TOWN SPORTS INTERNATIONAL INC, S-1, 1998-08-14

TOWN SPORTS INTERNATIONAL INC
S-1, 1998-08-14
MISCELLANEOUS AMUSEMENT & RECREATION

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1998

REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

TOWN SPORTS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<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 No.)
</TABLE>

------------------------
888 SEVENTH AVENUE
NEW YORK, NEW YORK 10106
(212) 246-6700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
MR. RICHARD PYLE
CHIEF FINANCIAL OFFICER
TOWN SPORTS INTERNATIONAL, INC.
888 SEVENTH AVENUE
NEW YORK, NEW YORK 10106
(212) 246-6700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------

COPIES TO:

<TABLE>
<S> <C>
JOSHUA N. KORFF, ESQ. WILLIAM M. HARTNETT, ESQ.
KIRKLAND & ELLIS CAHILL GORDON & REINDEL
153 EAST 53RD STREET 80 PINE STREET
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10005
(212) 446-4800 (212) 701-3000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION
<S> <C> <C>
Common Stock, par value $0.001 per share................................................ $57,500,000 $16,962.50
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to paragraph (a) of Rule 457 of the Securities Act.

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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

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<PAGE>
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 OR 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 THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION

, 1998

Town Sports International

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

All of the shares of common stock, par value $0.001 per share ("Common
Stock") offered hereby (the "Offering") are being sold by Town Sports
International, Inc. (collectively with its subsidiaries, "Town Sports" or the
"Company"). Prior to this Offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $ and $ per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price.

Concurrently with the consummation of the Offering, certain affiliates (the
"Purchasing Affiliates") of the Company will purchase directly from the Company,
at a price per share equal to the initial public offering price, less
underwriting discounts and commissions, shares of Common Stock, for an
aggregate purchase price of $ (the "Affiliate Stock Purchase"). The
Underwriters will not participate in, or receive any underwriting discounts or
commissions on, the sale of Common Stock to Purchasing Affiliates in the
Affiliate Stock Purchase. This Prospectus relates to the offer and sale of
shares of Common Stock pursuant to the Offering and the Affiliate Stock
Purchase.

At the request of the Company, the Underwriters have reserved for sale, at
the initial offering price, up to 5.0% of the shares offered hereby for
directors, officers, employees, business associates, and related persons of the
Company. The number of shares of Common Stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Any reserved shares which are not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares offered
hereby.

The Company intends to apply for listing of the Common Stock for trading on
the Nasdaq National Market under the symbol "TOWN."
------------------------

THE OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share...................................................... $ $ $
Total(3)....................................................... $ $ $
</TABLE>

(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses estimated at $ , payable by the Company.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to additional shares of Common Stock solely to cover
over-allotments, if any, and the Selling Stockholder has granted to the
Underwriters a 30-day option to purchase up to additional shares
of Common Stock solely to cover over-allotments, if any. To the extent the
option is exercised, the Underwriters will offer the shares at the Price to
Public shown above. If all such shares are purchased, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Stockholder will be $ , $ , $ ,
and $ , respectively. See "Underwriting."

The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if delivered and accepted by them,
and subject to their right to reject orders in whole or in part. It is expected
that delivery of certificates for such shares of Common Stock will be made at
the offices of BT Alex. Brown Incorporated in Baltimore, Maryland on or about
, 1998.
------------------------

BT ALEX. BROWN BEAR, STEARNS & CO. INC.

THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
[Inside Front Cover]

THE UNDERWRITERS AND CERTAIN OTHER PERSONS PARTICIPATING IN THIS OFFERING MAY
ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET
PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-
COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING
THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. REFERENCES TO FISCAL 1994, 1995, 1996, 1997 AND 1998 OF THE COMPANY
REFER TO THE FISCAL YEAR ENDING ON MAY 31ST OF SUCH YEAR. FOLLOWING THE
CONSUMMATION OF THE OFFERING, THE COMPANY INTENDS TO CHANGE ITS FISCAL YEAR END.
AS A RESULT, THE COMPANY WILL HAVE A SHORT FISCAL YEAR END FOR THE SEVEN MONTHS
ENDED DECEMBER 31, 1998. REFERENCES TO FISCAL 1999 AND BEYOND OF THE COMPANY
REFER TO THE FISCAL YEAR ENDING DECEMBER 31ST OF SUCH YEAR. AS USED HEREIN,
"TOWN SPORTS" AND THE "COMPANY" REFER TO TOWN SPORTS INTERNATIONAL, INC. AND ITS
SUBSIDIARIES. UNLESS OTHERWISE INDICATED, THE INFORMATION SET FORTH IN THIS
PROSPECTUS DOES NOT GIVE EFFECT TO THE EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION.

THE COMPANY

Town Sports International, Inc. ("Town Sports" or the "Company") is one of
the two leading owners and operators of fitness clubs in the Northeast and
Mid-Atlantic regions of the United States. As of August 12, 1998, the Company
operated 64 clubs that collectively served over 175,000 members. The Company
develops clusters of clubs to serve densely populated major metropolitan regions
in which a high percentage of the population commutes to work. The Company
services such populations by clustering clubs near the highest concentrations of
its target customers' areas of both employment and residence. The Company's
target customer is college-educated, typically between the ages of 20 and 44 and
earns an annual income in excess of $50,000.

The Company's goal is to develop the premier health club network in each of
the major metropolitan regions it enters. Management believes that clustering
clubs allows the Company to achieve strategic operating advantages that enhance
its ability to achieve this goal. When entering new regions, the Company
develops its clusters by initially opening or acquiring clubs located in the
more central urban markets of the region and then branching out from these urban
centers to suburbs and ancillary communities. Capitalizing on this clustering of
clubs, in fiscal 1998, approximately half of the Company's members participated
in a membership plan that allows unlimited access to all of the Company's clubs
for a higher membership fee.

The Company has executed this strategy successfully in the New York region
through the network of clubs it operates under its New York Sports Club ("NYSC")
brand name. The Company is the largest fitness club operator in Manhattan with
23 locations and operates a total of 52 clubs under the NYSC name within a
defined radius of New York City. The Company is in the process of more fully
developing clusters within a smaller radius surrounding Washington, DC under its
Washington Sports Club ("WSC") brand name and has begun establishing similar
clusters surrounding Boston and Philadelphia under its Boston Sports Club
("BSC") and Philadelphia Sports Club ("PSC") brand names, respectively. The
Company employs localized brand names for its clubs to create an image and
atmosphere consistent with the local community and to foster recognition as a
local network of quality fitness clubs rather than a national chain.

1
<PAGE>
past five fiscal years and was 26.2% in fiscal 1998. Comparable club revenue
growth has enabled the Company to increase revenue per weighted average club in
each of the past five fiscal years. Revenue per weighted average club has risen
from $1.8 million in fiscal 1994 to $2.3 million in fiscal 1998. 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 clubs experience little incremental cost associated with such
revenue increases, the Company realizes a greater proportionate increase in
profitability. This operating leverage has allowed it to achieve EBITDA growth
over the past five years at a compound annual rate of approximately 44.8% from
$3.6 million in fiscal 1994 to $15.9 million in fiscal 1998. The Company's rate
of EBITDA growth from fiscal 1997 to fiscal 1998 accelerated to 89.6%. The
Company reported net income of $277,000 in fiscal 1998 versus a net loss of
$936,000 in fiscal 1997.

Management seeks to provide a broad array of high quality exercise programs
and equipment that is both popular and effective, while reinforcing the quality
exercise experience the Company strives to make available to its customers.
While the Company does not generally build locations with amenities such as
swimming pools or racquet and basketball courts, the Company does strive to
establish at least one flagship club that has such amenities in each of its
markets. Management believes that it is generally more economical to acquire
clubs with such amenities than to develop them as greenfield clubs.

Management engages in a detailed site analysis and selection process based
upon information provided by the Company's proprietary development software to
identify potential target areas for additional clubs based upon population
demographics, traffic and commuting patterns, availability of sites and
competitive market information. In addition to the Company's existing 64 clubs
under operation and the 12 sites for which the Company has entered into lease
commitments, management has identified approximately 125 target areas in which
it plans to add clubs under the brand names NYSC, WSC, BSC or PSC. Management
estimates that it will identify approximately 50 additional target areas in
which to add clubs under these brand names. Once the Company begins to approach
saturation of these regions, management will explore expansion opportunities in
contiguous regions along the East Coast and the Mid-Atlantic. Since its
inception, the Company has never closed a club prior to the expiration of a
lease and has closed only one club at the expiration of a lease.

The Company possesses an experienced management team, the top five
executives of which have been working together at the Company since 1990.
Management believes that it has the depth, experience and motivation to manage
the Company's internal and external growth, and that the Company has put in
place the infrastructure and systems to manage effectively the Company's planned
expansion for the next three years. Management believes that the presence of
such infrastructure will enable the Company over time to leverage certain fixed
cost aspects of overhead to realize increased EBITDA margins as the Company
continues to expand its club base. This operating leverage has already helped
the Company to more than double its EBITDA margin to approximately 19.3% in
fiscal 1998 compared to approximately 9.7% in fiscal 1997. In the aggregate,
management owns Common Stock or options to purchase Common Stock which will
represent approximately % of the Company's diluted shares upon the
consummation of the Offering and the Affiliate Stock Purchase.

The fitness club industry is a highly fragmented, growing industry.
According to published industry sources, total fitness club industry revenues
increased at a compound annual rate of approximately 8.6% from $5.5 billion in
1991 to $9.0 billion in 1997. Over that same period of time, fitness club
memberships have increased at a compound annual rate of 5.1% from 16.7 million
to 22.5 million, despite the fact that the number of fitness clubs has remained
relatively stable. In 1997, approximately 13,800 fitness clubs were in
operation. The ten largest club operators accounted for less than 8.0% of those
clubs and approximately 17.2% of total industry revenues. In addition,
approximately 65.0% of these clubs are operated by single club operators. Based
upon this data, management believes that considerable consolidation will occur
in the industry and the Company expects to play a significant role, on a
regional basis, in this consolidation.

2
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The Company's clustering of clubs in major metropolitan regions has enabled
the Company to develop four strategic operating advantages. First, the Company
has developed a fully-automated, centrally controlled system which provides a
streamlined enrollment process through which the Company sells its simplified
membership plans. This streamlined process has resulted in approximately 90% of
members paying monthly dues through electronic funds transfer ("EFT") in fiscal
1998. Substantially all other members prepay annual dues in full. Second,
management believes the Company has developed a distinct brand image in the
markets it serves as a local network of fitness clubs that consistently provides
a quality experience across all clubs. Third, the Company has a policy of
providing a high degree of customer service. Management believes that it can
attract and retain quality full-time program instructors and professional
fitness trainers as a result of the Company's ability to offer benefits to these
full-time employees. Fourth, the Company has developed proprietary information
systems which, in conjunction with its other systems, assist the Company in
tracking sales, leads and membership statistics, developing targeted marketing
programs and identifying new markets for club locations.

In an effort to increase revenues, EBITDA and net income, the Company has
developed four core growth strategies. First, the Company plans to continue to
acquire single- and multi-club businesses with the flexibility to make payment
in the form of the Company's common stock and/or cash. Second, the Company plans
to continue to open new greenfield club locations in underserved markets and in
markets where potential acquisitions are not available on acceptable terms.
Third, the Company plans to continue to increase comparable club revenues by
raising monthly dues on an annual basis and increasing its emphasis on providing
value added services for incremental fees. Fourth, management believes that it
has built the personnel and systems infrastructure to manage the Company's
expansion plans over the next three years without significant incremental
corporate overhead.

RECENT DEVELOPMENTS

On August 6, 1998, the Company acquired from Lifestyle Fitness of
Springfield, Inc. and its affiliates (collectively, "Lifestyle") substantially
all of the assets associated with Lifestyle's six fitness clubs located in New
Jersey in a series of related transactions (the "Lifestyle Acquisition"). In
addition, the Company assumed the obligations under a lease for a seventh club
to be constructed in the same market area. For the twelve months ended June 30,
1998, Lifestyle generated revenues of approximately $7.9 million. The Company
plans to operate these clubs under its NYSC brand name.

3
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THE OFFERING

<TABLE>
<S> <C>
Common Stock offered hereby....... shares
Common Stock to be outstanding
after the Offering and the
Affiliate Stock Purchase(1)..... shares
Use of Proceeds................... To repay certain indebtedness of the Company, to open or
acquire additional fitness clubs, to update management
information systems and for general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol.......................... "TOWN"
</TABLE>

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(1) Does not include shares issuable upon the exercise of outstanding options
issued pursuant to the Old Option Plan and the Equity Incentive Plan (each
as defined), at a weighted average exercise price of $ .

THE RECAPITALIZATION

In December 1996, the Company consummated a recapitalization (the
"Recapitalization") 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 acquired shares of Common Stock and
series A preferred stock, representing approximately 73.0% of the Company's
voting equity interests on a fully-diluted basis. In addition, certain members
of the Company's management acquired shares of the Company's Common Stock and
series B preferred stock, representing 27.0% of the Company's voting equity
interests on a fully-diluted basis. See "The Recapitalization" and "Certain
Relationships and Related Transactions--The Recapitalization."

THE PREFERRED EXCHANGE

Prior to the consummation of the Offering and the Affiliate Stock Purchase,
holders of the Company's preferred stock and options to purchase preferred stock
intend to exchange such stock and options for shares of the Company's Common
Stock and options to purchase shares of Common Stock, respectively (the
"Preferred Exchange"). See "The Preferred Exchange" and "Security Ownership."

RISK FACTORS

Purchasers of shares of the Common Stock in the Offering and the Affiliate
Stock Purchase should carefully consider the risk factors set forth under the
caption "Risk Factors" and the other information included in this Prospectus
prior to making an investment decision. See "Risk Factors."

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

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 Company's
internet web site is located at http://www.nysc.com.

THIS PROSPECTUS MAKES REFERENCE TO EBITDA WHICH IS DEFINED AS EARNINGS
BEFORE INTEREST, TAXES, DEPRECIATION, AMORTIZATION, EXTRAORDINARY CHARGES AND
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING POLICY. INVESTORS SHOULD BE AWARE
THAT THE ITEMS EXCLUDED FROM EBITDA, SUCH AS DEPRECIATION AND AMORTIZATION, ARE
SIGNIFICANT COMPONENTS IN AN ACCURATE ASSESSMENT OF THE COMPANY'S FINANCIAL
PERFORMANCE. EBITDA IS PRESENTED BECAUSE MANAGEMENT BELIEVES IT PROVIDES USEFUL
INFORMATION REGARDING THE OPERATING PERFORMANCE AND FINANCIAL CONDITION OF THE
COMPANY. EBITDA SHOULD NOT BE CONSIDERED IN ISOLATION OR AS A SUBSTITUTE FOR NET
INCOME, CASH FLOWS, OR OTHER CONSOLIDATED INCOME OR CASH FLOW DATA PREPARED IN
ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") OR AS A
MEASURE OF THE COMPANY'S PROFITABILITY OR LIQUIDITY.

