of this Agreement.

(f) NOTICES. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement will
be in writing and will be deemed to have been given when delivered personally,
mailed by certified or registered mail, return receipt requested and postage
prepaid, or sent via a nationally recognized overnight courier, or sent via
facsimile to the recipient. Such notices, demands and other communications will
be sent to the address indicated below:

To the Company:

Town Sports International, Inc.
888 Seventh Avenue, Suite 1801
New York, New York 10106
Attention: Alex Alimanestianu
Facsimile No.: (212) 246-8422

With copies to (which shall not constitute notice to the
Company):

Bruckmann, Rosser, Sherrill & Co., Inc.
126 East 56th Street, 29th Floor
New York, New York 10022
Attention: Stephen Edwards
Facsimile No.: (212) 521-3799

Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Attention: Kirk A. Radke, Esq.
Facsimile No.: (212) 446-4900

To BRS:

Bruckmann, Rosser, Sherrill & Co., Inc.
126 East 56th Street, 29th Floor
New York, New York 10022

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<PAGE>

Attention: Stephen Edwards
Facsimile No.: (212) 521-3799

With a copy to (which shall not constitute notice to BRS):

Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Attention: Kirk A. Radke, Esq.
Facsimile No.: (212) 446-4900

To Farallon:

c/o Farallon Capital Management, L.L.C.
One Maritime Plaza, Suite 1325
San Francisco, California 94111
Attention: Jason M. Fish
Facsimile No.: (415) 421-2133

With a copy to (which shall not constitute notice to Farallon):

Richards, Spears, Kibbe & Orbe
One Chase Manhattan Plaza, 57th Floor
New York, New York 10005
Attention: William Q. Orbe, Esq.
Facsimile No.: (212) 530-1801

To Canterbury:

Canterbury Mezzanine Capital, L.P.
600 Fifth Avenue, 23rd Floor
New York, New York 10020
Attention: Patrick N. W. Turner
Facsimile No.: (212) 332-1584

With a copy to (which shall not constitute notice to
Canterbury):

Cravath Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019-7475
Attention: Mayme Greer, Esq.
Facsimile No.: (212) 474-3700

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<PAGE>

To any of the Executives:

[EXECUTIVE'S NAME]
c/o Town Sports International, Inc.
888 Seventh Avenue, Suite 1801
New York, New York 10106
Facsimile No.: (212) 246-8422

or such other address or to the attention of such other Person as the recipient
party shall have specified by prior written notice to the sending party.

(g) WAIVER OF JURY TRIAL. Each of the parties hereto waives any
right it may have to trial by jury in respect of any litigation based on,
arising out of, under or in connection with this agreement or any course of
conduct, course of dealing, verbal or written statement or action of any party
hereto.

(j) DESCRIPTIVE HEADINGS. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.

* * * * *

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<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

TOWN SPORTS INTERNATIONAL, INC.

By: /s/ A. Alimanestianu
--------------------------------
Name: Alexander Alimanestianu
Title: Executive Vice President

BRUCKMANN, ROSSER, SHERRILL & CO., L.P.

By: BRS Partners, Limited Partnership
Its: General Partner

By: /s/ Stephen Edwards
--------------------------------
Name: Stephen Edwards
Title: Vice President

CANTERBURY MEZZANINE CAPITAL, L.P.

By: Canterbury Capital, L.L.C.
Its: General Partner

By: /s/ Nicholas B. Murphy
--------------------------------
Name: Nicholas B. Murphy
Title: Member

By: /s/
--------------------------------
Name:
Title: Member

<PAGE>

FARALLON CAPITAL PARTNERS, L.P.

By: Farallon Partners, L.L.C.
Its: General Partner

By: /s/ David I. Cohen
--------------------------------
Name: David I. Cohen
Title: Managing Member

FARALLON CAPITAL INSTITUTIONAL PARTNERS, L.P.

By: Farallon Partners, L.L.C.
Its: General Partner

By: /s/ David I. Cohen
--------------------------------
Name: David I. Cohen
Title: Managing Member

RR CAPITAL PARTNERS, L.P.

By: Farallon Partners, L.L.C.
Its: General Partner

By: /s/ David I. Cohen
--------------------------------
Name: David I. Cohen
Title: Managing Member

FARALLON CAPITAL INSTITUTIONAL PARTNERS II,
L.P.

By: Farallon Partners, L.L.C.
Its: General Partner

By: /s/ David I. Cohen
--------------------------------
Name: David I. Cohen
Title: Managing Member

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Peter J. Bazzel
- --------------------------------------
EXECUTIVE

Name:(Print): Peter J. Bazzel
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Karl M. Derlent
- --------------------------------------
EXECUTIVE

Name:(Print): Karl M. Derlent
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Raymond Dewhirst
- --------------------------------------
EXECUTIVE

Name:(Print): Raymond Dewhirst
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Margaret R. Stevens
- --------------------------------------
EXECUTIVE

Name:(Print): Margaret R. Stevens
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Bob Calvo
- --------------------------------------
EXECUTIVE

Name:(Print): Bob Calvo
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Mona N. Guzman
- --------------------------------------
EXECUTIVE

Name:(Print): Mona N. Guzman
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Carol Cornbill
- --------------------------------------
EXECUTIVE

Name:(Print): Carol Cornbill
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Nina Dachaine
- --------------------------------------
EXECUTIVE

Name:(Print): Nina Dachaine
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Edward Trainor
- --------------------------------------
EXECUTIVE

Name:(Print): Edward Trainor
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Leslie Kimeding
- --------------------------------------
EXECUTIVE

Name:(Print): Leslie Kimeding
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ D.A. Smith (Debbie)
- --------------------------------------
EXECUTIVE

Name:(Print): D.A. Smith (Debbie)
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ R.G. Pyle
- --------------------------------------
EXECUTIVE

Name:(Print): R.G. Pyle
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ A. Alimanestianu
- --------------------------------------
EXECUTIVE

Name:(Print): Alexander Alimanestianu
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Robert Giardina
- --------------------------------------
EXECUTIVE

Name:(Print): Robert Giardina
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Mark Smith
- --------------------------------------
EXECUTIVE

Name:(Print): Mark Smith
------------------------

<PAGE>

EXECUTIVE SIGNATURE PAGE

/s/ Heinz Ritscuard
- --------------------------------------
EXECUTIVE

Name:(Print): Heinz Ritscuard
------------------------

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Bruce Bruckmann
- --------------------------------------
BRS INVESTOR

Name: (Print): Bruce Bruckmann
----------------------
Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Donald Bruckmann
- --------------------------------------
BRS INVESTOR

Name: (Print): Donald Bruckmann
----------------------
Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ BCB Partnership
- --------------------------------------
BRS INVESTOR

Name: (Print): BCB Partnership
----------------------
Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ NAZ Partnership
- --------------------------------------
BRS INVESTOR

Name: (Print): NAZ Partnership
----------------------
Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Harold O. Rosser
- --------------------------------------
BRS INVESTOR