4
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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND CLUB OPERATING DATA)

Set forth below are summary historical consolidated financial and other
operating data of the Company for the five years ended May 31, 1998 and summary
pro forma financial data for fiscal 1998. The summary historical consolidated
financial statement data for fiscal 1996, 1997 and 1998 were derived from the
audited Consolidated Financial Statements of the Company, which are included
herein. The summary historical consolidated financial statement data for fiscal
1994 and 1995 were derived from the audited consolidated financial statements of
the Company, which are not included herein. The summary pro forma data are not
necessarily indicative of the actual results of operations or financial position
that would have been achieved had such transactions and the Offering and the
Affiliate Stock Purchase been completed on the dates specified, nor are the
statements necessarily indicative of the Company's future results of operations
or financial position. The information contained in this table should be read in
conjunction with "Selected Historical and Pro Forma Consolidated Financial
Data," "Unaudited Pro Forma Condensed Combined Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and accompanying notes thereto appearing
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
ACQUISITIONS
AND OFFERING
YEAR ENDED MAY 31, PRO FORMA(1)
----------------------------------------------------- -------------
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $ 24,890 $ 33,349 $ 43,755 $ 56,567 $ 82,350 $ 94,845
Operating expenses(2)................................ 22,787 33,969 41,626 55,291 74,170 87,534
--------- --------- --------- --------- --------- -------------
Operating income..................................... 2,103 (620) 2,129 1,276 8,180 7,311
Interest expense, net................................ 342 654 952 2,455 5,902 6,385
Net income (loss).................................... 937 (733) 549 (936) 277(3) (398)(3)
Net income (loss) attributable to common
stockholders....................................... $ 937 $ (991) $ 149 $ (2,222) $ (2,110 (3) $ (398)(3)
PRO FORMA EARNINGS PER COMMON SHARE DATA(4):
Earnings per common share:
Basic..............................................
Diluted............................................
Weighted average common shares outstanding:
Basic..............................................
Diluted............................................
OTHER OPERATING DATA:
EBITDA(5)............................................ $ 3,617 $ 1,548 $ 5,058 $ 5,495 $ 15,916 $ 17,491
EBITDA margin(5)..................................... 14.5% 4.6% 11.6% 9.7% 19.3% 18.4%
Depreciation and amortization........................ $ 1,514 $ 2,168 $ 2,929 $ 4,219 $ 7,736 $ 10,180
Compensation expense in connection with stock
options(6)......................................... -- 635 1,967 5,933 1,442 3,198
Cash provided by (used in):
Operating activities............................... $ 3,066 $ 3,283 $ 5,695 $ 12,302 $ 15,733 $ 15,733
Investing activities............................... (5,875) (7,674) (5,487) (13,571) (36,040) (46,290)
Financing activities............................... $ 2,910 $ 4,244 $ 144 $ 2,809 $ 40,836 $ 86,336
New clubs opened(7).................................. 4 2 2 3 1 1
Clubs acquired(7).................................... -- -- 1 5 13 19
Wholly-owned clubs operated at end of period(7)...... 16 20 23 28 45 51
Total clubs operated at end of period(8)............. 23 25 28 35 49 55
Members at end of period(9).......................... 38,300 48,300 54,800 78,600 125,100 143,000
Comparable club revenue increase(10)................. 10.9% 14.7% 27.3% 17.7% 26.2% 26.2%
Revenue per weighted average club(11)................ $ 1,809 $ 1,794 $ 2,017 $ 2,267 $ 2,287 $ 2,143
</TABLE>

<TABLE>
<CAPTION>
AS OF MAY 31, 1998
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................... $ 5,898 $ 1,648 $ 41,148
Total assets......................................................... 111,977 118,277 158,973
Long-term debt, including current installments....................... 88,289 94,589 88,589
Stockholders' equity (accumulated deficit)........................... $ (5,107) $ (5,107) $ 41,589
</TABLE>

5
<PAGE>
- --------------------------

(1) Gives effect to the acquisitions of Ultrafit Inc. and affiliates ("Ovox")
and Lifestyle (individually, the "Ovox Acquisition," the "Lifestyle
Acquisition," and collectively the "Acquisitions.") pursuant to various
asset purchase agreements and a purchase option agreement. The Ovox
Acquisition and the Lifestyle Acquisition occurred on April 6, 1998 and
August 6, 1998, respectively. In addition, the unaudited condensed combined
financial data gives effect to the Preferred Exchange, the Offering, the
Affiliate Stock Purchase and the application of the estimated net proceeds
therefrom. See "Unaudited Pro Forma Condensed Combined Financial Data."

(2) Includes payroll and related, club operating, general and administrative,
depreciation and amortization and compensation expense in connection with
the issuance of stock options.

(3) Reflects the write-off of previously capitalized fees and expenses of
$782,000 net of taxes of $624,000 related to the repayment of certain
indebtedness. Prior to fiscal 1998, the Company capitalized direct costs
incurred to obtain leases for new clubs to be constructed by the Company.
During the quarter ended May 31, 1998, the Company adopted the provisions of
Statement of Position 98-5 REPORTING ON THE COSTS OF START-UP ACTIVITIES
("SOP 98-5"), which requires that these costs be expensed as incurred. In
connection with the adoption of SOP 98-5, the Company, effective June 1,
1997, recorded a pre-tax charge of $88,000 net of $70,000 in taxes, as the
cumulative effect of this accounting change. See Notes 2(m) and 16 to the
Company's Consolidated Financial Statements.

(4) The pro forma per common share data included above has been prepared
assuming the Preferred Exchange had occurred on June 1, 1997. Accordingly,
the pro forma per common share amounts have been computed based on net
income before accreted dividends on preferred stock and, with respect to the
historical pro forma earnings per share only, based upon a lower
compensation expense in connection with the issuance of stock options, which
has been reduced by the $636,000 of compensatory accreted preferred
dividends in connection therewith. The weighted average number of shares of
outstanding Common Stock has been increased by the effects of the Preferred
Exchange using the treasury stock method.

(5) EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, extraordinary charges and cumulative effect of changes in
accounting policy. EBITDA is presented because management believes it
provides useful information regarding the operating performance and
financial condition of the Company. EBITDA should not be considered in
isolation or as a substitute for net income, cash flows, or other
consolidated income (loss) or cash flow data prepared in accordance with
GAAP, or as a measure of the Company's profitability or liquidity. EBITDA
margin is defined as EBITDA as a percentage of revenues.

(6) Represents non-cash charges related to the vesting of certain stock options
issued to management and the accretion of preferred dividends related to
preferred stock underlying certain of such options. Upon the completion of
the Offering, the vesting of certain stock options will accelerate pursuant
to the terms of the Company's Old Option Plan (as defined), which will cause
the Company to recognize an additional compensation expense of $2.0 million
in the quarter ended November 30, 1998. As such, the Acquisitions and
Offering pro forma as adjusted compensatory expense for fiscal 1998 reflects
this $2.0 million charge, as well as the actual charge incurred in fiscal
1998 reduced by the portion of such charges associated with accretion of
preferred dividends underlying certain of such options. In addition, in
connection with the Preferred Exchange, the Company will recognize a
non-recurring compensation expense in connection with stock options of
$352,000 in the quarter ended November 30, 1998 that represents the discount
to the offering price (reflecting underwriting discounts and commissions) at
which the Series B Options (as defined) will convert into options to
purchase Common Stock. See "The Preferred Exchange" and footnote 4 above.

(7) During fiscal 1995, the Company acquired two formerly managed clubs. During
fiscal 1997, the Company opened or acquired six clubs and closed one club
upon the expiration of its lease. During fiscal 1998, the Company opened or
acquired 14 clubs and acquired three formerly managed clubs.

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

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

(10) The Company defines comparable clubs as those clubs operated by the Company
for at least 13 full months.

(11) Revenue per weighted average club is calculated as club revenue divided by
the product of the total numbers of clubs and their weighted average months
in operation, as a percentage of the total year.

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<PAGE>
RISK FACTORS

AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING
RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION PRESENTED IN THIS PROSPECTUS,
BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS
CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED
BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.

NET LOSSES. The Company incurred a net loss of $936,000 in fiscal 1997 and
$733,000 in fiscal 1995. These losses have resulted from a variety of costs
including, but not limited to, debt financing costs resulting from the Company's
growth strategy and non-cash charges such as depreciation and amortization of
goodwill. In addition, the Company has historically experienced non-cash
compensation expense in connection with the issuance of stock options. Upon the
completion of the Offering, the vesting of certain stock options will accelerate
pursuant to the terms of the Company's Old Option Plan, which will cause the
Company to recognize an additional compensation expense of $2.0 million in the
quarter ended November 30, 1998. In addition, in connection with the Preferred
Exchange, the Company will recognize a non-recurring compensation expense in
connection with stock options of $352,000 in the quarter ended November 30, 1998
that represents the discount to the offering price (reflecting underwriting
discounts and commissions) at which the Series B Options will convert into
options to purchase Common Stock. See "The Preferred Exchange." Although the
Company had net income in fiscal 1998, there can be no assurance that the
Company will generate net income in the future. Increased goodwill,
amortization, depreciation and financing costs associated with future
acquisitions and greenfield club openings will impact profitability and may
result in net losses in the future. The Company anticipates recording a net loss
for the seven months ended December 31, 1998.

ACQUISITION OF CLUBS. The Company's growth strategy is dependent on its
ability to acquire and operate successfully fitness clubs in selected locations
in large metropolitan areas within the Northeast and Mid-Atlantic regions of the
United States. The successful acquisition and operation of fitness clubs will
depend on various factors, including the ability of the Company and its
management to: (i) locate suitable acquisition targets; (ii) obtain financing to
consummate such acquisitions; (iii) negotiate acceptable purchase agreements;
(iv) obtain lease assignments on acceptable terms; (v) effectively integrate
acquired businesses with existing operations; (vi) expand its membership base at
acquired locations; (vii) hire, train and retain qualified employees; and (viii)
effectively address issues raised by other factors, some or all of which may be
beyond the Company's control. As a result of the foregoing, there can be no
assurance that the Company will be able to acquire clubs in areas in which it
wishes to expand. There can be no assurance that any future acquisitions will be
successfully integrated into the Company's operations, that competition for
acquisitions will not intensify or that the Company will be able to complete
such acquisitions on acceptable terms and conditions. There can be no assurance
that the Company's acquisition strategy will be successful. Even if the Company
is able to expand its business, there can be no assurance that such expansion
will be profitable for the Company.

DEVELOPMENT OF GREENFIELD CLUBS. The Company's growth strategy depends to a
significant degree on its ability to successfully develop and operate new
greenfield club locations. The successful development of new clubs will depend
on various factors, including: the ability of the Company to: (i) obtain
financing; (ii) locate suitable sites for clubs; (iii) negotiate successfully
lease agreements and meet construction schedules and budgets; (iv) resolve
zoning, permitting or other regulatory issues relating to the construction of
new clubs; (v) hire, train and retrain qualified personnel; (vi) obtain new
members; and (vii) effectively address issues raised by other factors, some or
all of which may be beyond the Company's control. The Company has historically
experienced delays in new club openings associated with zoning, permitting and
other regulatory approvals. As a result, there can be no assurance that the

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<PAGE>
Company will be able to implement its growth strategy, open new clubs on a
timely and cost-efficient basis or operate its new clubs profitably.

ABILITY TO MAINTAIN PRIOR RATE OF GROWTH. From fiscal 1994 to fiscal 1998,
the Company experienced compound annual growth rates of 34.9% and 44.8% increase
in revenues and EBITDA, respectively. These growth rates may not be indicative
of future growth. In the future, the Company's rate of growth will be dependent
upon, among other things, the continued success of its efforts to acquire or
open clubs, as well as continued comparable club revenue growth. There can be no
assurance that the Company's rate of growth will not decline or that it will
continue to be profitable in any succeeding fiscal year. In addition, the
Company may have difficulty maintaining its prior rate of growth to the extent
it becomes larger. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

POTENTIAL INABILITY TO MANAGE GROWTH. The Company has opened or acquired 44
clubs since May 31, 1993 and plans to maintain such growth through continued
acquisitions and development of greenfield clubs, which expansion could place a
strain on the Company's operational, human and financial resources. As a result
of the Company's accelerated rate of growth, the Company will need to manage an
increased number of employees and the expansion of its operating and financial
systems, as well as the geographic area of its operations. The Company's growth
will increase the operating complexity of the Company and the level of
responsibility exercised by both existing and new management personnel. There
can be no assurance that the Company will be able to attract and retain
qualified management and employees, that the Company's current operating and
financial systems and controls will be adequate to manage the Company's growth
or that any steps taken to improve such systems and controls will be sufficient,
nor can there be any assurance that the Company's accelerated growth strategy
will not have a material adverse effect on the Company's business, results of
operations or financial condition.

PERFORMANCE OF RECENTLY OPENED CLUBS. The Company has opened a total of six
new greenfield clubs in the last three fiscal years. Upon opening a greenfield
club, the Company typically experiences an initial period of club operating
losses in such greenfield club. Although the Company pre-sells memberships,
pre-sold membership enrollment typically generates insufficient revenue for the
club to generate a positive EBITDA contribution (before corporate overhead). As
a result, a greenfield club typically generates an EBITDA loss in its first full
year of operation and substantially lower EBITDA margins in its second full year
of operations than a mature club. These club EBITDA losses (before corporate
overhead) and lower club EBITDA (before corporate overhead) margins will
negatively impact the Company future results of operations. This negative impact
will be increased by the initial expensing of pre-opening costs which include
legal and other costs associated with lease negotiations and permitting and
zoning requirements, as well as increased depreciation and amortization
expenses, which will further negatively impact net income. A greenfield club
typically reaches mature levels in three to four years and generates positive
cash flow much sooner than EBITDA contributions due to the rent expense deferred
for several months (in accordance with GAAP). The Company may, in its
discretion, accelerate or expand its plans to open new greenfield clubs, which
may adversely affect results from operations temporarily.

NEED FOR INCREMENTAL CAPITAL. The opening of greenfield clubs and the
acquisition of existing clubs requires considerable capital. Although management
believes that proceeds from the Offering, together with internally generated
funds and available borrowings under the Company's Credit Facility (as defined),
will be sufficient to finance the Company's current operating and growth plans
through the end of fiscal 1999, any material acceleration or expansion of that
plan through additional greenfields or acquisitions (to the extent such
acquisitions include cash payments) may require the Company to pursue additional
sources of financing prior to the end of fiscal 1999. There can be no assurance
that such financing will be available or that it will be available on acceptable
terms. The inability to finance such further or accelerated expansion on
acceptable terms may negatively impact the Company's competitive

8
<PAGE>
position and or materially adversely affect the Company's business, results of
operations or financial condition. In addition, such financing may take the form
of additional offerings of Common Stock, which may cause dilution to the
existing shareholders at that time. Alternatively, such financing may take the
form of additional indebtedness which may increase the Company's leverage.

ATTRACTION AND RETENTION OF MEMBERS. The performance of the Company's clubs
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. Most of the
Company's members can cancel their club membership at any time upon 30 days
notice. In addition, there are numerous factors that could lead to a decline in
membership levels at established clubs or that could prevent the Company from
increasing its membership at newer clubs, including the reputation of the
Company, the ability of the Company to deliver to its members 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. As a result of these factors, there can
be no assurance that the Company's membership levels will be adequate to
maintain or permit the expansion of its operations. In addition, a decline in
membership levels may have a material adverse effect on the Company's
performance, financial condition and results of operations. See
"Business--Growth Strategy."

LEVERAGE AND RESTRICTIVE COVENANTS. Although the Company will use the
proceeds from the Offering to reduce certain debt, the Company will remain
significantly leveraged following the Offering and the Affiliate Stock Purchase.
As of May 31, 1998, on a pro forma basis after giving effect to the Lifestyle
Acquisition, the Offering and the Affiliate Stock Purchase, the Company's total
consolidated indebtedness would have been $88.6 million and total stockholders'
equity would have been $41.4 million. See "Capitalization."

Due to the level of the Company's remaining indebtedness after giving effect
to the Offering and the Affiliate Stock Purchase, any material adverse
development affecting the business of the Company could significantly limit its
ability to withstand competitive pressures and adverse economic conditions, to
take advantage of expansion opportunities or other significant business
opportunities that may arise, or to meet its obligations as they become due. The
terms of the agreements governing the Company's outstanding indebtedness,
including the Credit Facility and the Senior Notes (as defined), will continue
to impose operating and financial restrictions on the Company and certain of its
subsidiaries. Such restrictions limit, among other things, the Company's ability
to incur additional indebtedness and to make dividend payments. See Note 6 to
the Company's Consolidated Financial Statements, "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Description of Certain Indebtedness."