Name: (Print): Harold O. Rosser
----------------------
Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Virgil Sherrill
- --------------------------------------
BRS INVESTOR

Name: (Print): Virgil Sherrill
----------------------
Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Stephen Sherrill
- --------------------------------------
BRS INVESTOR

Name: (Print): Stephen Sherrill
----------------------
Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Nancy Zweng
- --------------------------------------
BRS INVESTOR

Name: (Print): Nancy Zweng
----------------------
Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Paul D. Kaminski
- --------------------------------------
BRS INVESTOR

Name: (Print): Paul D. Kaminski
----------------------
Title (if any): Attorney-in-fact

<PAGE>

BRS INVESTOR SIGNATURE PAGE

/s/ Paul D. Kaminski
- --------------------------------------
BRS INVESTOR

Name: (Print): Paul D. Kaminski
----------------------
Title (if any): Attorney-in-fact

<PAGE>

SCHEDULE A
----------

<PAGE>

EXHIBIT A
---------

FORM OF JOINDER TO
SHAREHOLDERS AGREEMENT
----------------------

THIS JOINDER to the Shareholders Agreement, dated as of December __,
1996 by and among Town Sports International, Inc., a New York corporation (the
"COMPANY"), and certain shareholders of the Company (the "AGREEMENT"), is made
and entered into as of _____________, ____ by and between the Company and
____________ ("HOLDER"). Capitalized terms used herein but not otherwise
defined shall have the meanings set forth in the Agreement.

WHEREAS, Holder has acquired certain shares of Common Stock ("HOLDER
STOCK"), and the Agreement and the Company requires Holder, as a holder of
Common Stock, to become a party to the Agreement, and Holder agrees to do so in
accordance with the terms hereof.

1. AGREEMENT TO BE BOUND. Holder hereby agrees that upon
execution of this Joinder, it shall become a party to the Agreement and shall
be fully bound by, and subject to, all of the covenants, terms and conditions of
the Agreement as though an original party thereto and shall be deemed a
Shareholder [AND ______] for all purposes thereof. In addition, Holder hereby
agrees that all Common Stock held by Holder shall be deemed Shareholder Shares
for all purposes of the Agreement.

2. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
this Joinder shall bind and inure to the benefit of and be enforceable by the
Company and its successors and assigns and Holder and any subsequent holders of
Holder Stock and the respective successors and assigns of each of them, so long
as they hold any shares of Holder Stock.

3. COUNTERPARTS. This Joinder may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.

4. NOTICES. For purposes of Section 12(f) of the Agreement, all
notices, demands or other communications to the Holder shall be directed to:

[Name]
[Address]
[Facsimile Number]

5. GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY AND INTERPRETATION OF THIS JOINDER SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF
THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.

<PAGE>

6. DESCRIPTIVE HEADINGS. The descriptive headings of this Joinder
are inserted for convenience only and do not constitute a part of this Joinder.

* * * * *

-24-

<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Joinder as
of the date first above written.

TOWN SPORTS INTERNATIONAL, INC.

By:
------------------------------
Name:
Title:

[HOLDER]

By:
------------------------------

<PAGE>

Exhibit 11.1

Town Sports International, Inc.

Statement of Computation of Per Share Data

For the year ended May 31, 1997 and the three months ended August 31, 1997
All figures are $'000, except share data

<TABLE>
<CAPTION>
May 31, 1997 August 31, 1997
------------------------ ----------------------
Fully Fully
Primary Diluted Primary Diluted
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Net loss......................................................... $ (2,222) $ (2,222) $ ( 12) $ ( 12)
---------- ------------ ---------- ----------
---------- ------------ ---------- ----------

Weighted average number of common shares outstanding............. 1,010,000 1,010,000 1,010,000 1,010,000

Shares issuable upon exercise of outstanding options and
warrants....................................................... 171,164 171,164
---------- ------------ ---------- ----------

Weighted average number of common shares used in computing
per share data................................................. 1,010,000 1,181,164 1,010,000 1,181,164
---------- ------------ ---------- ----------
---------- ------------ ---------- ----------

Net loss per share............................................... $ ( 2.20) $ ( 1.88) $ (0.01) $ (0.01)
---------- ------------ ---------- ----------
---------- ------------ ---------- ----------
</TABLE>

<PAGE>
Exhibit 12.1

TOWN SPORTS INTERNATIONAL, INC.
All figures $'000, except coverage ratios

COMPUTATION OF EARNINGS TO FIXED CHARGES

For the Three Months
For the Year Ended May 31, Ended August 31,
---------------------------------- --------------------
1995 1996 1997 1996 1997
--------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
Earnings available for fixed charges:
Income (loss) before income taxes ....................... $ (1,274) $ 1,177 $ (1,178) $ 958 $ 976
Loss: income from investments accounted
for by the equity method......................... 270 331 179 71 65
Add: Cash distributions from investments
accounted for by the equity method................ 99 124 41 34 (38)
Add: Fixed charges, net of capitalized
interest.......................................... 2,476 3,215 5,421 808 2,049
--------- ------- --------- ------ -------
Total...................................... $ 1,031 $ 4,185 $ 4,101 $ 1,729 $ 2,922
--------- ------- --------- ------- -------
--------- ------- --------- ------- -------

Fixed Charges
Interest (includes amortization of debt
expense)............................................... $ 682 $ 1,012 $ 2,570 $ 203 $ 1,173
Interest portion of rent expense......................... 1,794 2,263 2,851 605 876
Capitalized interest..................................... 71 48 28 0 9
--------- ------- --------- ------- -------
Total...................................... $ 2,547 $ 3,321 $ 5,449 $ 808 $ 2,058
--------- ------- --------- ------- -------
--------- ------- --------- ------- -------

Coverage (deficit):
Earnings to fixed charges................................ $ (1,516) 1.3x $ (1,345) 2.1x 1.4x
--------- ------- --------- ------- -------
--------- ------- --------- ------- -------
</TABLE>

<PAGE>
Exhibit 21.1

Town Sports International, Inc.
Subsidiaries

Subsidiaries (1)

TSI Allston, Inc.
TSI Arthro Fitness Services, Inc.
TSI Baltimore, Inc.
TSI Bethesda, Inc.
TSI Broadway, Inc.
TSI Brunswick, Inc.
TSI Cash Management, Inc.
TSI Cobble Hill, Inc.
TSI Copley, Inc.
TSI Dupont Circle, Inc.
TSI Dupont II, Inc.
TSI East 23, Inc.
TSI East 34, Inc.
TSI East 36, Inc.
TSI East 41, Inc.
TSI East 51, Inc.
TSI East 59, Inc.
TSI East 76, Inc.
TSI East 91, Inc.
TSI East 94, Inc.
TSI Fenway, Inc.
TSI Fifth Avenue, Inc.
TSI First Avenue, Inc.
TSI Forest Hills, Inc.
TSI Glover, Inc.
TSI Great Neck, Inc.
TSI Greenwich Street, Inc.
TSI Herald, Inc.
TSI Hoboken, Inc.
TSI Holdings (DC), Inc.
TSI Holdings (IP), Inc.
TSI International, Inc.
TSI Lexington, Inc.
TSI Lincoln, Inc.