REGIONAL CONCENTRATION OF OPERATIONS. As of August 12, 1998, the Company
owned and/or managed 52 clubs and a physical therapy facility in the New York
region of which 23 clubs are in Manhattan. Substantially all of the Company's
other clubs are located in the Northeast and Mid-Atlantic regions of the United
States. The Company's geographic concentration in these regions and, in
particular, the New York area, heightens the Company's exposure to adverse
developments related to competition, as well as, economic and demographic
changes in these regions. There can be no assurance that the Company's
geographic concentration will not result in a material adverse effect on its
business, financial condition or results of operations in the future.

COMPETITION. The fitness club industry is highly competitive. The Company
competes with other fitness clubs, physical fitness and recreational facilities
established by local governments and hospitals and by businesses for their
employees, amenity and condominium clubs, the YMCA and similar organizations
and, to a certain extent, with racquet and tennis and other athletic clubs,
country clubs, weight reducing salons and the home-use fitness equipment
industry. The Company also competes with other entertainment and retail
businesses for the discretionary income of its target markets. There can be no

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<PAGE>
assurance that the Company will be able to compete effectively in the future in
the markets in which it operates. Competitors, which may include companies which
are larger and have greater resources than the Company, may enter these markets
to the detriment of the Company. These competitive conditions may limit the
Company's ability to increase dues without a material loss in membership,
attract new members and attract and retain qualified personnel. Additionally,
consolidation in the fitness club industry could result in increased competition
among participants, particularly large multi-facility operators that are able to
compete for attractive acquisition candidates, thereby increasing costs
associated with expansion through both acquisitions, and lease negotiation and
real estate availability for greenfields. See "Business--Competition."

HEALTH RISKS. Use of the Company's 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 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 such claim. The Company currently maintains
general liability coverage, but, 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.

CONTROL OF THE COMPANY BY CERTAIN STOCKHOLDERS. Upon completion of the
Offering and the Affiliate Stock Purchase, approximately % of the Common
Stock of the Company will be owned beneficially by BRS and approximately %
will be owned by management of the Company. By combining their voting power,
these stockholders could exercise control over the Company. In addition, any
holder of a significant percentage of the Company's Common Stock could exercise
similar control. The concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of the Company, and there can be no
assurance that such a change in control will not have a material adverse effect
on the Company's business, financial condition or results of operations. See
"Security Ownership."

DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the continued
services of its senior management team, particularly Mark Smith, Chief Executive
Officer; Robert Giardina, President and Chief Operating Officer; Richard Pyle,
Executive Vice President and Chief Financial Officer; Alexander Alimanestianu,
Executive Vice President, Development; Deborah Smith, Senior Vice President,
Operations and Leslie Kimerling, Senior Vice President, Information Management
and Planning. The Company believes the loss of such key personnel could have a
material adverse effect on the Company and its financial performance. Currently,
the Company does not have any long-term employment agreements with its executive
officers, and there can be no assurance that the Company can attract and retain
sufficient qualified personnel to meet its business needs. See
"Management--Directors and Executive Officers."

GOVERNMENT REGULATION. The Company's operations and business practices are
subject to federal, state and local government regulation in the various
jurisdictions in which its clubs are located, including: (i) general rules and
regulations of the Federal Trade Commission (the "FTC"), state and local
consumer protection agencies and state statutes that prescribe certain forms and
provisions of membership contracts and which govern the advertising, sale,
financing and collection of such memberships; (ii) state and local health
regulations; (iii) federal regulation of health and nutritional supplements; and
(iv) regulation of rehabilitation service providers. Although management is not
aware of any proposed changes in any statutes, rules or regulations, any changes
in such laws could have a material adverse effect on the Company's financial
condition and results of operations. See "Business--Government Regulation."

ABSENCE OF DIVIDENDS; RESTRICTION ON PAYMENT OF DIVIDENDS. The Company does
not expect to pay dividends for the foreseeable future. The Company's Credit
Facility and its Senior Notes restrict the

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<PAGE>
ability of the Company to pay dividends on the Common Stock. See "Dividend
Policy" and "Description of Certain Indebtedness."

IMPACT OF THE YEAR 2000. The Company has conducted a review of its
information systems that could be affected by Year 2000 compliance issues and
has determined that a portion of such systems are not Year 2000 compliant. The
Company is developing a plan to resolve the issue, the implementations of which
should be completed by December 31, 1998 at an estimated cost of $300,000. The
Company's inability to update its computer systems in a timely and cost
efficient manner could have a material adverse effect on the Company's business,
financial condition or results of operations.

The Company also relies directly and indirectly, on external systems of
business enterprises such as third party suppliers, members, creditors and
financial organizations, and of governmental entities for accurate exchange of
data. Even if the internal systems of the Company are not materially affected by
the Year 2000 issue, the Company could be affected by disruptions in the
operation of the enterprises with which the Company interacts. Despite the
Company's efforts to address the Year 2000 impact on its internal systems and
business operations, there can be no assurance that such impact will not result
in a material disruption of its business or have a material adverse effect on
the Company's business, financial condition or results of operations.

ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS. Certain provisions of the
Company's Amended and Restated Certificate of Incorporation and Bylaws may be
deemed to have anti-takeover effects and may discourage, delay or prevent a
takeover attempt that a stockholder might consider in its best interest. These
provisions, among other things: (i) classify the Company's Board of Directors
into three classes, each of which will serve for different three year periods;
(ii) provide that a director may be removed by stockholders only for cause by a
vote of the holders of more than two-thirds of the shares entitled to vote;
(iii) provide that all vacancies on the Company's Board of Directors, including
any vacancies resulting from an increase in the number of directors, may be
filled by a majority of the remaining directors, even if the number is less than
quorum; (iv) provide that special meetings of the stockholders may only be
called by the Chairman of the Board of Directors, a majority of the Board of
Directors or upon the demand of the holders of a majority of the shares entitled
to vote at any such special meeting; and (v) require a vote of the holders of
more than two-thirds of the shares entitled to vote in order to amend the
foregoing and certain other provisions of the Amended and Restated Certificate
of Incorporation and Bylaws. In addition, the Board of Directors, without
further action of the stockholders, is permitted to issue and fix the terms of
preferred stock which may have rights senior to those of the Common Stock.

Furthermore, the Indenture governing the Company's Senior Notes includes
change in control provisions which provide, among other things, that upon a
change in control of the Company, the holders of the Senior Notes may require
the Company to repurchase the Senior Notes at a purchase price equal to 101% of
the principal amount thereof plus accrued interest to the date of purchase. In
addition, a change of control as defined in the agreement governing the Credit
Facility of the Company constitutes an event of default under the Company's
Credit Facility. See "Description of Certain Indebtedness."

DILUTION. The initial public offering price will be substantially higher
than the $ net tangible book value per share of Common Stock. Investors
purchasing shares of Common Stock will therefore incur immediate and substantial
dilution of approximately $ in net tangible book value per share of Common
Stock from the initial public offering price. See "Dilution."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of a
substantial number of shares of Common Stock in the public market or the
perception that such sales could occur could adversely affect prevailing market
prices for the Common Stock. Upon completion of the Offering and the Affiliate
Stock Purchase, the Company will have shares of Common Stock
outstanding. Of such shares, the shares of Common Stock being sold in
the Offering and the Affiliate Stock Purchase (together

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<PAGE>
with any shares sold upon exercise of the Underwriters' over-allotment option)
will be immediately eligible for sale in the public market without restriction,
except for shares purchased by or issued to any affiliate of the Company. BRS
and its affiliates have certain demand registration rights with respect to
shares of the Common Stock of the Company held by them. All stockholders of the
Company immediately prior to the Offering have piggyback rights with respect to
sales of shares of Common Stock by the Company, and in the case of holders other
than BRS and its affiliates, piggyback rights with respect to sales by BRS or
its affiliates.

In connection with the Offering, the Company's executive officers and
directors and all of the Company's other existing stockholders have agreed not
to dispose of any shares of Common Stock for a period of 180 days from the date
of this Prospectus, or to make any demand for or exercise any right with respect
to the registration of the shares for such 180 day period, and the Company has
agreed not to dispose of any shares (other than issuances by the Company of
certain employee stock options and shares covered thereby) for a period of 180
days from the date of this Prospectus, without the prior written consent of BT
Alex. Brown Incorporated, on behalf of the Underwriters. All existing
stockholders have also waived all rights to register securities owned by them in
connection with the Offering.

Upon expiration of the 180 day lockup period, shares of Common
Stock will be eligible for sale subject to certain volume and other limitations
imposed by Rule 144 under the Securities Act. The sale of a substantial number
of shares held by the existing stockholders, whether pursuant to a subsequent
public Offering or otherwise, or the perception that such sales could occur,
could adversely affect the market price of the Common Stock and could materially
impair the Company's future ability to raise capital through an Offering of
equity securities. See "Description of Capital Stock," "Shares Eligible for
Future Sale" and "Underwriting."

NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Common Stock. Although
application will be made to list the Common Stock for trading on the Nasdaq
National Market, there can be no assurance that an active trading market for the
Common Stock will develop or be sustained following the Offering or that the
market price of the Common Stock will not decline below the initial public
offering price. The initial public offering price of the Common Stock offered
hereby will be determined by negotiations between the Company and the
Representatives (as defined) and may not be indicative of future market prices.
The price at which the Common Stock will trade will depend upon a number of
factors, including, but not limited to, the Company's historical and anticipated
quarterly and annual operating results, variations between such results and
analyst and investor expectations, investor perceptions of the Company and
comparable public companies, changes in the industries in which the Company
operates or in the industries of the Company's significant customers, and
general market and economic conditions, some of which factors are beyond the
Company's control. The stock market has from time to time experienced extreme
price and volume fluctuations which have often been unrelated and/or
disproportionate to the operating performance of the affected companies. Such
fluctuations could adversely affect the market price of the Company's Common
Stock. See "Underwriting."

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USE OF PROCEEDS

Assuming an initial public offering price of $ per share (the midpoint of
the range), the proceeds to the Company from the sale of shares of Common
Stock offered hereby are estimated to be approximately $45.5 million ($47.8
million if the Underwriters' over-allotment option is exercised in full) after
deducting the estimated underwriting discounts and commissions and expenses
associated with this Offering payable by the Company. The Company intends to use
the net proceeds of the Offering and the Affiliate Stock Purchase: (i) to repay
$17.5 million of indebtedness that management anticipates will be outstanding
under the Credit Facility at the time of the Offering; (ii) to open or acquire
additional fitness clubs; (iii) $2.5 million to update its management
information systems and (iv) for general corporate purposes. Pending the
application thereof, the net proceeds will be invested in short-term,
interest-bearing, investment grade marketable securities.

The Company's Credit Facility has a final scheduled maturity date of October
15, 2002, and borrowings thereunder bear interest at a rate equal to either the
Alternate Base Rate, as defined therein, plus 1.5% or at a rate equal to the
Eurodollar borrowing rate plus 2.5%, at the Company's option. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," and "Description of Certain
Indebtedness--Credit Facility."

THE RECAPITALIZATION

In December 1996, the Company consummated a leveraged recapitalization of
the Company (the "Recapitalization") pursuant to which, among other things, BRS
and certain institutional investors acquired shares of the Company's Common
Stock and series A preferred stock, par value $1.00 per share (the "Series A
Preferred Stock"), representing approximately 73.0% of the Company's voting
equity interests on a fully-diluted basis. In addition, certain members of the
Company's management acquired shares of the Company's Common Stock and series B
preferred stock, par value $1.00 per share (the "Series B Preferred Stock"),
representing approximately 27.0% of the Company's voting equity interests on a
fully-diluted basis. The Series A Preferred Stock and the Series B Preferred
Stock are collectively referred to herein as the "Preferred Stock."

In addition, pursuant to the Recapitalization, the Company instituted a
common stock option plan granting certain members of the Company's management
options to acquire shares of Common Stock (as amended in April 1998, the "Old
Option Plan"). The Old Option Plan provided for aggregate option grants
exercisable for 80,876 shares of the Common Stock of the Company. As of May 31,
1998, options to purchase an aggregate of 57,142 shares of the Common Stock at
an exercise price of $1.00 per share (such options, which were granted in
December 1996, the "1996 Options") and 14,700 shares at a price of $17.50 per
share (such options, which were granted in April 1998, the "1998 Options") were
outstanding under the Old Option Plan.

In December 1996, the Company adopted the Preferred Stock Option Plan (the
"Preferred Option Plan") designed to advance the Company's best interests by
providing additional incentives to executive and other key employees of the
Company. The Preferred Option Plan provides for aggregate option grants
exercisable for 164,783 shares of Series B Preferred Stock (the "Series B
Options"). As of May 31, 1998, options to purchase an aggregate of 164,783
shares of Preferred Stock at an exercise price of $10.00 were outstanding under
the Preferred Option Plan. Prior to the Offering, management intends to convert
all options outstanding under the Preferred Option Plan into options to purchase
shares of Common Stock of the Company pursuant to the Preferred Exchange.

THE PREFERRED EXCHANGE

Immediately prior to the consummation of the Offering, (a) all shares of
Series A Preferred Stock and Series B Preferred Stock will be converted into a
number of shares of Common Stock equal to (i) the liquidation value plus accrued
and unpaid dividends of such underlying shares of preferred stock as of

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the date of the Offering divided by (ii) the offering price per share less
underwriting discounts and commissions, and (b) all options for Series B
Preferred Stock will be converted into options for a number shares of Common
Stock equal to (i) the liquidation value of the underlying shares of Series B
Preferred Stock, plus all unpaid accrual amounts on such options divided by (ii)
the offering price per share less underwriting discounts and commissions. The
options will have an exercise price of $ per share. See "Security Ownership"
and "Certain Relationships and Related Transactions."

DIVIDEND POLICY

The Company has not paid any dividends with respect to the Common Stock.
Following the Offering, the Company intends to retain future earnings, if any,
to finance its growth and development. The Company, therefore, does not expect
to pay any cash dividends in the foreseeable future. In addition, the Senior
Notes and the Credit Facility restrict the payment of cash dividends by the
Company (subject to certain limited exceptions), and the Company may in the
future enter into loan or other agreements or issue debt securities or preferred
stock that restrict the payment of dividends. The declaration and payment of
dividends by the Company are subject to the discretion of the Board of Directors
of the Company (the "Board"). Any future determination to pay dividends will
depend on the Company's results of operations, financial condition, capital
requirements, contractual restrictions and other factors deemed appropriate by
the Board.

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CAPITALIZATION

The following table sets forth the cash and the capitalization of the
Company: (i) on an actual basis as of May 31, 1998; (ii) pro forma to reflect
the Lifestyle Acquisition and the Preferred Exchange and (iii) pro forma as
adjusted for the Offering and the Affiliate Stock Purchase and the use of
proceeds thereof assuming an initial public offering price of $ (the midpoint
of the range) after deducting estimated Offering expenses payable by the Company
and the accelerated vesting of certain options in connection therewith. This
table should be read in conjunction with the financial statements, and the
related notes thereto, included elsewhere in this Prospectus. See "Use of
Proceeds," "Selected Historical and Pro Forma Consolidated Financial Data,"
"Unaudited Pro Forma Condensed Combined Financial Data" and "Security
Ownership."

<TABLE>
<CAPTION>
AS OF MAY 31, 1998
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- ------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Cash and cash equivalents........................................ $ 22,997 $ 18,747(1) $ 58,247
---------- ----------- ------------
---------- ----------- ------------
Long-term debt (including current portion):
Borrowings under the Credit Facility........................... $ -- $ 6,000(1) $ --
Senior Notes................................................... 85,000 85,000 85,000
Capitalized lease obligations.................................. 1,463 1,463 1,463
Other notes payable............................................ 1,826 2,126 2,126
---------- ----------- ------------
Total long-term debt....................................... 88,289 94,589 88,589
---------- ----------- ------------
Stockholders' equity (deficit):
Series A Preferred Stock, $1.00 par value; at liquidation
value, 200,000 shares authorized; 153,637 shares issued and
outstanding actual; and no shares issued and outstanding pro
forma and pro forma as adjusted.............................. 18,736 -- --
Series B Preferred Stock, $1.00 par value; at liquidation
value, 200,000 shares authorized; 3,857 shares issued and
outstanding actual; and no shares issued and outstanding pro
forma and pro forma as adjusted(2)........................... 164 -- --
Common Stock, $0.001 par value, 1,150,000 shares authorized;
1,015,714 shares issued and outstanding actual; shares
issued and outstanding pro forma; and shares issued and
outstanding pro forma as adjusted(2)(3)...................... 1 1 1
Unearned compensation.......................................... (2,546) (2,546) (506)
Paid-in capital................................................ 3,994 23,246 68,746
Accumulated deficit............................................ (25,456) (25,632) (26,652)
---------- ----------- ------------
Total stockholders' equity (deficit)....................... (5,107) (4,931) 41,589
---------- ----------- ------------
Total capitalization..................................... $ 83,182 $ 89,658 $ 130,178
---------- ----------- ------------
---------- ----------- ------------
</TABLE>

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

(1) Reflects the decrease in cash and increase of indebtedness associated with
the Lifestyle Acquisition.

(2) Excludes Series B Options.

(3) Excludes 80,872 shares of Common Stock reserved for issuance pursuant to the
Old Option Plan, under which options to purchase an aggregate of 71,842
shares of Common Stock have been granted. Also excludes 114,022 shares
(which shall be reduced to 75,714 shares upon consummation of the Offering)
of Common Stock issuable pursuant to the exercise of warrants. See
"Description of Capital Stock--Warrant; --Old Option Plan."

15
<PAGE>
DILUTION

As of May 31, 1998, the Company had a net tangible book value (deficit) of
approximately $(37.1) million, or $ per share of Common Stock. Net tangible
book value (deficit) per share of Common Stock represents the difference between
the net tangible assets and the liabilities of the Company, on a consolidated
basis, divided by the total number of shares of Common Stock outstanding. Pro
forma net tangible book value (deficit) per share gives effect to the Lifestyle
Acquisition and the Preferred Exchange. As adjusted pro forma net tangible book
value (deficit) per share gives effect to the Lifestyle Acquisition, the
Preferred Exchange, the Offering and the Affiliate Stock Purchase. Pro forma net
tangible book value (deficit) would have been $(45.8) million, or $ per share
of common stock as of May 31, 1998. Pro forma as adjusted net tangible book
value (deficit) would have been approximately $(332,000), or $ per share as of
May 31, 1998. This value represents an immediate increase in pro forma net
tangible book value (deficit) of $ per share of Common Stock to existing
stockholders and an immediate dilution of $ per share to new investors. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share (1)................................ $
Pro forma net tangible book value (deficit) per share at May 31,
1998................................................................. $
Increase in per share attributable to new investors....................
---------
As adjusted pro forma net tangible book value per share....................
---------
Net tangible book value dilution per share to new investors(2)............. $
---------
---------
</TABLE>

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

(1) Before deduction of underwriting discounts and commissions and estimated
expenses payable by the Company in connection with the Offering.

(2) If the Underwriters' over-allotment option is exercised in full, dilution to
new investors will be $ per share.

The following table summarizes, on a pro forma basis as of May 31, 1998, the
number of shares of Common Stock purchased from the Company, the estimated value
of the total consideration or value paid or deemed attributable thereto and the
weighted average price per share paid or attributable to existing stockholders
and the new investors purchasing shares in the Preferred Exchange, the Offering
and the Affiliate Stock Purchase.

<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED
------------------------ ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................................... % $ % $
New investors............................................ $
----- ----- ----------- -----
Total................................................ 100% $ 100%
----- ----- ----------- -----
----- ----- ----------- -----
</TABLE>

The foregoing tables assume no exercise of stock options and warrants after
May 31, 1998. As of May 31, 1998, there were outstanding options and warrants to
purchase an aggregate of 185,864 shares of Common Stock at a weighted average
exercise price of approximately $1.70 per share. If all of the foregoing options
and warrants had been exercised, pro forma net tangible book value per share
would have been $ , representing an immediate dilution to new investors of
$ per share and an immediate increase in net tangible book value (deficit) of
$ per share attributable to the Preferred Exchange, the Offering and the
Affiliate Stock Purchase.

16
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND CLUB OPERATING DATA)

Set forth below are selected historical and pro forma consolidated financial
and other operating data of the Company as of the dates and for the periods
presented. The selected historical consolidated statement of operations for
fiscal 1996, 1997 and 1998 and the selected historical consolidated balance
sheet data at the end of fiscal 1997 and 1998 were derived from the audited
Consolidated Financial Statements of the Company, which are included herein. The
selected historical consolidated financial data for fiscal 1994 and 1995 were
derived from the audited consolidated financial statements of the Company, which
are not included therein. The information contained in this table and
accompanying notes should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and accompanying notes thereto appearing
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues............................................................... $ 24,890 $ 33,349 $ 43,755 $ 56,567 $ 82,350
Operating expenses:
Payroll and related.................................................. 10,799 16,105 18,626 23,321 33,309
Club operating....................................................... 8,115 11,740 14,542 18,044 25,858
General and administrative........................................... 2,359 3,321 3,562 3,774 5,825
Depreciation and amortization........................................ 1,514 2,168 2,929 4,219 7,736
Compensation expense in connection with stock options(1)............. -- 635 1,967 5,933 1,442
--------- --------- --------- --------- ----------
Operating income (loss)............................................ 2,103 (620) 2,129 1,276 8,180
Interest expense, net.................................................. 342 654 952 2,455 5,902
--------- --------- --------- --------- ----------
Income (loss) before provision for income tax (benefit)............ 1,761 (1,274) 1,177 (1,179) 2,278
Provision for income tax (benefit)..................................... 824 (541) 628 (243) 1,131
Extraordinary item..................................................... -- -- -- -- (782)(2)
Cumulative effect of change in accounting policy....................... -- -- -- -- (88)(3)
--------- --------- --------- --------- ----------
Net income (loss).................................................. 937 (733) 549 (936) 277
Accreted dividends on preferred stock.................................. -- (258) (400) (1,286) (2,387)
Net Income (loss) attributable to common stockholders.............. $ 937 $ (991) $ 149 $ (2,222) $ (2,110)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
PRO FORMA EARNINGS PER COMMON SHARE DATA(4):
Earnings per common share:
Basic..............................................................
Diluted............................................................
Weighted average common shares outstanding:
Basic..............................................................
Diluted............................................................
OTHER OPERATING DATA:
EBITDA(5).............................................................. $ 3,617 $ 1,548 $ 5,058 $ 5,495 $ 15,916
EBITDA margin(5)....................................................... 14.5% 4.6% 11.6% 9.7% 19.3%
Cash provided by (used in):
Operating activities................................................. $ 2,839 $ 3,283 $ 5,695 $ 12,302 $ 15,733
Investing activities................................................. (5,648) (7,674) (5,487) (13,571) (36,040)
Financing activities................................................. $ 2,910 $ 4,244 $ 144 $ 2,809 $ 40,836
New clubs opened(6).................................................... 4 2 2 3 1
Clubs acquired(6)...................................................... -- -- 1 5 13
Wholly owned clubs operated at end of period(6)........................ 16 20 23 28 45
Total clubs operated at end of period(7)............................... 23 25 28 35 49
Members at end of period(8)............................................ 38,300 48,300 54,800 78,600 125,100
Comparable club revenue increase(9).................................... 10.9% 14.7% 27.3% 17.7% 26.2%
Revenue per weighted average club(10).................................. $ 1,809 $ 1,794 $ 2,017 $ 2,267 $ 2,287
</TABLE>

<TABLE>
<CAPTION>
AS OF MAY 31,
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
BALANCE SHEET DATA:
Working capital........................................................ $ (1,219) $ (2,329) $ (4,048) $ (8,436) $ 5,898
Total assets........................................................... 18,421 27,274 34,805 52,923 111,977
Long-term debt, including current installments......................... 10,205 10,430 10,453 41,071 88,289
Stockholders' equity (accumulated deficit)............................. 2,343 1,987 5,474 (6,951) (5,107)
</TABLE>

17
<PAGE>
- ------------------------

(1) Represents non-cash charges related to the vesting of certain stock options
issued to management and the accretion of preferred dividends related to
preferred stock underlying certain of such options. Upon completion of the
Offering, the vesting of certain stock options will accelerate pursuant to
the terms of the Company's Old Option Plan which will cause the Company to
recognize an additional compensation expense of $2.0 million in the quarter
in which this vesting occurs. Such vesting is currently expected to occur in
the quarter ended November 30, 1998. In addition, in connection with the
Preferred Exchange, the Company will recognize a non-recurring compensation
expense in connection with stock options of $352,000 in the quarter ended
November 30, 1998 that represents the discount to the offering price
(reflecting underwriting discounts and commissions) at which the Series B
Options will convert into options to purchase Common Stock. See "The
Preferred Exchange."

(2) Reflects the write-off of previously capitalized fees and expenses of
$782,000, net of taxes of $624,000, related to the repayment of certain
indebtedness. See Note 16 to the Company's Consolidated Financial
Statements.

(3) Prior to fiscal 1998, the Company capitalized direct costs incurred to
obtain leases for new clubs to be constructed by the Company. During the
quarter ended May 31, 1998, the Company adopted the provisions of Statement
of Position 98-5 REPORTING ON THE COSTS OF START-UP ACTIVITIES ("SOP 98-5")
which requires that these costs be expensed as incurred. In connection with
the adoption of SOP 98-5 the Company, effective June 1, 1997, recorded a
pre-tax charge of $88,000 net of $70,000 in taxes, as the cumulative effect
of this accounting change. See Note 2(m) to the Company's Consolidated
Financial Statements.

(4) The pro forma per common share data included above has been prepared
assuming the Preferred Exchange had occurred on June 1, 1997. Accordingly,
the pro forma per common share amounts have been computed based on net
income before accreted dividends on preferred stock and based upon a lower
compensation expense in connection with stock options, which has been
reduced by the $636,000 of compensatory accreted preferred dividends in
connection therewith. The weighted average number of shares of outstanding
Common Stock has been increased by the effects of the Preferred Exchange,
using the treasury stock method.

(5) EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, extraordinary charges and cumulative effect of changes in
accounting policy. EBITDA is presented because management believes it
provides useful information regarding the operating performance and
financial condition of the Company. EBITDA should not be considered in
isolation or as a substitute for net income, cash flows, or other
consolidated income (loss) or cash flow data prepared in accordance with
GAAP or as a measure of the Company's profitability or liquidity. EBITDA
Margin is defined as EBITDA as a percentage of revenues.

(6) During fiscal 1995, the Company acquired two formerly managed clubs. During
fiscal 1997, the Company opened or acquired six clubs and closed one club
upon the expiration of its lease. During fiscal 1998, the Company opened or
acquired 14 clubs and acquired three formerly managed clubs.

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

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

(9) The Company defines comparable clubs as those clubs operated by the Company
for at least 13 full months.

(10) Revenue per weighted average club is calculated as club revenue divided by
the product of the total numbers of clubs and their weighted average months
in operation as a percentage of the total year.

18
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

The following unaudited pro forma condensed combined financial data gives
effect to the Ovox Acquisition and the Lifestyle Acquisition, which occurred on
April 6, 1998 and August 6, 1998, respectively. In addition, the unaudited
condensed combined financial data gives effect to the Offering and the Affiliate
Stock Purchase and the application of the estimated net proceeds therefrom and
the Preferred Exchange.

The unaudited pro forma condensed combined balance sheet reflects the
historic financial position of the Company pro forma for the effects of the
Lifestyle Acquisition, the Preferred Exchange, the Offering and the Affiliate
Stock Purchase as if they each had occurred on May 31, 1998. As noted above, the
Ovox Acquisition occurred prior to May 31, 1998 and accordingly, pro forma
balance sheet adjustments for Ovox were not necessary since the historic
financial position of the Company includes the effects of the Ovox Acquisition.

The unaudited pro forma condensed combined statement of operations reflects
the Acquisitions, the Preferred Exchange and the Offering and the Affiliate
Stock Purchase as if they had occurred on June 1, 1997. The pro forma statement
of operations adjustments for the Ovox Acquisition relate only to the period
prior to the date of its acquisition since the historic operating results of the
Company include Ovox's results since its acquisition by the Company.

The unaudited pro forma condensed combined financial data does not reflect
cost savings, synergies or other financial benefits which may be achieved from
the acquisition of Ovox or Lifestyle except for the net effect of the
cancellation of a consulting contract, nor do they purport to be indicative of
the operating results or the financial position that would have been realized
had the Acquisitions been consummated as of the date or for the period for which
the pro forma data is presented. The unaudited pro forma adjustments described
in the notes are based upon current preliminary estimates and contain
assumptions that the Company's management believe are reasonable in such
circumstances.

The information herein is qualified in its entirety by the historical
financial statements and respective notes thereto of the Company, Ovox and
Lifestyle, which are included elsewhere herein.