- ------------
(1)The Subsidiaries are all wholly owned by Town Sports International, Inc.
except TSI Washington, Inc., TSI Dupont Circle, Inc., TSI Dupont II, Inc., TSI
Glover, Inc., and TSI M Street, Inc. which are each wholly owned by TSI Holdings
(DC), Inc.

<PAGE>

TSI M Street, Inc.
TSI Madison, Inc.
TSI Mamaroneck, Inc.
TSI Princeton, LLC
TSI Rockville, Inc.
TSI Scarsdale, Inc.
TSI Seaport, Inc.
TSI Sheridan, Inc.
TSI Society Hill, Inc.
TSI Wall Street, Inc.
TSI Washington, Inc.
TSI West 23, Inc.
TSI West 80, Inc.
TSI White Plains, Inc.

<PAGE>
Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration on Form S-4 of our reports
dated July 24, 1997, on our audits of the financial statements and financial
statement schedule of Town Sports International, Inc. and Subsidiaries. We also
consent to the reference to our firm under the caption "Experts."

Coopers & Lybrand, L.L.P.

New York, New York
November 20, 1997

<PAGE>
Exhibit 25.1

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

-------------------

FORM T-1

STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE

-------------------

CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)

-------------------

UNITED STATES TRUST COMPANY OF NEW YORK
(Exact name of trustee as specified in its charter)

New York 13-3818954
(Jurisdiction of incorporation or (I. R. S. Employer
organization if not a U. S. national bank) Identification Number)

114 West 47th Street 10036-1532
New York, New York (Zip Code)
(Address of principal
executive offices)

-------------------
Town Sports International, Inc.
(Exact name of obligor as specified in its charter)

New York 13-2749906
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)

888 Seventh Avenue 10106
New York, New York (Zip code)
(Address of principal executive offices)

-------------------
9 3/4% Senior Notes due 2004
(Title of the indenture securities)

<PAGE>

GENERAL

1. GENERAL INFORMATION

Furnish the following information as to the trustee:

(a) Name and address of each examining or supervising authority to
which it is subject.

Federal Reserve Bank of New York (2nd District), New York, New York
(Board of Governors of the Federal Reserve System). Federal Deposit
Insurance Corporation, Washington, D. C. New York State Banking
Department, Albany, New York

(b) Whether it is authorized to exercise corporate trust powers.

The trustee is authorized to exercise corporate trust powers.

2. AFFILIATIONS WITH THE OBLIGOR

If the obligor is an affiliate of the trustee, describe each such
affiliation.

None.

3,4,5,6,7,8,9,10,11,12,13,14 and 15.

The obligor is currently not in default under any of its outstanding
securities for which United States Trust Company of New York is Trustee.
Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14
and 15 of Form T-1 are not required under General Instruction B.

16. LIST OF EXHIBITS

T-1.1 -- Organization Certificate, as amended, issued by the State of
New York Banking Department to transact business as a Trust
Company, is incorporated by reference to Exhibit T-1.1 to
Form T-1 filed on September 15, 1995 with the Commission
pursuant to the Trust Indenture Act of 1939, as amended by
the Trust Indenture Reform Act of 1990 (Registration No.
33-97056).

T-1.2 -- Included in Exhibit T-1.1.

T-1.3 -- Included in Exhibit T-1.1.

-2-
<PAGE>

LISTS OF EXHIBITS (Continued)

T-1.4 -- The By-laws of the United States Trust Company of New York,
as amended, is incorporated by reference to Exhibit T-1.4 to
Form T-1 filed on September 15, 1995 with the Commission
pursuant to the Trust Indenture Act of 1939, as amended by
the Trust Indenture Reform Act of 1990 (Registration No.
33-97056).

T-1.6 -- The consent of the trustee required by Section 321(b) of the
Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990.

T-1.7 -- A copy of the latest report of condition of the trustee
pursuant to law or the requirements of its supervising or
examining authority.

NOTE

As of November 13, 1997, the trustee had 2,999,020 shares of Common Stock
outstanding, all of which are owned by its parent company, U. S. Trust
Corporation. The term "trustee" in Item 2, refers to each of United
States Trust Company of New York and its parent company, U. S. Trust
Corporation.

In answering Item 2 in this statement of eligibility, as to matters
peculiarly within the knowledge of the obligor or its directors, the
trustee has relied upon information furnished to it by the obligor and
will rely on information to be furnished by the obligor and the trustee
disclaims responsibility for the accuracy or completeness of such
information.

-------------------------

Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, United States Trust Company of New York, a corporation organized
and existing under the laws of the State of New York, has duly caused
this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of New York, and
State of New York, on the 13th day of November, 1997.

UNITED STATES TRUST COMPANY OF
NEW YORK, Trustee

By: /S/ Patricia Stermer
-------------------------------
Patricia Stermer
Assistant Vice President

-3-

<PAGE>

Exhibit T-1.6

The consent of the trustee required by Section 321(b) of the Act.

United States Trust Company of New York
114 West 47th Street
New York, NY 10036

September 1, 1995

Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549

Gentlemen:

Pursuant to the provisions of Section 321(b) of the Trust Indenture Act
of 1939, as amended by the Trust Indenture Reform Act of 1990, and
subject to the limitations set forth therein, United States Trust Company
of New York ("U.S. Trust") hereby consents that reports of examinations
of U.S. Trust by Federal, State, Territorial or District authorities may
be furnished by such authorities to the Securities and Exchange
Commission upon request therefor.

Very truly yours,

UNITED STATES TRUST COMPANY
OF NEW YORK

-------------------------------
By: /S/Gerard F. Ganey
Senior Vice President

<PAGE>

EXHIBIT T-1.7

UNITED STATES TRUST COMPANY OF NEW YORK
CONSOLIDATED STATEMENT OF CONDITION
JUNE 30, 1997
(IN THOUSANDS)

<TABLE>
<S> <C>
ASSETS
Cash and Due from Banks............................................ $ 83,529
Short-Term Investments............................................. 259,746
Securities, Available for Sale..................................... 924,165
Loans.............................................................. 1,437,342
Less: Allowance for Credit Losses.................................. 13,779
----------
Net Loans.......................................................... 1,423,563
Premises and Equipment............................................. 61,515
Other Assets....................................................... 122,696
----------
Total Assets.................................................. $2,875,214
----------
----------
LIABILITIES
Deposits:
Non-Interest Bearing.......................................... $ 763,075
Interest Bearing.............................................. 1,409,017
----------
Total Deposits.............................................. 2,172,092
Short-Term Credit Facilities....................................... 404,212
Accounts Payable and Accrued Liabilities........................... 132,213
----------
Total Liabilities............................................. $2,708,517
----------
----------
STOCKHOLDER'S EQUITY
Common Stock....................................................... 14,995
Capital Surplus.................................................... 49,541
Retained Earnings.................................................. 100,930
Unrealized Gains (Losses) on Securities
Available for Sale, Net of Taxes................................. 1,231
----------
Total Stockholder's Equity......................................... 166,697
----------
Total Liabilities and Stockholder's Equity....................... $2,875,214
----------
----------
</TABLE>

I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named
bank do hereby declare that this Statement of Condition has been prepared in
conformance with the instructions issued by the appropriate regulatory authority
and is true to the best of my knowledge and belief.