The following pro forma financial data is provided:

1. Unaudited pro forma condensed combined balance sheet as of May 31, 1998.

2. Unaudited pro forma condensed combined statement of operations for the
year ended May 31, 1998.

3. Unaudited notes to pro forma condensed combined financial data.

19
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MAY 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THE THE
COMPANY LIFESTYLE PRO FORMA COMPANY OFFERING
HISTORICAL HISTORICAL(1) ADJUSTMENTS(2) PRO FORMA ADJUSTMENTS
------------ ------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............ $ 22,997 $ 102 $ (4,352)(3) $ 18,747 $39,500(4)
Accounts receivable and other current
assets............................. 1,770 26 (26)(5) 1,770
------------ ------------- -------------- -------------- ------------
Total current assets............. 24,767 128 (4,378) 20,517 39,500
Fixed assets, net...................... 54,518 1,577 263(6) 56,358
Intangible assets, net................. 19,923 8,710(7) 28,633
Deferred tax asset..................... 7,159 7,159 1,196(4)
Deferred membership costs.............. 4,933 1,150 (1,150)(5) 4,933
Other assets........................... 677 180 (180)(5) 677
------------ ------------- -------------- -------------- ------------
Total assets..................... $111,977 $ 3,035 $ 3,265 $118,277 $40,696
------------ ------------- -------------- -------------- ------------
------------ ------------- -------------- -------------- ------------

LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY:
Current liabilities:
Current portion of long-term debt and
capital lease obligations.......... $ 2,036 $ 102 $ (102)(5) $ 2,036
Accounts payable and accrued
expenses........................... 10,442 449 (449)(5) 10,442
Deferred revenue..................... 6,391 2,473 (2,473)(5) 6,391
------------ ------------- -------------- -------------- ------------
Total current liabilities........ 18,869 3,024 (3,024) 18,869
Long term debt and capital lease
obligations.......................... 86,253 147 153(8) 86,553
Credit Facility........................ 6,000(9) 6,000 (6,000)(4)
Deferred lease liabilities............. 9,298 522 (522)(5) 9,298
Deferred revenue and other
liabilities.......................... 2,664 446 (446)(5) 2,664
------------ ------------- -------------- -------------- ------------
Total liabilities................ 117,084 4,139 2,161 123,384 (6,000)
------------ ------------- -------------- -------------- ------------
Stockholders' (deficit) equity:
Preferred Stock...................... 18,900 18,900 (18,900)(4)
Common Stock......................... 1 86 (86)(5) 1
Paid-in capital...................... 3,994 3,994 64,752(4)
Unearned compensation................ (2,546) (2,546) 2,040(4)
Accumulated (deficit) equity......... (25,456) (1,190) 1,190(5) (25,456) (1,196)(4)
------------ ------------- -------------- -------------- ------------
Total stockholders' (deficit)
equity (5,107) (1,104) 1,104 (5,107) 46,696
------------ ------------- -------------- -------------- ------------
Total liabilities and
stockholders' equity
(deficit)...................... $111,977 $ 3,035 $ 3,265 $118,277 $40,696
------------ ------------- -------------- -------------- ------------
------------ ------------- -------------- -------------- ------------

<CAPTION>
THE
COMPANY
PRO FORMA
AS ADJUSTED
------------
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents............ $ 58,247
Accounts receivable and other current
assets............................. 1,770
------------
Total current assets............. 60,017
Fixed assets, net...................... 56,358
Intangible assets, net................. 28,633
Deferred tax asset..................... 8,355
Deferred membership costs.............. 4,933
Other assets........................... 677
------------
Total assets..................... $158,973
------------
------------
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY:
Current liabilities:
Current portion of long-term debt and
capital lease obligations.......... $ 2,036
Accounts payable and accrued
expenses........................... 10,442
Deferred revenue..................... 6,391
------------
Total current liabilities........ 18,869
Long term debt and capital lease
obligations.......................... 86,553
Credit Facility........................
Deferred lease liabilities............. 9,298
Deferred revenue and other
liabilities.......................... 2,664
------------
Total liabilities................ 117,384
------------
Stockholders' (deficit) equity:
Preferred Stock......................
Common Stock......................... 1
Paid-in capital...................... 68,746
Unearned compensation................ (506)
Accumulated (deficit) equity......... (26,652)
------------
Total stockholders' (deficit)
equity 41,589
------------
Total liabilities and
stockholders' equity
(deficit)...................... $158,973
------------
------------
</TABLE>

See unaudited notes to pro forma condensed combined financial data

20
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
OVOX LIFESTYLE
THE ---------------------------- ----------------------- THE
COMPANY HISTORICAL PRO FORMA HISTORICAL PRO FORMA COMPANY OFFERING
HISTORICAL 6/1-4/5(10) ADJUSTMENTS 6/1-5/31(11) ADJUSTMENTS PRO FORMA ADJUSTMENTS
---------- ------------- ------------ ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Club operations... $79,719 $4,754 $ 7,687 $92,160
Other............. 2,631 54 2,685

<CAPTION>
---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
82,350 4,808 7,687 94,845
<CAPTION>
---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating expenses:
Payroll and
related......... 33,309 1,912 2,657 $ 213(12) 38,091
Club operating.... 25,858 1,266 1,835 28,959
General and
administrative... 5,825 327 1,444 (490)(12) 7,106
Depreciation and
amortization.... 7,736 217 $ 841(13) 409 977(14) 10,180
Compensation
expense in
connection with
stock options... 1,442 1,442 $ 1,756(15)
---------- ------------- ------------ ----------- --------- ------------ ------------
74,170 3,722 841 6,345 700 85,778 1,756
---------- ------------- ------------ ----------- --------- ------------ ------------
Operating
income...... 8,180 1,086 (841) 1,342 (700) 9,067 (1,756)
Interest expense,
net of interest
income............ 5,902 (26) 312(16) 63 614(17) 6,865 (480)(18)
---------- ------------- ------------ ----------- --------- ------------ ------------
Income (loss)
before
provision
(benefit)
for
corporate
income
taxes....... 2,278 1,112 (1,153) 1,279 (1,314) 2,202 (1,276)
Provision (benefit)
for corporate
income taxes...... 1,131 14 (35)(19) 54 (72)(19) 1,092 (638)(20)
---------- ------------- ------------ ----------- --------- ------------ ------------
Net income
(loss)
before
extraordinary
item and
cumulative
effect of
change in
accounting
policy...... 1,147 1,098 (1,118) 1,225 (1,242) 1,110 (638)
Extraordinary loss
from early
extinguishment of
debt, net of
income taxes...... (782) (782)
---------- ------------
Income (loss) before
cumulative effect
of change in
accounting
policy............ 365 1,098 (1,118) 1,225 (1,242) 328 (638)
Cumulative effect on
prior years of a
change in
accounting policy,
net of income
taxes............. (88) (88)
---------- ------------- ------------ ----------- --------- ------------ ------------
Net income (loss)... 277 $1,098 $(1,118) $ 1,225 $(1,242) 240 (638)
------------- ------------ ----------- ---------
------------- ------------ ----------- ---------
Accreted dividends
on preferred
stock............. (2,387) (2,387) 2,387(21)
---------- ------------ ------------
Net income (loss)
attributable to
common
stockholders...... $(2,110) $(2,147) $ 1,749
---------- ------------ ------------
---------- ------------ ------------
Pro forma per share
data:
Basic........... $ (22) $ (22)
---------- ------------
---------- ------------
Diluted......... $ (22) $ (22)
---------- ------------
---------- ------------
Pro forma weighted
average common
shares:
Basic........... (22) (22)
---------- ------------
---------- ------------
Diluted......... (22) (22)
---------- ------------
---------- ------------
Other operating
data:
EBITDA.......... $15,916 $19,247
EBITDA margin... 19.3% 20.3%

THE COMPANY
PRO FORMA
AS ADJUSTED
------------
<S> <C>
Revenues:
Club operations... $92,160
Other............. 2,685
------------
<S> <C>
94,845
------------
<S> <C>
Operating expenses:
Payroll and
related......... 38,091
Club operating.... 28,959
General and
administrative... 7,106
Depreciation and
amortization.... 10,180
Compensation
expense in
connection with
stock options... 3,198
------------
87,534
------------
Operating
income...... 7,311
Interest expense,
net of interest
income............ 6,385
------------
Income (loss)
before
provision
(benefit)
for
corporate
income
taxes....... 926
Provision (benefit)
for corporate
income taxes...... 454
------------
Net income
(loss)
before
extraordinary
item and
cumulative
effect of
change in
accounting
policy...... 472
Extraordinary loss
from early
extinguishment of
debt, net of
income taxes...... (782)
------------
Income (loss) before
cumulative effect
of change in
accounting
policy............ (310)
Cumulative effect on
prior years of a
change in
accounting policy,
net of income
taxes............. (88)
------------
Net income (loss)... (398)

Accreted dividends
on preferred
stock.............

Net income (loss)
attributable to
common
stockholders...... $ (398)
------------
------------
Pro forma per share
data:
Basic........... $ (23)
------------
------------
Diluted......... $ (23)
------------
------------
Pro forma weighted
average common
shares:
Basic........... (23)
------------
------------
Diluted......... (23)
------------
------------
Other operating
data:
EBITDA.......... $17,491
EBITDA margin... 18.4%
</TABLE>

See unaudited notes to pro forma condensed combined financial data

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

UNAUDITED NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL DATA

(1) The historical balance sheet of Lifestyle as of May 31, 1998 has been
derived from unaudited financial information not included herein.

(2) On August 6, 1998, the Company acquired certain assets of Lifestyle.
Lifestyle operated six fitness clubs in New Jersey and is currently
developing a seventh club. For the purpose of preparing the unaudited pro
forma condensed combined balance sheet, the Lifestyle Acquisition has been
accounted for in accordance with the purchase method whereby the purchase
price of $10.6 million has been allocated to the tangible assets acquired on
the basis of their respective estimated fair values. The excess of the
purchase price over the tangible assets acquired has been allocated to the
acquired membership lists and goodwill, on a club-by-club basis. The
acquired membership lists are amortized over two years while goodwill is
amortized over the lives of the respective leases. The table below
summarizes the purchase price and the estimated allocation thereof.

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Computation of the purchase price:
Cash and cash equivalents............................................................ $ 4,000
Borrowings under the Credit Facility................................................. 6,000
Notes payable to seller.............................................................. 300
Transaction costs.................................................................... 250
---------------
Total purchase price............................................................. $ 10,550
---------------
---------------
Estimated allocation of the purchase price:
Tangible assets acquired............................................................. $ 1,840
Membership lists..................................................................... 825
Goodwill............................................................................. 7,885
---------------
$ 10,550
---------------
---------------
</TABLE>

(3) Reflects the $4.0 million of purchase price paid from cash and cash
equivalents, as well as transaction costs of $250,000 and $102,000 of cash
and cash equivalents on Lifestyle's balance sheet, which was not acquired by
the Company.

(4) Reflects the net proceeds to the Company of the Offering and the Affiliate
Stock Purchase (estimated to be $45.5 million) and the application thereof,
which includes the repayment of borrowings under the Credit Facility of an
estimated $6.0 million. Pending application of the net proceeds for the
Company's acquisition and other capital expenditure plans, such net proceeds
will be invested in investment grade marketable securities and have been
reflected as such in the Offering Adjustments. Also gives effect to the
Preferred Exchange whereby Preferred Stock, which as of May 31, 1998 had an
aggregate liquidation value of $18.9 million, will convert into shares
of Common Stock. Also gives effect to the vesting of certain stock options
which will cause the Company to recognize an additional compensation expense
of $2.0 million and $1.0 million associated tax benefit. In addition, in
connection with the Preferred Exchange, the Company will recognize a
non-recurring compensation expense in connection with stock options of
$352,000 that represents the discount to the offering price (reflecting
underwriting discounts and commissions) at which the Series B Options will
convert into options to purchase Common Stock and $176,000 associated tax
benefit in the quarter ended November 30, 1998. See "The Preferred
Exchange."

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

UNAUDITED NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL DATA (CONTINUED)

The adjustments to cash and cash equivalents and paid-in capital consist of
the following:

<TABLE>
<CAPTION>
PAID-IN
CASH CAPITAL
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Estimated net proceeds of the Offering and Affiliate Stock Purchase............ $ 45,500 $ 45,500
Repayment of borrowing, under the Credit facility.............................. (6,000)
The effects of the exchange of the Preferred Stock............................. 18,900
The effects of the exchange of the Series B Options............................ 352
--------- ---------
$ 39,500 $ 64,752
--------- ---------
--------- ---------
</TABLE>

(5) Adjustments to eliminate Lifestyle's assets not acquired and liabilities and
stockholders' deficit not assumed in the Lifestyle Acquisition.

(6) Represents the allocation of the purchase price to the fair values of the
fixed assets acquired.

(7) Represents an increase in intangible assets resulting from acquired
membership lists of $825,000 and goodwill of $7.9 million.

(8) Includes the notes payable to seller of $300,000 reduced by $147,000 of long
term debt not assumed in the Lifestyle Acquisition.

(9) Reflects borrowings under the Credit Facility to finance the purchase price.

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

UNAUDITED NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL DATA (CONTINUED)

(10) The information presented as "Ovox Historical" reflects results for the ten
months ended on the date of the Ovox Acquisition. To reflect Ovox's results
on a fiscal year ended May 31, 1998, consistent with the Company's fiscal
year, the following adjustments were made:

<TABLE>
<CAPTION>
OVOX LESS, FIVE PLUS, THREE
FISCAL YEAR MONTHS MONTHS OVOX
ENDED ENDED ENDED HISTORICAL
12/31/97(A) 5/31/97(B) 4/5/98(B) 6/1/97-4/5/98
----------- ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Club operations............................................ $ 5,246 $ 2,091 $ 1,599 $ 4,754
Other...................................................... 70 33 17 54
----------- ----------- ----------- -------------
5,316 2,124 1,616 4,808
----------- ----------- ----------- -------------
Operating expenses:
Payroll and related........................................ 1,956 768 724 1,912
Club operating............................................. 1,477 517 306 1,266
General and administrative................................. 403 161 85 327
Depreciation and amortization.............................. 312 166 71 217
----------- ----------- ----------- -------------
4,148 1,612 1,186 3,722
----------- ----------- ----------- -------------
Operating income....................................... 1,168 512 430 1,086
Interest income, net of interest expense..................... 9 5 22 26
----------- ----------- ----------- -------------
Income before provision for corporate income taxes..... 1,177 517 452 1,112
Provision for corporate income taxes......................... 31 31 14 14
----------- ----------- ----------- -------------
Net income............................................. $ 1,146 $ 486 $ 438 $ 1,098
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
</TABLE>

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

(a) Derived from the audited combined financial statements of Ovox for the
year ended December 31, 1997, which are included elsewhere herein.

(b) Derived from unaudited financial information not provided herein.

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

UNAUDITED NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL DATA (CONTINUED)

(11) The information presented as "Lifestyle Historical" reflects results for
the year ended May 31, 1998. To reflect Lifestyle's results on a fiscal year
ended May 31, 1998, consistent with the Company's fiscal year, the following
adjustments were made:

<TABLE>
<CAPTION>
LIFESTYLE LESS, FIVE PLUS, FIVE
FISCAL YEAR MONTHS MONTHS LIFESTYLE
ENDED ENDED ENDED HISTORICAL
12/31/97(A) 5/31/97(B) 5/31/98(B) 6/1/97-5/31/98
----------- ----------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Club operations............................................ $ 6,749 $ 2,563 $ 3,501 $ 7,687
----------- ----------- ----------- -------
Operating expenses:
Payroll and related....................................... 2,614 1,014 1,057 2,657
Club operating............................................ 1,672 618 781 1,835
General and administrative................................ 1,466 645 623 1,444
Depreciation and amortization............................. 381 148 176 409
----------- ----------- ----------- -------
6,133 2,425 2,637 6,345
----------- ----------- ----------- -------
Operating income...................................... 616 138 864 1,342
----------- ----------- ----------- -------
Interest expense............................................ 51 12 24 63
----------- ----------- ----------- -------
Income before provision for corporate income taxes.... 565 126 840 1,279
Provision for corporate income taxes........................ 32 3 25 54
----------- ----------- ----------- -------
Net income............................................ $ 533 $ 123 $ 815 $ 1,225
----------- ----------- ----------- -------
----------- ----------- ----------- -------
</TABLE>

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

(a) Derived from the audited combined financial statements of Lifestyle
for the year ended December 31, 1997 (which are included elsewhere
herein).

(b) Derived from unaudited financial information not provided herein.

(12) The increase in payroll and related and the decrease in general and
administrative reflect the cancellation of a consulting contract between
Lifestyle and a related party of Lifestyle net of the estimated cost of area
operations and sales managers.

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fees paid to consultant..................................................................... $ 490
Estimated cost, including benefits, of the managers......................................... (213)
</TABLE>

(13) The increase in depreciation and amortization expense represents the
amortization of acquired membership lists and goodwill of $945,000 and $5.6
million, respectively. Acquired membership lists are amortized over a two
year period while goodwill is amortized over the lives of the acquired clubs
leases ranging from six to 15 years. As of the date of the Ovox Acquisition,
the fair value of

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

UNAUDITED NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL DATA (CONTINUED)

Ovox's fixed assets approximated Ovox's historical book value. Accordingly,
no pro forma adjustment for fixed assets was necessary.

<TABLE>
<CAPTION>
MEMBERSHIP
LISTS GOODWILL TOTAL
------------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cost.................................................................. $945 $5,644
Weighted average life................................................. 2 years 10.5 years
------------- ------------
Amortization expense.................................................. $394(a) $ 447(a) $ 841
------------- ------------ ---------
------------- ------------ ---------
</TABLE>

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

(a) Adjustments relate only to the ten months prior to the acquisition
date.

(14) The increase in depreciation and amortization expense represents (i)
depreciation of the fair value adjustment to fixed assets, and (ii) the
amortization of acquired membership lists and goodwill of $825,000 and $7.8
million, respectively. Fixed assets are amortized over their respective
useful lives which range from five to 15 years, and acquired membership
lists are amortized over a two year period while goodwill is amortized over
the lives of the acquired clubs' leases of 15 years.