Richard E. Brinkmann, SVP & Controller

August 7, 1997

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MAY 31, 1997 AND AUGUST 31, 1997, THE CONSOLIDATED
STATEMENT OF OPERATIONS AND THE CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED MAY 31, 1997 AND FOR THE THREE MONTHS ENDED AUGUST 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> MAY-31-1997 MAY-31-1998
<PERIOD-START> JUN-01-1996 JUN-01-1997
<PERIOD-END> MAY-31-1997 AUG-31-1997
<CASH> 2,468 702
<SECURITIES> 0 0
<RECEIVABLES> 228 292
<ALLOWANCES> 0 0
<INVENTORY> 327 403
<CURRENT-ASSETS> 3,802 2,401
<PP&E> 47,326 52,339
<DEPRECIATION> 13,112 14,491
<TOTAL-ASSETS> 52,819 55,874
<CURRENT-LIABILITIES> 12,238 12,522
<BONDS> 39,147 40,727
0 0
16,394 16,932
<COMMON> 1 1
<OTHER-SE> (23,346) (23,148)
<TOTAL-LIABILITY-AND-EQUITY> 52,819 55,874
<SALES> 0 0
<TOTAL-REVENUES> 56,567 17,198
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 55,291 15,078
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,455 1,144
<INCOME-PRETAX> (1,179) 976
<INCOME-TAX> (243) 450
<INCOME-CONTINUING> (936) 526
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (936) 526
<EPS-PRIMARY> (2.20) (0.01)
<EPS-DILUTED> (1.88) (0.01)

</TABLE>

<PAGE>
LETTER OF TRANSMITTAL

TO TENDER FOR EXCHANGE
9 3/4% SENIOR NOTES DUE 2004
OF
TOWN SPORTS INTERNATIONAL, INC.

PURSUANT TO THE PROSPECTUS DATED , 1997

THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON , 1997 UNLESS EXTENDED (THE "EXPIRATION DATE").

PLEASE READ CAREFULLY THE ATTACHED INSTRUCTIONS

If you desire to accept the Exchange Offer, this Letter of Transmittal should be
completed, signed, and submitted to the Exchange Agent:

<TABLE>
<S> <C> <C>
BY OVERNIGHT COURIER: BY HAND: BY REGISTERED OR CERTIFIED
United States Trust Company United States Trust Company MAIL:
of New York of New York United States Trust Company
770 Broadway, 13th Floor 111 Broadway of New York
New York, New York 10003 Lower Level P.O. Box 844
Attn: Corporate Trust New York, New York 10006 New York, New York
Services Attn: Corporate Trust Services 10276-0844
Attn: Corporate Trust
Services
Cooper Station
</TABLE>

DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.

FOR ANY QUESTIONS REGARDING THIS LETTER OF TRANSMITTAL OR FOR ANY ADDITIONAL
INFORMATION, YOU MAY CONTACT THE EXCHANGE AGENT BY TELEPHONE AT 800-548-6565, OR
BY FACSIMILE AT 212-420-6152.

The undersigned hereby acknowledges receipt of the Prospectus dated
, 1997 (the "Prospectus") of Town Sports International, Inc., a New
York corporation (the "Issuer"), and this Letter of Transmittal (the "Letter of
Transmittal"), that together constitute the Issuer's offer (the "Exchange
Offer") to exchange $1,000 in principal amount of its Series B 9 3/4% Senior
Notes due 2004 (the "Exchange Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement, for each $1,000 in principal amount of its outstanding
9 3/4% Senior Notes due 2004 (the "Notes"), of which $85 million aggregate
principal amount is outstanding. Capitalized terms used but not defined herein
have the meanings ascribed to them in the Prospectus.

The undersigned hereby tenders the Notes described in Box 1 below (the
"TENDERED NOTES") pursuant to the terms and conditions described in the
Prospectus and this Letter of Transmittal. The undersigned is the registered
owner of all the Tendered Notes and the undersigned represents that it has
received from each beneficial owner of the Tendered Notes ("BENEFICIAL OWNERS")
a duly completed and executed form of "INSTRUCTION TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM BENEFICIAL OWNER" accompanying
this Letter of Transmittal, instructing the undersigned to take the action
described in this Letter of Transmittal.

Subject to, and effective upon, the acceptance for exchange of the Tendered
Notes, the undersigned hereby exchanges, assigns, and transfers to, or upon the
order of, the Issuer, all right, title, and interest in, to, and under the
Tendered Notes.

Please issue the Exchange Notes exchanged for Tendered Notes in the name(s)
of the undersigned. Similarly, unless otherwise indicated under "SPECIAL
DELIVERY INSTRUCTIONS" below (Box 3), please send or cause to be sent the
certificates for the Exchange Notes (and accompanying documents, as appropriate)
to the undersigned at the address shown below in Box 1.

The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent as the true and lawful agent and attorney in fact of the undersigned with
respect to the Tendered Notes, with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest), to
(i) deliver the Tendered Notes to the Issuer or cause ownership of the Tendered
Notes to be transferred to, or upon the order of, the Issuer, on the books of
the registrar for the Notes and deliver all accompanying evidences of transfer
and authenticity to, or upon the order of, the Issuer upon receipt by the
Exchange Agent, as the undersigned's agent, of the Exchange Notes
<PAGE>
to which the undersigned is entitled upon acceptance by the Issuer of the
Tendered Notes pursuant to the Exchange Offer, and (ii) receive all benefits and
otherwise exercise all rights of beneficial ownership of the Tendered Notes, all
in accordance with the terms of the Exchange Offer.

The undersigned understands that tenders of Notes pursuant to the procedures
described under the caption "The Exchange Offer" in the Prospectus and in the
instructions hereto will constitute a binding agreement between the undersigned
and the Issuer upon the terms and subject to the conditions of the Exchange
Offer, subject only to withdrawal of such tenders on the terms set forth in the
Prospectus under the caption "The Exchange Offer-Withdrawal of Tenders." All
authority herein conferred or agreed to be conferred shall survive the death or
incapacity of the undersigned and any Beneficial Owner(s), and every obligation
of the undersigned or any Beneficial Owners hereunder shall be binding upon the
heirs, representatives, successors, and assigns of the undersigned and such
Beneficial Owner(s).