<TABLE>
<CAPTION>
FIXED MEMBERSHIP
ASSETS LISTS GOODWILL TOTAL
--------- ------------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cost.......................................... $ 263 $ 825 $ 7,885
Weighted average life......................... 7 years 2 years 15 years
--------- ------------- ----------
Depreciation and amortization expense......... 38 413 526 $ 977
--------- ------------- ---------- ---------
--------- ------------- ---------- ---------
</TABLE>

(15) Upon the completion of the Offering, certain outstanding stock options will
vest which will cause the Company to recognize an additional compensation
expense in connection with stock options of $2.0 million. In addition, in
connection with the Preferred Exchange, the Company will recognize a
non-recurring compensation expense in connection with stock options of
$352,000 in the quarter ended November 30, 1998 that represents the discount
to the offering price (reflecting underwriting discounts and commissions) at
which the Series B Options will convert into options on Common Stock. See
"The Preferred Exchange." In addition, accreted dividends on certain
outstanding preferred stock options (totaling $636,000) which have been
included in compensation expense in connection with stock options have been
eliminated assuming the Preferred Exchange had occurred on June 1, 1997.

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Compensation expense from vesting options.................................... $ 2,040
Compensation expense from the exchange of Series B Options................... 352
Accreted dividends on preferred stock options................................ (636)
-------
$ 1,756
-------
-------
</TABLE>

(16) Net interest expense increased as the result of (i) reduced interest income
as levels of cash and cash equivalents available for investment were reduced
by $7.9 million used to finance the Ovox Acquisition, and (ii) increased
interest expense related to seller finance. Adjustments are as follows:

(i) $7.9 million financed by cash and cash equivalents at an assumed annual
interest rate of 4.0%,

(ii) $236,000 financed by the seller at an annual interest rate of prime
plus 2.0% (10.5%) and

26
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL DATA (CONTINUED)

(iii) Elimination of Ovox's interest income.

The components of the interest expense adjustment are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Reductions in cash and cash equivalents(a)............................... $ 265
Seller finance(a)........................................................ 21
Elimination of Ovox's interest income.................................... 26
-----
$ 312
-----
-----
</TABLE>

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

(a) Adjustments for cash and cash equivalents and the seller finance
relate only to the ten months prior to the acquisition date.

(17) The increase in net interest expense represents the financing of the
purchase of $10.6 million, which includes:

(i) $6.0 million financed by borrowings under the Company's Credit Facility
assuming an annual interest rate of 8.0%,

(ii) $4.3 million financed by cash and cash equivalents assuming reduced
interest income at 4.0%,

(iii) $300,000 financed by the seller at an annual interest rate of 9.0% and

(iv) Elimination of Lifestyle's interest expense.

The components of the interest expense adjustment are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Credit Facility.............................................................. $ 480
Reduction in cash and cash equivalents....................................... 170
Seller finance............................................................... 27
Elimination of Lifestyle's interest expense.................................. (63)
-----
$ 614
-----
-----
</TABLE>

(18) Interest expense has been reduced by $480,000. Such amount represents the
interest expense incurred from the assumed borrowings under the Credit
Facility to finance the Lifestyle Acquisition, as such borrowings will be
repaid from the proceeds of the Offering and the Affiliate Stock Purchase.

27
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL DATA (CONTINUED)

(19) Income taxes have been provided for based on the Company's effective tax
rate of 50.0%.

<TABLE>
<CAPTION>
OVOX LIFESTYLE
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Income before taxes.......................................................... $ 1,112 $ 1,279
Pre tax adjustments.......................................................... (1,153) (1,314)
--------- -----------
(41) (35)
Effective tax rate........................................................... 50.0% 50.0%
--------- -----------
(21) (18)
Taxes included in historical operating results............................... (14) (54)
--------- -----------
Adjustment for taxes......................................................... $ (35) $ (72)
--------- -----------
--------- -----------
</TABLE>

(20) Offering adjustments have been tax effected at a rate of 50.0%.

(21) Adjustment to eliminate accreted dividends on preferred stock to give
effect to the Preferred Exchange.

(22) The pro forma per common share data has been prepared assuming the
Preferred Exchange had occurred on June 1, 1997. Accordingly, the pro forma
per common share amounts have been computed based on net income before
accreted dividends on preferred stock. In addition, accreted dividends on
certain outstanding preferred stock options (totaling $636,000), which have
been included in compensation expense in connection with stock options, have
been eliminated. The weighted average number of shares of outstanding Common
Stock has been increased by the effects of the Preferred Exchange using the
treasury stock method.

(23) The pro forma as adjusted per common share data has been prepared assuming
the Acquisitions, the Offering and the Affiliate Stock Purchase had occurred
on June 1, 1997. The weighted average number of shares of outstanding Common
Stock has been increased by the effects of the Preferred Exchange and the
Offering, using the treasury stock method.

28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH
THE AUDITED FINANCIAL STATEMENTS INCLUDED ELSEWHERE HEREIN.

IN ADDITION, THE FOLLOWING DISCUSSION MAKES REFERENCE TO EBITDA WHICH IS
DEFINED AS EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AMORTIZATION,
EXTRAORDINARY CHARGES AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING POLICY.
INVESTORS SHOULD BE AWARE THAT THE ITEMS EXCLUDED FROM EBITDA, SUCH AS
DEPRECIATION AND AMORTIZATION, ARE SIGNIFICANT COMPONENTS IN AN ACCURATE
ASSESSMENT OF THE COMPANY'S FINANCIAL PERFORMANCE. EBITDA IS PRESENTED BECAUSE
MANAGEMENT BELIEVES IT PROVIDES USEFUL INFORMATION REGARDING THE OPERATING
PERFORMANCE AND FINANCIAL CONDITION OF THE COMPANY. EBITDA SHOULD NOT BE
CONSIDERED IN ISOLATION OR AS A SUBSTITUTE FOR NET INCOME, CASH FLOWS, OR OTHER
CONSOLIDATED INCOME OR CASH FLOW DATA PREPARED IN ACCORDANCE WITH GAAP OR AS A
MEASURE OF THE COMPANY'S PROFITABILITY OR LIQUIDITY.

INTRODUCTION

The Company is one of the two leading owners and operators of fitness clubs
in the Northeast and Mid-Atlantic regions of the United States. As of August 12,
1998, the Company operated 64 clubs that collectively served over 175,000
members. The Company develops clusters of clubs to serve densely populated major
metropolitan regions in which a high percentage of the population commutes to
work. The Company services such populations by clustering clubs near the highest
concentrations of its target customers' areas of both employment and residence.
The Company's target customer is college-educated, typically between the ages of
20 and 44 and earns an annual income in excess of $50,000.

The Company's goal is to develop the premier health club network in each of
the major metropolitan regions it enters. Management believes that clustering
clubs allows the Company to achieve strategic operating advantages that enhance
its ability to achieve this goal. In entering new regions, the Company develops
these clusters by initially opening or acquiring clubs located in the more
central urban markets of the region and then branching out from these urban
centers to suburbs and ancillary communities. Capitalizing on this clustering of
clubs, in fiscal 1998, approximately half of the Company's members participated
in a membership plan that allows unlimited access to all of the Company's clubs
for a higher membership fee.

The Company has executed this strategy successfully in the New York region
through the network of clubs it operates under its NYSC brand name. The Company
is the largest fitness club operator in Manhattan with 23 locations and operates
a total of 52 clubs under the NYSC name within a defined radius of New York
City. The Company is in the process of more fully developing clusters within a
smaller radius surrounding Washington, DC under its WSC brand name and has begun
establishing similar clusters surrounding Boston and Philadelphia under its BSC
and PSC brand names, respectively. The Company employs localized brand names for
its clubs to create an image and atmosphere consistent with the local community,
and to foster the recognition as a local network of quality fitness clubs rather
than a national chain.

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

29
<PAGE>
During the last several years, the Company has increased revenues and EBITDA
by expanding its club base in the New York, Washington, DC, Boston and other
metropolitan areas along the Northeast Corridor. As a result of the Company's
expanding club base and relatively fixed nature of the Company's operating
costs, the Company's EBITDA has increased from $1.5 million in fiscal 1995 to
$15.9 million in fiscal 1998, and EBITDA as a percentage of revenues has
increased from 4.6% to 19.3% over the same period. During the same period, the
Company's net income increased from a net loss of $733,000 for fiscal 1995 to
net income of $277,000 for fiscal 1998. Management expects the strong growth in
revenues, EBITDA and net income to continue as the 25 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 increase in
revenues during its first three years of operation as it reaches maturity.
Because there is relatively little incremental cost associated with such
increasing revenue, there is a greater proportionate increase in profitability.
In the aggregate, the 25 clubs opened or acquired since the beginning of fiscal
1996 generated revenue, EBITDA (before corporate overhead), and operating income
(before corporate overhead) of $30.3 million, $5.8 million and $1.7 million,
respectively. The Company believes that the revenues, EBITDA (before corporate
overhead) and operating income (before corporate overhead) of these 25 clubs
will increase significantly as they mature. As a result of the Company's
accelerated expansion program, however, management expects EBITDA and operating
income margins to be negatively impacted in the near term.

COMPARABLE CLUB REVENUE

The Company defines comparable clubs as those clubs that were operated by
the Company for at least 13 full months. The Company's comparable club revenue
increased 26.2%, 17.7% and 27.3% in fiscal 1998, 1997 and 1996, respectively.

NET LOSSES

The Company incurred a net loss of $936,000 in fiscal 1997 and $733,000 in
fiscal 1995 and expects to incur a net loss during the seven months ended
December 31, 1998. Losses have resulted from a variety of costs, including, but
not limited to, amortization of goodwill and debt financing costs resulting from
the Company's acquisition strategy as well as compensation expense incurred in
connection with the vesting of certain stock options held by management. Upon
the completion of the Offering, the vesting of certain stock options will
accelerate pursuant to the terms of the Company's Old Option Plan, which will
cause the Company to recognize an additional compensation expense of $2.0
million in the quarter ended November 30, 1998. In addition, in connection with
the Preferred Exchange, the Company will recognize a non-recurring compensation
expense in connection with stock options of $352,000 in the quarter ended
November 30, 1998 that represents the discount to the offering price (reflecting
underwriting discounts and commissions) at which the Series B Options will
convert into options to purchase Common Stock. See "The Preferred Exchange." On
an ongoing basis thereafter, compensation expense incurred in connection with
existing stock options will be immaterial. Increased goodwill, amortization,
depreciation and financing costs associated with future acquisitions and
greenfield club openings will impact profitability and may result in net losses
in the future.

CHANGE OF FINANCIAL REPORTING PERIOD

Following the consummation of the Offering, the Company intends to change
its fiscal year end in order to report on a calendar year basis. As a result,
the Company will report a short financial period for the seven months ended
December 31, 1998, and thereafter on a calendar year basis beginning with fiscal
1999.

30
<PAGE>
RECENT DEVELOPMENTS

On August 6, 1998, the Company acquired from Lifestyle for approximately
$10.6 million substantially all of the assets associated with Lifestyle's six
fitness clubs located in New Jersey in a series of related transactions. In
addition, the Company assumed the obligations under a lease for a seventh club
to be constructed in the same market area. For the twelve months ended June 30,
1998, Lifestyle generated revenues of approximately $7.9 million. The Company
plans to operate these clubs under its NYSC brand name.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
FISCAL
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenue............................................................ 100.0% 100.0% 100.0%
--------- --------- ---------
Operating Expenses:
Payroll and related.............................................. 42.6 41.2 40.4
Club operating................................................... 33.2 31.9 31.4
General and administrative....................................... 8.1 6.7 7.1
Depreciation and amortization.................................... 6.7 7.5 9.4
Compensation expense in connection with stock options............ 4.5 10.5 1.8
--------- --------- ---------
Operating income (loss)........................................ 4.9 2.2 9.9
Interest expense, net.............................................. 2.2 4.3 7.2
--------- --------- ---------
Income (loss) before provision for income tax (benefit).......... 2.7 (2.1) 2.7
Provision for income tax (benefit)................................. 1.4 (0.4) 1.4
Extraordinary item................................................. -- -- (0.9)
Cumulative effect of change in accounting policy................... -- -- (0.1)
--------- --------- ---------
Net income (loss).............................................. 1.3 (1.7) 0.3
Accreted dividend on preferred stock............................... 0.9 2.2 2.9
Net income (loss) attributable to common stockholders.......... 0.4% (3.9)% (2.6)%
--------- --------- ---------
--------- --------- ---------
</TABLE>

FISCAL 1998 COMPARED TO FISCAL 1997

REVENUES. Revenues increased approximately $25.8 million, or 45.6%, to
$82.4 million during fiscal 1998 from $56.6 million in fiscal 1997. This
increase resulted primarily from the maturation of three clubs opened or
acquired during fiscal 1996 (approximately $3.0 million, of which $2.7 million
was related to membership growth); the six clubs opened or acquired during
fiscal 1997 (approximately $8.1 million, of which $7.0 million was related to
membership growth and $1.1 million was related to increase in ancillary revenue)
and 14 clubs opened or acquired during fiscal 1998 (approximately $10.1 million,
of which $8.7 million was related to membership growth and $1.4 million was
related to increase in ancillary revenue). In addition, revenues increased
during fiscal 1998 by $4.2 million at the Company's mature clubs of which $3.5
million was due to membership growth and $0.7 million was due to increased
ancillary revenue such as sales of personal training.

OPERATING EXPENSES. Operating expenses increased $18.9 million, or 34.1%,
to $74.2 million in fiscal 1998 from $55.3 million in fiscal 1997. This increase
was primarily due to a 40.4% increase in total club months to 417 in fiscal 1997
from 297 in fiscal 1996, in addition to the following factors:

31
<PAGE>
Payroll and related increased by $10.0 million, or 42.8%, to $33.3
million in fiscal 1998, from $23.3 million in fiscal 1997. This increase was
attributable to the acquisition or opening of 14 clubs in fiscal 1998 and a
full year of operating the six clubs opened or acquired in fiscal 1997.

Club operating increased by $7.9 million, or 43.3%, to $25.9 million in
fiscal 1998, from $18.0 million in fiscal 1997. This increase is
attributable to the acquisition or opening of 14 clubs in fiscal 1998 and
the additional expenses attributable to operating the six clubs opened or
acquired by the Company in fiscal 1997.

General and administrative increased by $2.0 million, or 54.3%, to $5.8
million in fiscal 1998, from $3.8 million. This increase is attributable to
associated expenses as a result of the Company's expansion, such as the
expansion of the Company's corporate office, the change in accounting policy
to expense certain Organizational Costs in the period in which they are
incurred rather than capitalizing them.

Depreciation and amortization increased by $3.5 million, or 83.4%, to
$7.7 million in fiscal 1998, from $4.2 million in fiscal 1997. This increase
is attributable primarily to increased fixed assets and intangible assets
arising out of new club acquisitions and openings during fiscal 1998, and a
full year of depreciation and amortization for fixed asset additions,
acquisitions or openings during fiscal 1997. Intangible assets acquired in
fiscal 1997 and 1998 totaled $1.7 million and $14.5 million, respectively.

Compensation expense in connection with stock options decreased by $4.5
million, or 75.7%, to $1.4 million in fiscal 1998, from $5.9 million in
fiscal 1997. In 1997, this expense was attributable to the adjustment of the
Company's stock options to fair market value in connection with the
Recapitalization.

INTEREST EXPENSE, NET. Interest expense increased $3.4 million to $5.9
million during fiscal 1998 from $2.5 million in fiscal 1997. The increased level
of interest expense was primarily due to the issuance of the Senior Notes.