The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, exchange, assign, and transfer the Tendered Notes
and that the Issuer will acquire good and unencumbered title thereto, free and
clear of all liens, restrictions, charges, encumbrances, and adverse claims when
the Tendered Notes are acquired by the Issuer as contemplated herein. The
undersigned and each Beneficial Owner will, upon request, execute and deliver
any additional documents reasonably requested by the Issuer or the Exchange
Agent as necessary or desirable to complete and give effect to the transactions
contemplated hereby.

The undersigned hereby represents and warrants that the information set
forth in Box 2 is true and correct.

By accepting the Exchange Offer, the undersigned hereby represents and
warrants that (i) the Exchange Notes to be acquired by the undersigned and any
Beneficial Owner(s) in connection with the Exchange Offer are being acquired by
the undersigned and any Beneficial Owner(s) in the ordinary course of business
of the undersigned and any Beneficial Owner(s), (ii) the undersigned and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, (iii) except as otherwise disclosed in
writing herewith, neither the undersigned nor any Beneficial Owner is an
"affiliate," as defined in Rule 405 under the Securities Act, of the Issuer, and
(iv) the undersigned and each Beneficial Owner acknowledge and agree that any
person participating in the Exchange Offer with the intention or for the purpose
of distributing the Exchange Notes must comply with the registration and
prospectus delivery requirements of the Securities Act of 1933, as amended
(together with the rules and regulations promulgated thereunder, the "Securities
Act"), in connection with a secondary resale of the Exchange Notes acquired by
such person and cannot rely on the position of the Staff of the Securities and
Exchange Commission (the "Commission") set forth in the no-action letters that
are discussed in the section of the Prospectus entitled "The Exchange Offer." In
addition, by accepting the Exchange Offer, the undersigned hereby (i) represents
and warrants that, if the undersigned or any Beneficial Owner of the Notes is a
Participating Broker-Dealer, such Participating Broker-Dealer acquired the Notes
for its own account as a result of market-making activities or other trading
activities and has not entered into any arrangement or understanding with the
Company or any affiliate of the Company (within the meaning of Rule 405 under
the Securities Act) to distribute the New Notes to be received in the Exchange
Offer, and (ii) acknowledges that, by receiving New Notes for its own account in
exchange for Notes, where such Notes were acquired as a result of market-making
activities or other trading activities, such Participating Broker-Dealer will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes.

/ / CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED HEREWITH.

/ / CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE
"USE OF GUARANTEED DELIVERY" BELOW (Box 4).

/ / CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE
TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER
FACILITY AND COMPLETE "USE OF BOOK-ENTRY TRANSFER" BELOW (Box 5).
<PAGE>
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING THE BOXES

BOX 1
DESCRIPTION OF NOTES TENDERED
(Attach additional signed pages, if necessary)

<TABLE>
<CAPTION>
Aggregate
Name(s) and Address(es) of Registered Note Holder(s), Certificate Principal Amount Aggregate
exactly as name(s) appear(s) on Note Certificate(s) Number(s) of Represented by Principal Amount
(Please fill in, if blank) Notes* Certificate(s) Tendered**
<S> <C> <C> <C>
TOTAL
</TABLE>

* Need not be completed by persons tendering by book-entry transfer.

** The minimum permitted tender is $1,000 in principal amount of Notes. All
other tenders must be in integral multiples of $1,000 of principal amount.
Unless otherwise indicated in this column, the principal amount of all
Note Certificates identified in this Box 1 or delivered to the Exchange
Agent herewith shall be deemed tendered. See Instruction 4.
<PAGE>

<TABLE>
<S> <C>
BOX 2

BENEFICIAL OWNER(S)

STATE OF PRINCIPAL RESIDENCE OF EACH PRINCIPAL AMOUNT OF TENDERED NOTES
BENEFICIAL OWNER OF TENDERED NOTES HELD FOR ACCOUNT OF BENEFICIAL OWNER

</TABLE>

BOX 3

SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 5, 6 AND 7)

TO BE COMPLETED ONLY IF EXCHANGE NOTES EXCHANGED FOR NOTES AND UNTENDERED NOTES
ARE TO BE SENT TO SOMEONE OTHER THAN THE UNDERSIGNED, OR TO THE UNDERSIGNED AT
AN ADDRESS OTHER THAN THAT SHOWN ABOVE.

Mail Exchange Note(s) and any untendered Notes to:
Name(s):

- --------------------------------------------------------------------------------

(please print)

Address:

- --------------------------------------------------------------------------------

(include Zip Code)

Tax Identification or
Social Security No.:
<PAGE>
BOX 4

USE OF GUARANTEED DELIVERY
(SEE INSTRUCTION 2)

TO BE COMPLETED ONLY IF NOTES ARE BEING TENDERED BY MEANS OF A NOTICE OF
GUARANTEED DELIVERY.

Name(s) of Registered Holder(s):

- --------------------------------------------------------------------------------

Date of Execution of Notice of Guaranteed Delivery: ____________________________

Name of Institution which Guaranteed Delivery:
- ------------------------------------------------

BOX 5

USE OF BOOK-ENTRY TRANSFER
(SEE INSTRUCTION 1)

TO BE COMPLETED ONLY IF DELIVERY OF TENDERED NOTES IS TO BE MADE BY BOOK-ENTRY
TRANSFER.

Name of Tendering Institution: _________________________________________________

Account Number: ________________________________________________________________

Transaction Code Number: _______________________________________________________
<PAGE>

BOX 6
TENDERING HOLDER SIGNATURE
(SEE INSTRUCTIONS 1 AND 5)
IN ADDITION, COMPLETE SUBSTITUTE FORM W-9

X --------------------------------------- Signature Guarantee
X --------------------------------------- (If required by Instruction 5)
(Signature of Registered Holder(s) or Authorized Signature
Authorized Signatory) X ---------------------------------------
Note: The above lines must be signed by the Name: ------------------------------------
registered holder(s) of Notes as their (please print)
name(s) appear(s) on the Notes or by Title: ------------------------------------
persons(s) authorized to become registered Name of Firm: ----------------------------
holder(s) (evidence of which authorization (Must be an Eligible Institution
must be transmitted with this Letter of as defined in Instruction 2)
Transmittal). If signature is by a trustee, Address: ----------------------------------
executor, administrator, guardian, ------------------------------------------
attorney-in-fact, officer, or other person ------------------------------------------
acting in a fiduciary or representative (include Zip Code)
capacity, such person must set forth his or Area Code and Telephone Number:
her full title below. See Instruction 5. ------------------------------------------
Name(s):---------------------------------- Dated: ----------------------------------
----------------------------------
Capacity: ----------------------------------
----------------------------------
Street Address:----------------------------
----------------------------------
----------------------------------
(include Zip Code)
Area Code and Telephone Number:
----------------------------------
Tax Identification or Social Security
Number:
----------------------------------
</TABLE>

BOX 7
BROKER-DEALER STATUS

<TABLE>
<S> <C>
Check this box if the Beneficial Owner of the Notes is a Participating Broker-Dealer
/ / and such Participating Broker-Dealer acquired the Notes for its own account as a
result of market-making activities or other trading activities.
</TABLE>
<PAGE>

<TABLE>
<C> <S> <C>
- -------------------------------------------------------------------------------------------
PAYOR'S NAME: TOWN SPORTS INTERNATIONAL, INC.
Name (if joint names, list first and circle the name of the person or
entity whose number you enter in Part 1 below. See instructions if
your name has changed.)
Address
SUBSTITUTE City, State and ZIP Code
FORM W-9 List account number(s) here (optional)
Department of the Part 1--PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION Social Security
Treasury NUMBER ("TIN") IN THE BOX AT RIGHT AND CERTIFY BY Number or TIN
SIGNING AND DATING BELOW
Part 2--Check the box if you are NOT subject to backup withholding
Internal Revenue under the provisions of section 3406(a)(1)(C) of the Internal Revenue
Service Code because (1) you have not been notified that you are subject to
backup withholding as a result of failure to report all interest or
dividends or (2) the Internal Revenue Service has notified you that
you are no longer subject to backup withholding. / /

CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I Part 3--
CERTIFY THAT THE INFORMATION PROVIDED ON THIS FORM Awaiting TIN / /
IS TRUE, CORRECT AND COMPLETE.
SIGNATURE DATE
</TABLE>

Note: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL

FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER

1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND NOTES. A properly completed
and duly executed copy of this Letter of Transmittal, including Substitute Form
W-9, and any other documents required by this Letter of Transmittal must be
received by the Exchange Agent at its address set forth herein, and either
certificates for Tendered Notes must be received by the Exchange Agent at its
address set forth herein or such Tendered Notes must be transferred pursuant to
the procedures for book-entry transfer described in the Prospectus under the
caption "EXCHANGE OFFER--BOOK-ENTRY TRANSFER" (and a confirmation of such
transfer received by the Exchange Agent), in each case prior to 5:00 p.m., New
York City time, on the Expiration Date. The method of delivery of certificates
for Tendered Notes, this Letter of Transmittal and all other required documents
to the Exchange Agent is at the election and risk of the tendering holder and
the delivery will be deemed made only when actually received by the Exchange
Agent. If delivery is by mail, registered mail with return receipt requested,
properly insured, is recommended. Instead of delivery by mail, it is recommended
that the Holder use an overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure timely delivery. No Letter of
Transmittal or Notes should be sent to the Company. Neither the Issuer nor the
registrar is under any obligation to notify any tendering holder of the Issuer's
acceptance of Tendered Notes prior to the closing of the Exchange Offer.

2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Notes
but whose Notes are not immediately available, and who cannot deliver their
Notes, this Letter of Transmittal or any other documents required hereby to the
Exchange Agent prior to the Expiration Date must tender their Notes according to
the guaranteed delivery procedures set forth below, including completion of Box
4. Pursuant to such procedures: (i) such tender must be made by or through a
firm which is a member of a recognized Medallion Program approved by the
Securities Transfer Association Inc. (an "Eligible Institution") and the Notice
of Guaranteed Delivery must be signed by the holder; (ii) prior to the
Expiration Date, the Exchange Agent must have received from the holder and the
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by mail or hand delivery) setting forth the name and address of the
holder, the certificate number(s) of the Tendered Notes and the principal amount
of Tendered Notes, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after the
Expiration Date, this Letter of Transmittal together with the certificate(s)
representing the Notes and any other required documents will be deposited by the
Eligible Institution with the Exchange Agent; and (iii) such properly completed
and executed Letter of Transmittal, as well as all other documents required by
this Letter of Transmittal and the certificate(s) representing all Tendered
Notes in proper form for transfer, must be received by the Exchange Agent within
five New York Stock Exchange trading days after the Expiration Date. Any holder
who wishes to tender Notes pursuant to the guaranteed delivery procedures
described above must ensure that the Exchange Agent receives the Notice of
Guaranteed Delivery relating to such Notes prior to 5:00 p.m., New York City
time, on the Expiration Date. Failure to complete the guaranteed delivery
procedures outlined above will not, of itself, affect the validity or effect a
revocation of any Letter of Transmittal form properly completed and executed by
an Eligible Holder who attempted to use the guaranteed delivery process.

3. BENEFICIAL OWNER INSTRUCTIONS TO REGISTERED HOLDERS. Only a holder in
whose name Tendered Notes are registered on the books of the registrar (or the
legal representative or attorney-in-fact of such registered holder) may execute
and deliver this Letter of Transmittal. Any Beneficial Owner of Tendered Notes
who is not the registered holder must arrange promptly with the registered
holder to execute and deliver this Letter of Transmittal on his or her behalf
through the execution and delivery to the registered holder of the INSTRUCTIONS
TO REGISTERED HOLDER AND/OR BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM
BENEFICIAL OWNER form accompanying this Letter of Transmittal.

4. PARTIAL TENDERS. Tenders of Notes will be accepted only in integral
multiples of $1,000 in principal amount. If less than the entire principal
amount of Notes held by the holder is tendered, the tendering
<PAGE>
holder should fill in the principal amount tendered in the column labeled
"Aggregate Principal Amount Tendered" of the box entitled "Description of Notes
Tendered" (Box 1) above. The entire principal amount of Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
If the entire principal amount of all Notes held by the holder is not tendered,
then Notes for the principal amount of Notes not tendered and Exchange Notes
issued in exchange for any Notes tendered and accepted will be sent to the
Holder at his or her registered address, unless a different address is provided
in the appropriate box on this Letter of Transmittal, as soon as practicable
following the Expiration Date.

5. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the
registered holder(s) of the Tendered Notes, the signature must correspond with
the name(s) as written on the face of the Tendered Notes without alteration,
enlargement or any change whatsoever.

If any of the Tendered Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal. If any Tendered
Notes are held in different names, it will be necessary to complete, sign and
submit as many separate copies of the Letter of Transmittal as there are
different names in which Tendered Notes are held.

If this Letter of Transmittal is signed by the registered holder(s) of
Tendered Notes, and Exchange Notes issued in exchange therefor are to be issued
(and any untendered principal amount of Notes is to be reissued) in the name of
the registered holder(s), then such registered holder(s) need not and should not
endorse any Tendered Notes, nor provide a separate bond power. In any other
case, such registered holder(s) must either properly endorse the Tendered Notes
or transmit a properly completed separate bond power with this Letter of
Transmittal, with the signature(s) on the endorsement or bond power guaranteed
by an Eligible Institution.

If this Letter of Transmittal is signed by a person other than the
registered holder(s) of any Tendered Notes, such Tendered Notes must be endorsed
or accompanied by appropriate bond powers, in each case, signed as the name(s)
of the registered holder(s) appear(s) on the Tendered Notes, with the
signature(s) on the endorsement or bond power guaranteed by an Eligible
Institution.

If this Letter of Transmittal or any Tendered Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations, or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and, unless waived by the
Issuer, evidence satisfactory to the Issuer of their authority to so act must be
submitted with this Letter of Transmittal.