PROVISION FOR INCOME TAX (BENEFIT). The income tax provision for fiscal
1998 was $1.1 million compared to a tax benefit of $243,000 for fiscal 1997. For
fiscal 1998, the Company's effective tax rate was negatively impacted by high
state and local tax rates combined with a tax rate change. In fiscal 1997, the
income tax benefit was reduced by adjustments to expected tax refunds reduced in
part by the reversal of a valuation allowance on state net operating losses
carryforward, which was no longer needed.

EXTRAORDINARY ITEM. During fiscal 1998, the Company conducted the Senior
Note Offering pursuant to which the Company repaid its existing indebtedness.
Accordingly, previously capitalized fees and expenses of $1.4 million relating
to the former debt were written off, $782,000 net of a tax effect of $624,000.

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY. In accordance with the
American Institute of Certified Public Accountants ("AICPA") recently issued
Statement of Position 98-5 (Accounting for the Costs of Start-up Activities),
the Company has expensed all Organizational Costs capitalized in previous fiscal
years. Accordingly, $158,000 was written off, $88,000 net of a tax effect of
$70,000.

ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the Preferred
Stock increased $1.1 million to $2.4 million during fiscal 1998, from $1.3
million in fiscal 1997. This increase is the result of the Preferred Stock being
outstanding for a full year in 1998 and for only five months in 1997.

FISCAL 1997 COMPARED TO FISCAL 1996

REVENUES. Revenues increased $12.8 million, or 29.3%, to $56.6 million
during fiscal 1997 from $43.8 million in fiscal 1996. This increase resulted
primarily from the maturation of four clubs opened or

32
<PAGE>
acquired during fiscal 1995 (approximately $2.8 million, of which $2.4 million
was related to membership growth and $380,000 was related to dues and ancillary
revenue increases), the three clubs opened or acquired in fiscal 1996
(approximately $4.3 million, of which $3.7 million was related to membership
growth and $557,000 was related to dues and ancillary revenue increases), and
the six clubs opened or acquired in fiscal 1997 (approximately $3.7 million, of
which $3.1 million was related to membership growth and $596,000 was related to
dues and ancillary revenue increases). In addition, revenues increased during
fiscal 1997 due to revenue growth at the Company's mature clubs resulting from
membership growth (approximately $2.1 million) as well as increased sales of
personal services such as private training (approximately $560,000).

OPERATING EXPENSES. Operating expenses increased $13.7 million, or 32.8%,
to $55.3 million in fiscal 1997, from $41.6 million in fiscal 1996. This
increase was primarily due to a 16.5% increase in total club months to 297 in
fiscal 1996 from 255 in fiscal 1995, in addition to the following factors:

Payroll and related increased by $4.7 million, or 25.2%, to $23.3
million in fiscal 1997, from $18.6 million in fiscal 1996. This increase was
attributable to the acquisition or opening of six clubs in fiscal 1997 and a
full year of operating the three clubs opened or acquired in fiscal 1996.

Club operating increased by $3.5 million, or 24.1%, to $18.0 million in
fiscal 1997, from $14.5 million in fiscal 1996. This increase is
attributable to the acquisition or opening of six clubs in fiscal 1997 and
the additional expenses attributable to operating three clubs opened or
acquired by the Company in fiscal 1996.

General and administrative increased by $212,000, or 6.0%, to $3.8
million in fiscal 1997, from $3.6 million in fiscal 1996.

Depreciation and amortization increased by $1.3 million, or 44.0%, to
$4.2 million in fiscal 1997, from $2.9 million in fiscal 1996. This increase
is attributable to the increased fixed assets placed in service and
intangible assets acquired arising out of acquisition or opening of new
clubs.

Compensation expense in connection with stock options increased by $3.9
million, or 201.6%, to $5.9 million in fiscal 1997, from $2.0 million in
fiscal 1996. In 1997, this expense was attributable to the adjustment of the
Company's stock options to fair market value in connection with the
Recapitalization.

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 increased indebtedness due to the Recapitalization during this period.

PROVISION FOR INCOME TAX (BENEFIT). Provision for income tax (benefit)
changed by $871,000 to a benefit of $243,000 in fiscal 1997 from an expense of
$628,000 in fiscal 1996, as a result of the 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 partially
offset by a reduction in the valuation allowance for the deferred tax assets.

ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the Preferred
Stock increased $886,000 to $1.3 million during fiscal 1997, from $400,000 in
fiscal 1996. This increase reflects the issuance of the Preferred Stock in
connection with the Recapitalization and redemption of formerly existing
preferred stock.

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LIQUIDITY AND CAPITAL RESOURCES

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

OPERATING ACTIVITIES. Net cash provided by operating activities for fiscal
1998 was $15.7 million compared to $12.3 million and $5.7 million during fiscal
1997 and 1996, respectively. These increases were primarily due to the
maturation of recently opened or acquired clubs, as well as improved performance
in the Company's mature clubs. Excluding cash and cash equivalents, the Company
normally operates with a working capital deficit because it receives revenue
either (i) during the month services are rendered, or (ii) when paid-in-full 12
months in advance. As a result, the Company has no material accounts receivable.
In addition, because initiation fees are received at enrollment and are
recognized over the estimated average term of membership, the Company records a
deferred revenue liability. Management believes that the Company's working
capital deficit is an important source of cash flow from operating activities
that it believes will continue to grow as the Company's revenues increase.

INVESTING ACTIVITIES. The Company invested $36.0 million, $13.6 million and
$5.5 million in capital expenditures and asset acquisitions during fiscal 1998,
1997 and 1996, respectively, primarily as a result of the Company's expansion
efforts. The Company estimates that, through the end of fiscal 1999, it will
invest a total of approximately $95.0 million in capital expenditures and asset
acquisitions, which includes $8.0 million that management intends to invest to
maintain and expand certain existing clubs and $2.5 million to further upgrade
its management information systems. Management plans to fund the Company's
expansion with the proceeds of the Offering and the Affiliate Stock Purchase,
available borrowings under the Credit Facility and cash from operating
activities.

FINANCING ACTIVITIES. In October 1997, the Company issued the Senior Notes
and entered into the Credit Facility. After payment of fees and expenses of $3.3
million, the Company received net proceeds of $81.7 million, of which $41.5
million was used for the repayment of certain indebtedness. The Senior Notes
contain certain restrictive covenants and restrict the payment of dividends. The
Credit Facility contains certain restrictive covenants, including a leverage
ratio, an interest coverage ratio and dividend payment restrictions and is
collateralized by all the assets of the Company. As of May 31, 1998, the Company
had approximately $13.0 million available under the Credit Facility, which
matures in October 2002 and has no scheduled amortization requirements. The
Credit Facility was recently amended to allow for maximum borrowings of $25.0
million. As of August 12, 1998, the Company had approximately $17.0 million
available under the Credit Facility. Although management believes that proceeds
from the Offering and the Affiliate Stock Purchase, together with internally
generated funds and available borrowings under the Company's Credit Facility,
will be sufficient to finance the Company's current operating and growth plans
through the end of fiscal 1999, any material acceleration or expansion of that
plan through additional greenfields or acquisitions (to the extent such
acquisitions include cash payments) may require the Company to pursue additional
sources of financing prior to the end of fiscal 1999. There can be no assurance
that such financing will be available or that it will be available on acceptable
terms. The inability to finance such further or accelerated expansion on
acceptable terms may negatively impact the Company's competitive position and or
materially adversely affect the Company's business, results of operations or
financial condition.

EFFECT OF RECENT CHANGES IN ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued Statement No.
130 ("SFAS No. 130"), REPORTING COMPREHENSIVE INCOME AND STATEMENT NO. 131
("SFAS NO. 131"), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997, establishes standards for reporting and display of
comprehensive income and its

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components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No. 131 establishes standards for the
way in which public companies report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes the standards for related disclosure about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. Based on current estimates, management does not believe that the adoption
of SFAS No. 131 will have a material effect on the Company's financial
statements.

In February 1998, the Financial Accounting Standards Board issued Statement
No. 132 ("SFAS No. 132"), EMPLOYER DISCLOSURES ABOUT PENSIONS AND OTHER POST
RETIREMENT BENEFITS. This statement modifies financial statement disclosures
related to pension and other post retirement plans. In June 1998, the Financial
Accounting Standards Board issued Statement No. 133 ("SFAS No. 133"), ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which standardizes the
accounting for derivative instruments by requiring that all derivatives be
recognized as assets and liabilities and measured at fair value. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999.

Based on current estimates, management does not believe that the adoption of
SFAS No. 130, SFAS No. 131 and SFAS No. 132, or the future adoption of SFAS No.
133, will have a material effect on the Company's financial statements.

INFLATION

The Company believes that inflation has not had a material impact on its
results of operations for the three years ended May 31, 1998.

YEAR 2000 COMPLIANCE

The Company is assessing its information systems to determine the effect of
the Year 2000 issue. The Company expects to implement the systems and
programming changes necessary to address Year 2000 issues with respect to its
internal systems and does not believe that the cost of such actions will have a
material adverse effect on its business, financial condition or results of
operations or cash flows. Although the Company is not aware of any material
operational issues or costs associated with preparing its internal systems for
the Year 2000, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of necessary systems and
changes to address the Year 2000 issues, and the Company's inability to
implement such systems and changes in a timely manner could have a material
adverse effect on the Company's business, results of operations or financial
condition.

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BUSINESS

GENERAL

The Company has executed this strategy successfully in the New York region
through the network of clubs it operates under its NYSC brand name. The Company
is the largest fitness club operator in Manhattan with 23 locations and operates
a total of 52 clubs under the NYSC name within a defined radius of New York
City. The Company is in the process of more fully developing clusters within a
smaller radius surrounding Washington, DC under its WSC brand name and has begun
establishing similar clusters surrounding Boston and Philadelphia under its BSC
and PSC brand names, respectively. The Company employs localized brand names for
its clubs to create an image and atmosphere consistent with the local community
and to foster recognition as a local network of quality fitness clubs rather
than a national chain.

The Company has experienced significant growth over the past several years
through a combination of (i) acquiring existing, privately owned, single and
multi-club businesses, and (ii) developing and opening "greenfield" club
locations. From May 31, 1993 to August 12, 1998, the Company acquired 32
existing clubs, opened 14 greenfield clubs, sold one club and closed one club at
the expiration of its lease to increase its total clubs under operation from 20
to 64. The Company plans to acquire or open at least 25 clubs prior to December
31, 1999. The Company has achieved revenue growth over the past five fiscal
years at a compound annual rate of approximately 34.9% from $24.9 million in
fiscal 1994 to $82.4 million in fiscal 1998. This growth has been driven not
only by the addition of acquired and greenfield club locations, but also through
comparable club revenue growth, which has ranged from 10.9% to 27.3% for the
past five fiscal years and was 26.2% in fiscal 1998. Comparable club revenue
growth has enabled the Company to increase revenue per weighted average club in
each of the past five fiscal years. Revenue per weighted average club has risen
from $1.8 million in fiscal 1994 to $2.3 million in fiscal 1998. 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 clubs experience little incremental cost associated with such
revenue increases, the Company realizes a greater proportionate increase in
profitability. This operating leverage has allowed it to achieve EBITDA growth
over the past five years at a compound annual rate of approximately 44.8% from
$3.6 million in fiscal 1994 to $15.9 million in fiscal 1998. The Company's rate
of EBITDA growth from fiscal 1997 to fiscal 1998 accelerated to 89.6%. The
Company reported net income of $277,000 in fiscal 1998 versus a net loss of
$936,000 in fiscal 1997.

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The Company's model club ranges in size from approximately 15,000 to 25,000
square feet and averages approximately 20,000 square feet. Clubs typically have
an open space to accommodate cardiovascular and strength-training exercise, as
well as special purpose rooms to accommodate aerobic class instruction and other
exercise programs. Locker rooms generally include a sauna and steam room.
Management seeks to provide a broad array of high quality exercise programs and
equipment that is both popular and effective, while reinforcing the quality
exercise experience the Company strives to make available to its customers.
While the Company does not generally build locations with amenities such as
swimming pools or racquet and basketball courts, the Company does strive to
establish at least one flagship club that has such amenities in each of its
markets. Management believes that it is generally more economical to acquire
clubs with such amenities than to develop them as greenfield clubs.

INDUSTRY OVERVIEW

According to published industry sources, total fitness club industry
revenues have increased at a compound annual rate of approximately 8.6% from
$5.5 billion in 1991 to $9.0 billion in 1997. Over the same period of time,
fitness club memberships have increased at a compound annual rate of 5.1% from
16.7 million to 22.5 million and have increased over 50% since 1987. These
statistics imply that average revenue per member has grown at a compound annual
rate of 3.3% for the industry since 1991. Membership and revenue growth have
dramatically outpaced the growth of fitness clubs, which has grown at a compound
annual rate of only 2.1% to approximately 13,800 in 1997 from approximately
12,150 in 1991. Management believes that fitness clubs, on average, have
experienced significant excess capacity historically. Only more recently has the
industry as a whole experienced the level of membership and revenue per club to
realize the benefits of the inherent operating leverage in the industry. As a
result, fitness club growth accelerated to 5.0% in 1997 and the top 100 fitness
club companies plan to open approximately 315 clubs in 1998, in the aggregate.

Management believes that the growth in fitness club memberships is
attributable to several factors. Americans are focused on achieving a healthier,
more active lifestyle. Of the factors members consider very important in their
decision to join a fitness club, the most commonly mentioned is health, closely
followed by appearance related factors including muscle tone, looking better and
weight control.

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Management believes that the increased emphasis on appearance and wellness in
the media has heightened the focus on self image and fitness and will continue
to do so. Management also believes that fitness clubs provide a more convenient
venue for exercise than outdoor activities, particularly in densely populated
metropolitan areas. According to published industry reports, convenience is an
important factor in choosing a fitness club.

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

Across the industry, monthly membership dues have averaged between $54.00
and $58.00 per month for a single adult from 1994 through 1997. Around this
average monthly fee, management believes the industry can be segregated into
three tiers based upon price, service and quality: (i) an upper tier consisting
of clubs with monthly membership dues averaging in excess of $80.00 per month;
(ii) a middle tier consisting of clubs with monthly membership dues averaging
between $80.00 and $40.00 per month; and (ii) a lower tier consisting of clubs
with monthly membership dues averaging less than $40.00. While club quality is a
subjective measure based upon, among other things, available equipment and
facilities, cleanliness, maintenance and decor, management believes that a
company's ratio of members to employees provides a quantifiable measure of
service. According to published industry sources, the industry averages
approximately 173.5 members per full-time employee. The Company competes in the
middle tier in terms of pricing and is positioned toward the upper end of this
tier. Based upon the quality and service the Company provides its members,
management believes that the Company provides an attractive value to its members
at the monthly membership dues it charges.

The fitness club industry is highly fragmented. In 1997, the ten largest
operators accounted for less than 8.0% of total club ownership and approximately
17.2% of total industry revenues. In addition, approximately 65.0% of the total
industry clubs are operated by single club operators. Based upon this data,
management believes that considerable consolidation will occur in the industry.
According to published industry data, excluding the Company, the ten largest
industry participants plan to acquire approximately 50 clubs in 1998. The
Company expects to play a significant role as a consolidator on a regional
basis.