Endorsements on Tendered Notes or signatures on bond powers required by this
Instruction 5 must be guaranteed by an Eligible Institution.

Signatures on this Letter of Transmittal must be guaranteed by an Eligible
Institution unless the Tendered Notes are tendered (i) by a registered holder
who has not completed the box set forth herein entitled "Special Delivery
Instructions" (Box 3) or (ii) by an Eligible Institution.

6. SPECIAL DELIVERY INSTRUCTIONS. Tendering holders should indicate, in the
applicable box (Box 3), the name and address to which the Exchange Notes and/or
substitute Notes for principal amounts not tendered or not accepted for exchange
are to be sent, if different from the name and address of the person signing
this Letter of Transmittal. In the case of issuance in a different name, the
taxpayer identification or social security number of the person named must also
be indicated.

7. TRANSFER TAXES. The Issuer will pay all transfer taxes, if any,
applicable to the exchange of Tendered Notes pursuant to the Exchange Offer. If,
however, a transfer tax is imposed for any reason other than the transfer and
exchange of Tendered Notes pursuant to the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered holder or on any
other person) will be payable by the tendering holder. If satisfactory evidence
of payment of such taxes or exemption therefrom is not submitted with this
Letter of Transmittal, the amount of such transfer taxes will be billed directly
to such tendering holder.
<PAGE>
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the Tendered Notes listed in this Letter of
Transmittal.

8. TAX IDENTIFICATION NUMBER. Federal income tax law requires that the
holder(s) of any Tendered Notes which are accepted for exchange must provide the
Issuer (as payor) with its correct taxpayer identification number ("TIN"),
which, in the case of a holder who is an individual, is his or her social
security number. If the Issuer is not provided with the correct TIN, the Holder
may be subject to backup withholding and a $50 penalty imposed by the Internal
Revenue Service. (If withholding results in an over-payment of taxes, a refund
may be obtained.) Certain holders (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional
instructions.

To prevent backup withholding, each holder of Tendered Notes must provide
such holder's correct TIN by completing the Substitute Form W-9 set forth
herein, certifying that the TIN provided is correct (or that such holder is
awaiting a TIN), and that (i) the holder has not been notified by the Internal
Revenue Service that such holder is subject to backup withholding as a result of
failure to report all interest or dividends or (ii) the Internal Revenue Service
has notified the holder that such holder is no longer subject to backup
withholding. If the Tendered Notes are registered in more than one name or are
not in the name of the actual owner, consult the "Guidelines for Certification
of Taxpayer Identification Number on Substitute Form W-9" for information on
which TIN to report.

The Issuer reserves the right in its sole discretion to take whatever steps
are necessary to comply with the Issuer's obligation regarding backup
withholding.

9. VALIDITY OF TENDERS. All questions as to the validity, form, eligibility
(including time of receipt), acceptance and withdrawal of Tendered Notes will be
determined by the Issuer in its sole discretion, which determination will be
final and binding. The Issuer reserves the right to reject any and all Notes not
validly tendered or any Notes the Issuer's acceptance of which would, in the
opinion of the Issuer or their counsel, be unlawful. The Issuer also reserves
the right to waive any conditions of the Exchange Offer or defects or
irregularities in tenders of Notes as to any ineligibility of any holder who
seeks to tender Notes in the Exchange Offer. The interpretation of the terms and
conditions of the Exchange Offer (including this Letter of Transmittal and the
instructions hereto) by the Issuer shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of Notes
must be cured within such time as the Issuer shall determine. Neither the
Issuer, the Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of Notes, nor
shall any of them incur any liability for failure to give such notification.
Tenders of Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in this Letter of
Transmittal, as soon as practicable following the Expiration Date.

10. WAIVER OF CONDITIONS. The Company reserves the absolute right to amend,
waive or modify any of the conditions in the Exchange Offer in the case of any
Tendered Notes.

11. NO CONDITIONAL TENDER. No alternative, conditional, irregular, or
contingent tender of Notes or transmittal of this Letter of Transmittal will be
accepted.

12. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. Any tendering Holder whose
Notes have been mutilated, lost, stolen or destroyed should contact the Exchange
Agent at the address indicated herein for further instructions.

13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance and requests for additional copies of the Prospectus or this
Letter of Transmittal may be directed to the Exchange Agent at the address
indicated herein. Holders may also contact their broker, dealer, commercial
bank, trust company or other nominee for assistance concerning the Exchange
Offer.
<PAGE>
14. ACCEPTANCE OF TENDERED NOTES AND ISSUANCE OF NOTES; RETURN OF
NOTES. Subject to the terms and conditions of the Exchange Offer, the Issuer
will accept for exchange all validly tendered Notes as soon as practicable after
the Expiration Date and will issue Exchange Notes therefor as soon as
practicable thereafter. For purposes of the Exchange Offer, the Issuer shall be
deemed to have accepted tendered Notes when, as and if the Issuer has given
written or oral notice (immediately followed in writing) thereof to the Exchange
Agent. If any Tendered Notes are not exchanged pursuant to the Exchange Offer
for any reason, such unexchanged Notes will be returned, without expense, to the
undersigned at the address shown in Box 1 or at a different address as may be
indicated herein under "Special Delivery Instructions" (Box 3).

15. WITHDRAWAL. Tenders may be withdrawn only pursuant to the procedures
set forth in the Prospectus under the caption "The Exchange Offer."

<PAGE>
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO
9 3/4% SENIOR NOTES DUE 2004
OF
TOWN SPORTS INTERNATIONAL, INC.

Pursuant to the Prospectus Dated , 1997

This form must be used by a holder of 9 3/4% Senior Notes due 2004 (the
"Notes") of Town Sports International, Inc., a New York corporation (the
"Company"), who wishes to tender Notes to the Exchange Agent pursuant to the
guaranteed delivery procedures described in "The Exchange Offer-- Guaranteed
Delivery Procedures" of the Company's Prospectus, dated , 1997 (the
"Prospectus") and in Instruction 2 to the related Letter of Transmittal. Any
holder who wishes to tender Notes pursuant to such guaranteed delivery
procedures must ensure that the Exchange Agent receives this Notice of
Guaranteed Delivery prior to the Expiration Date of the Exchange Offer.
Capitalized terms used but not defined herein have the meanings ascribed to them
in the Prospectus or the Letter of Transmittal.

THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,

NEW YORK CITY TIME, ON , 1997 UNLESS EXTENDED (THE "EXPIRATION

DATE").

United States Trust Company
(the "Exchange Agent")

<TABLE>
<CAPTION>
BY REGISTERED OR CERTIFIED
BY OVERNIGHT COURIER: BY HAND: MAIL:
<S> <C> <C>
United States Trust Company United States Trust Company United States Trust Company
of New York of New York of New York
770 Broadway, 13th Floor 111 Broadway P.O. Box 844
New York, New York 10003 Lower Level Cooper Station
Attn: Corporate Trust New York, New York 10006 New York, New York 10276-0844
Services Attn: Corporate Trust
Services
Attn: Corporate Trust
Services
</TABLE>

DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL
NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
This form is not to be used to guarantee signatures. If a signature on a
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.

Ladies and Gentlemen:

The undersigned hereby tenders to the Company, upon the terms and subject to
the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Notes set forth below pursuant to the guaranteed delivery procedures set forth
in the Prospectus and in Instruction 2 of the Letter of Transmittal.

The undersigned hereby tenders the Notes listed below:

<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
CERTIFICATE NUMBER(S) (IF KNOWN) OF NOTES OR PRINCIPAL PRINCIPAL
ACCOUNT NUMBER AT THE BOOK-ENTRY FACILITY AMOUNT REPRESENTED AMOUNT TENDERED
<S> <C> <C>
</TABLE>

2
<PAGE>

<TABLE>
<CAPTION>
PLEASE SIGN AND COMPLETE
<S> <C> <C> <C>
Signatures of Registered Holder(s) or
Authorized Signatory: Date: , 1996
Address:
Name(s) of Registered Holder(s): Area Code and Telephone No.
</TABLE>

This Notice of Guaranteed Delivery must be signed by the Holder(s) exactly
as their name(s) appear on certificates for Notes or on a security position
listing as the owner of Notes, or by person(s) authorized to become Holder(s) by
endorsements and documents transmitted with this Notice of Guaranteed Delivery.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must provide the following information.

Please print name(s) and address(es)
Name(s): _______________________________________________________________________
________________________________________________________________________________
Capacity: ______________________________________________________________________
Address(es): ___________________________________________________________________
________________________________________________________________________________

3
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)

The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or is a commercial bank or trust company having an office or correspondent in
the United States, or is otherwise an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, guarantees deposit with the Exchange Agent of the Letter of Transmittal
(or facsimile thereof), together with the Notes tendered hereby in proper form
for transfer (or confirmation of the book-entry transfer of such Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility described in the
prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures" and in the Letter of Transmittal) and any other required documents,
all by 5:00 p.m., New York City time, on the fifth New York Stock Exchange
trading day following the Expiration Date.

<TABLE>
<S> <C>
Name of firm
(Authorized Signature)
Address Name
(Please Print)
Title
(Include Zip Code)
Area Code and Tel. No. Dated , 1996
</TABLE>

DO NOT SEND SECURITIES WITH THIS FORM. ACTUAL SURRENDER OF SECURITIES MUST
BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, AN EXECUTED LETTER OF TRANSMITTAL.

4
<PAGE>
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY

1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed and
duly executed copy of this Notice of Guaranteed Delivery and any other documents
required by this Notice of Guaranteed Delivery must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. The method
of delivery of this Notice of Guaranteed Delivery and any other required
documents to the Exchange Agent is at the election and sole risk of the holder,
and the delivery will be deemed made only when actually received by the Exchange
Agent. If delivery is by mail, registered mail with return receipt requested,
properly insured, is recommended. As an alternative to delivery by mail, the
holders may wish to consider using an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. For a
description of the guaranteed delivery procedures, see Instruction 2 of the
Letter of Transmittal.

2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY. If this Notice of
Guaranteed Delivery is signed by the registered holder(s) of the Notes referred
to herein, the signature must correspond with the name(s) written on the face of
the Notes without alteration, enlargement, or any change whatsoever. If this
Notice of Guaranteed Delivery is signed by a participant of the Book-Entry
Transfer Facility whose name appears on a security position listing as the owner
of the Notes, the signature must correspond with the name shown on the security
position listing as the owner of the Notes.

If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any Notes listed or a participant of the Book-Entry
Transfer Facility, this Notice of Guaranteed Delivery must be accompanied by
appropriate bond powers, signed as the name of the registered holder(s) appears
on the Notes or signed as the name of the participant shown on the Book-Entry
Transfer Facility's security position listing.

If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing and submit with the Letter of Transmittal evidence
satisfactory to the Company of such person's authority to so act.

3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance and requests for additional copies of the Prospectus may be directed
to the Exchange Agent at the address specified in the Prospectus. Holders may
also contact their broker, dealer, commercial bank, trust company, or other
nominee for assistance concerning the Exchange Offer.

<PAGE>
INSTRUCTIONS TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM BENEFICIAL OWNER
OF
TOWN SPORTS INTERNATIONAL, INC.
9 3/4% SENIOR NOTES DUE 2004

To Registered Holder and/or Participant of the Book-Entry Transfer Facility:

The undersigned hereby acknowledges receipt of the Prospectus, dated ,
1997 (the "Prospectus") of Town Sports International Inc., a New York
corporation (the "Company"), and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), that together constitute the Company's offer (the
"Exchange Offer"). Capitalized terms used but not defined herein have the
meanings ascribed to them in the Prospectus.

This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to action to be taken by you relating to the Exchange
Offer with respect to the 9 3/4% Senior Notes due 2004 (the "Notes") held by you
for the account of the undersigned.

The aggregate face amount of the Notes held by you for the account of the
undersigned is (FILL IN AMOUNT):

$ of the 9 3/4% Senior Notes due 2004

With respect to the Exchange Offer, the undersigned hereby instructs you
(CHECK APPROPRIATE BOX):

/ / TO TENDER the following Notes held by you for the account of the
undersigned (INSERT PRINCIPAL AMOUNT OF NOTES TO BE TENDERED, IF ANY): $

/ / NOT TO TENDER any Notes held by you for the account of the undersigned.

If the undersigned instruct you to tender the Notes held by you for the
account of the undersigned, it is understood that you are authorized (a) to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representation and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations that (i) the
undersigned's principal residence is in the state of (FILL IN STATE) ,
(ii) the undersigned is acquiring the Exchange Notes in the ordinary course of
business of the undersigned, (iii) the undersigned is not participating, does
not participate, and has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes, (iv) the undersigned
acknowledges that any person participating in the Exchange Offer for the purpose
of distributing the Exchange Notes must comply with the registration and
prospectus delivery requirements of the Securities Act of 1933, as amended (the
"Act"), in connection with a secondary resale transaction of the Exchange Notes
acquired by such person and cannot rely on the position of the Staff of the
Securities and Exchange Commission set forth in no-action letters that are
discussed in the section of the Prospectus entitled "The Exchange Offer--Resales
of the Exchange Notes," and (v) the undersigned is not an "affiliate," as
defined in Rule 405 under the Act, of the Company; (b) to agree, on behalf of
the undersigned, as set forth in the Letter of Transmittal; and (c) to take such
other action as necessary under the Prospectus or the Letter of Transmittal to
effect the valid tender of such Notes.

SIGN HERE
Name of beneficial owner(s): _________________________________________________
Signature(s): ________________________________________________________________
Name (PLEASE PRINT): _________________________________________________________
Address: _____________________________________________________________________
_______________________________________
_______________________________________
Telephone number: ____________________________________________________________
Taxpayer Identification or Social Security Number: ___________________________
Date: ________________________________________________________________________