STRATEGIC OPERATING ADVANTAGES

The Company's clustering of clubs in major metropolitan regions has enabled
the Company to develop the following strategic operating advantages:

STREAMLINED MEMBERSHIP STRUCTURE AND SALES PROCESS. The Company has
developed a fully-automated, centrally controlled membership enrollment format
that includes three membership plans: (i) the Passport Membership, which enables
members to use any Town Sports club at any time, priced from $71.00 to $76.00
per month; (ii) the Gold Membership, which enables members to use a single club
at any time and any Town Sports club during off-peak hours, priced from $49.00
to $71.00 per month depending on the region of enrollment; and (iii) the
Off-Peak Membership, which allows members to use any Town Sports club only
during off-peak hours, priced from $44.00 to $63.00 per month. Management
believes that this simplified membership structure combined with the Company's
centralized, automated enrollment software system ensures that members
understand the enrollment process and feel they are treated fairly and
consistently with regard to pricing. The centralized, automated enrollment
process enables the Company to ensure that each new member enrolls on terms that
are consistent with both the terms of other new members and the guidelines
established by the Company. The Company does not generally offer discounts on
monthly membership dues, but does, from time to time, offer promotions

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on initiation fees. During fiscal 1998, initiation fees and monthly membership
fees averaged $115.26 and $66.77, respectively, per EFT enrollee. EFT enables
the Company to collect dues monthly in advance based on a credit card or bank
account debit authorization contained in the membership agreement. Collection of
monthly dues through EFT assures a stable cash flow, eliminates the traditional
accounts receivable system, and minimizes bad debt write-offs. For fiscal 1998,
the Company collected approximately 90.0% of membership dues through EFT.
Substantially all other memberships were prepaid in full.

To attract and retain members, the Company emphasizes four key factors: (i)
the proximity of its clubs to concentrated commercial and residential areas
convenient to where members live and work; (ii) the lack of a long-term
obligation on the part of the enrollee; (iii) the price/value relationship of a
Town Sports membership; and (iv) access to value-added services. Management
believes that the lack of a long-term obligation in the form of a membership
contract provides a significant selling advantage to the Company. Unlike most of
its competitors, substantially all of the Company's EFT members may cancel their
club memberships any time upon 30 days notice. As a result of this lack of a
long-term contractual obligation, the Company places a heightened emphasis on
providing a quality exercise experience to retain its members. Nevertheless, the
Company's membership turnover is comparable to the industry averages in the
markets which it serves. Management believes the ease of payment that EFT
provides also contributes to the Company's ability to retain members.

DISTINCT BRAND IMAGE. Management believes that the marketing economies
derived from its clustering strategy have enabled the Company to establish a
consistent image in the markets it serves, as a local network of fitness clubs
that provides a quality experience across all clubs. The Company's club design,
exercise programs and equipment, pricing strategy and membership structure are
consistent from club to club. The Company employs different brand names to
create a local community feel to its clubs and reinforces this image through its
advertising campaign, which is designed to appeal to its target customer on a
region-by-region basis. The advertising campaign is designed to have a
sophisticated appeal featuring slogans that are intended to be provocative for
the markets in which they are used, as well as the appropriate local brand name
and logo. The Company generally does not feature pictures of its clubs or
members working out, nor are its advertisements promotionally driven. Management
believes that this approach enhances the integrity of the Company's brand names
and image as a consistent network of quality clubs with a serious approach to
fitness.

STRONG CUSTOMER SERVICE. The Company has a policy of providing a high
degree of customer service. In accordance with this policy, the Company strives
to maintain a ratio of no more than 160 members per full-time employee. For
fiscal 1998, the Company maintained an average ratio of approximately 150.9
members per full-time employee compared to an industry average of approximately
173.5 members per full-time employee. The Company also offers free services such
as blood pressure testing, CPR training, and smoking cessation classes to its
members. The Company's clustering strategy enables it to staff program
instructors and professional personal trainers at more than one club. As a
result, the Company can vary a given club's instructors, while providing
instructors sufficient classes to effectively and economically treat them as
full-time employees with benefits. Management believes the availability of
employee benefits provides the Company a strategic advantage in attracting and
retaining quality program instructors and professional personal trainers and
that this strategic advantage in turn translates into a more consistent and
higher quality workout experience for those members, in particular, who utilize
such services.

PROPRIETARY CENTRALIZED INFORMATION SYSTEMS. The Company has developed a
proprietary system to track, manage and analyze sales, leads, and membership
statistics which, in conjunction with its other systems, allows the Company to
track the frequency of member workouts, multi-club utilization, value-added
services and demographic profiles by member, which allows the Company to develop
targeted direct marketing programs and to modify its broadcast and print
advertising to improve consumer response. These systems also assist the Company
in evaluating staffing needs and program

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offerings. In addition, the Company relies on certain data gathered through its
information systems to assist in the identification of new markets for clubs and
site selection within those markets.

GROWTH STRATEGY

The Company has developed the following core strategies by which it intends
to increase revenues, EBITDA and net income:

ACQUIRE EXISTING CLUBS. Since May 31, 1993, the Company has acquired 32
clubs through the acquisition of single and multi-club businesses. Following the
Offering, such acquisitions may include payment in the form of the Company's
Common Stock or a combination of the Company's Common Stock and cash, as well as
acquisitions solely for cash. Management believes that this flexibility may
allow the Company to accelerate its acquisition program. While acquisitions can
generally be accomplished for roughly the same investment as greenfield clubs on
a per club basis, management believes that acquisitions present five distinct
advantages to greenfield clubs: (i) acquisitions can be accomplished at a much
more rapid pace than greenfield clubs, which may have lengthy zoning and
permitting requirements; (ii) the acquisition of several clubs can be
accomplished simultaneously; (iii) the availability of desirable, vacant real
estate locations may be scarce in a given market; (iv) acquisitions are
considered by management to carry less risk than a greenfield club, as acquired
clubs have existing member and revenue histories; and (v) acquisitions eliminate
a competitor from the market, thereby resulting in increased market share. If
the Company enters a new metropolitan region, management intends to do so
through the acquisition of a multi-club business to more quickly realize the
advantages of its clustering strategy. The Company will typically acquire an
existing club as opposed to develop greenfield club locations, in the case of
its flagship clubs. Management believes such acquisitions can be consummated on
terms more favorable than a greenfield club generally could be developed.

OPEN ADDITIONAL GREENFIELD CLUBS. The Company plans to continue to open
greenfield club locations in underserved markets and in markets where potential
acquisitions are not available on acceptable terms. The development of
greenfield clubs allows the Company to control the development, construction and
operations of a club more fully, and provides the Company with the opportunity
to optimize site selection and lease terms. In addition, greenfield clubs
generally provide higher returns than acquired clubs over the long term. New
greenfield clubs generally will be based on the Company's model club.
Development of a greenfield club from lease execution to the opening of a new
club typically spans nine to 18 months. The Company currently has 12 locations
under lease for which it is in various stages of club development, and
management anticipates ten of these clubs will be opened by December 31, 1999.

INCREASE COMPARABLE CLUB REVENUE. The Company employs a two-fold strategy
to continue to increase comparable club revenues. First, the Company increases
monthly dues on an annual basis. The Company implements such increases primarily
through the Company's EFT system after notification to members. Over the past
five fiscal years, annual increases in monthly membership dues have averaged
2.2% and typically occur in September of each year. After consummating an
acquisition, the Company gradually raises dues for pre-existing members of the
acquired clubs and may offer an opportunity for such members to accept an
increase to a lower monthly fee than the Company charges to its existing
members, in exchange for accepting such increase prior to the expiration of
pre-existing agreements or to step-up individuals to Passport Memberships.
Second, the Company intends to increase its emphasis on providing value-added
services for incremental fees, which include personal training, babysitting
services, boxing and martial arts camps and, in certain clubs, aquatic exercise,
swimming instruction, racquet sport instruction and court rentals. These
value-added services and others are advertised through in-club flyers and
through the Company's direct marketing program.

LEVERAGE CORPORATE MANAGEMENT AND SYSTEMS INFRASTRUCTURE. Management
believes it has made a significant investment in building a management and
systems infrastructure at the corporate level that is capable of supporting the
Company's expansion plans over the next three years. Management

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believes that, as the Company continues to implement its clustering strategy
within the NYSC, WSC, BSC and PSC networks, it will realize increased revenues
without a proportionate increase in certain fixed expenses at the corporate
level. In addition, management intends to streamline further the enrollment
process and certain other operational functions. Management believes that these
steps will lower general and administrative expenses as a percentage of
revenues. In the near-term, however, such increases in operating leverage may be
offset by costs associated with the acceleration of the Company's acquisition
and greenfield club development programs.

MARKETING

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

Advertisements generally feature creative slogans that communicate the
serious approach the Company takes toward fitness in a provocative and/or
humorous tone, rather than pictures of the Company's clubs or members
exercising. The Company does not advertise discounts on monthly membership dues.
Promotional marketing campaigns will typically feature opportunities to
participate in value-added services such as personal training for a limited
time, free of charge or at a discount to the standard rate. On occasion, the
Company will also offer reduced initiation fees to encourage enrollment.
Additionally, the Company frequently sponsors member referral incentive
programs. Approximately one-third of the Company's new members cite a referral
from an existing member as a reason for joining. Such incentive programs include
a free month of membership, personal training sessions, sports equipment such as
a free gym bag or a gift certificate for other in-club purchases. In addition,
the Company maintains four Internet sites that provide information about club
locations, program offerings and on-line promotions.

The Company also engages in public relations and special events to promote
its image in the local communities. To that end, the Company sponsors a squash
tournament in Grand Central Station and provides free workouts for four weeks to
balloon carriers in the Macy's Thanksgiving Day Parade in advance of the parade
in exchange for national television exposure during the parade. Management
believes that these public relations efforts enhance the Company's image and the
image of its local brand names in the communities in which it operates. The
Company also seeks to build its community image through co-operative advertising
campaigns with local sporting goods retailers.

SALES

Sales of new memberships are generally handled at the club level. The
Company employs approximately 165 "in-club" membership consultants who are
responsible for new membership sales. Each club generally has two full-time and
one part-time membership consultants. These consultants report both to the
general manager of the club as well as to one of the Company's seven area sales
managers, who in turn report to the Company's Vice President Sales. Membership
consultants' compensation consists of a base salary plus commission. Sales
commissions range from $45.00 to $65.00 per new member enrolled. The Company
provides additional incentive-based compensation in the form of bonuses
contingent upon individual, club and Company-wide enrollment goals. Membership
consultants must successfully complete a three-month, in-house training program
through which they learn the Company's sales strategy. In making a sales
presentation, membership consultants emphasize: (i) the proximity of its clubs
to concentrated commercial and residential areas convenient to where target
members live and work; (ii) the lack of a long-term obligation on the part of
the enrollee; (iii) the price value relationship of a

41
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Town Sports membership; and (iv) access to value-added services. All of the
Company's area sales managers have been promoted from within the Company to
their current positions. Management believes that providing employees with
opportunities for career advancement is essential to the Company's ability to
attract and retain qualified sales personnel. The Company also employs a
full-time corporate sales manager whose sole responsibility is to solicit group
memberships through senior level corporate contacts.

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

THE PASSPORT MEMBERSHIP, priced from $71.00 to $76.00 per month, is the
Company's highest priced membership and entitles members to use any Town
Sports club at any time. This membership is held by approximately 48.0% of
members.

THE GOLD MEMBERSHIP, priced from $49.00 to $71.00 per month based on the
market area of enrollment, enables members to use a specific club at any
time and any Town Sports club during off-peak times. This membership is held
by over 49.0% of members.

THE OFF-PEAK MEMBERSHIP, priced from $44.00 to $63.00 per month, is the
least expensive membership, and allows members to use any Town Sports club
only during off-peak times. This membership is held by approximately 3.0% of
members.

By clustering a group of clubs in a geographic area, the value of Company
memberships is enhanced by the ability to offer Passport Memberships, which
allow the member to use any Company club at any time. Approximately 48.0% of all
members choose the Passport Membership option. Management believes the
popularity of the Passport Membership results from the broader privileges and
greater convenience this membership plan provides through the opportunity for
members to access club facilities near to both their homes and offices.
Management also believes that Passport Memberships will increase as a percentage
of total memberships as the Company continues to build its clusters in the
Washington, DC, Boston and Philadelphia regions. The Boston and Philadelphia
regions, in particular, have not yet developed the critical mass to support
substantial sales of Passport Memberships. The Company's clustering strategy
also allows it to provide access to special facilities such as squash, tennis,
basketball and racquetball courts and swimming pools through flagship locations
strategically located in key target areas without offering such facilities in
every location.

In joining a club, a new member signs a membership agreement which obligates
the member to pay a one-time initiation fee and monthly dues on an ongoing
basis. In fiscal 1998, initiation fees averaged $121.01 for NYSC clubs and
$81.16 for other U.S. clubs. Monthly membership dues averaged approximately
$66.77 per month during that same period. The Company collects approximately
90.0% of all monthly membership dues through EFT. Substantially all other
monthly membership dues are paid in advance. EFT members can generally cancel
memberships at any time upon 30 days notice. Based upon detailed statistical
studies of the membership base at the Company's mature clubs, however, the
average length of the Company's memberships is approximately 24 months. The
membership agreement calls for monthly dues to be collected by EFT based on
credit card or bank account debit authorization contained in the agreement.
Management believes that its EFT program of monthly dues collection provides a
predictable and stable cash flow for the Company, eliminates the traditional
accounts receivable function, and minimizes bad-debt write-offs while providing
a significant competitive advantage in terms of the sales process, dues
collection, working capital management and membership retention. In addition, it
enables the Company to increase its dues in an efficient and consistent manner.
During the first week of each month, the Company receives the EFT dues for that
month by wire transfers initiated by Checkfree Corporation. Discrepancies and
insufficient funds incidents are researched and resolved by an in-house

42
<PAGE>
collection staff. For the past three fiscal years, the Company experienced an
average of uncollected EFT receivables of less than 1.2%.

In fiscal 1998, the Company collected average revenue per member of
approximately $832.73 per year, which positions the Company in the upper middle
of the industry from a pricing perspective. Management believes that industry
prices in its primary regional markets are higher than those of the country as a
whole. The Company's total EFT revenue has increased by $4.0 million per month
since May, 1995 to over $6.4 million in May, 1998. While the Company strongly
encourages monthly EFT memberships, approximately 10.0% of the Company's members
(often corporate group members) purchase paid-in-full memberships for a one year
term.

CLUB FORMAT AND LOCATIONS

The Company's clubs are typically located in well-established, higher-income
residential, commercial or mixed urban neighborhoods within major metropolitan
areas which are capable of supporting the development of a cluster of clubs.
Fitness clubs vary in size, available facilities and types of services provided
and generally have relatively high "retail" visibility, as well as proximity to
transportation. In the New York City and Washington, DC markets, the Company has
created clusters of clubs in urban areas and their commuter suburbs in
accordance with the Company's operating strategy of offering its target members
the convenience of multiple locations close to where they live and work,
reciprocal use privileges and standardized facilities and services.

The Company's clubs generally range in size from 15,000 to 25,000 square
feet. Membership for each club ranges from 2,500 to 4,500 members at maturity.
Although club members represent a cross-section of the population in a given
geographic market, the Company's typical member is college educated, between the
ages of 20 and 44 and earns an annual income in excess of $50,000.

The Company's facilities include state-of-the-art cardiovascular equipment,
including Lifecycles, StairMasters, treadmills, and elliptical motion machines;
strength equipment and free weights, including Cybex, Icarian, Nautilus and
Hammer Strength equipment; group exercise and cycling studio(s); Cardio-Theater
entertainment systems; locker rooms, including shower facilities, towel service,
and other amenities such as saunas and steamrooms; and a 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, babysitting, swimming pools, basketball, tennis,
racquetball and/or squash courts and climbing walls are available in flagship
locations.

The following list represents the Company's clubs locations:

<TABLE>
<CAPTION>
DATE OPENED OR
MANAGEMENT
LOCATION ADDRESS ASSUMED
- ----------------------------------- ------------------------------------ -------------------
<S> <C> <C>
NEW YORK SPORTS CLUBS:
1. Manhattan 404 Fifth Avenue January, 1974
2. Manhattan 151 East 86th Street January, 1977
3. Manhattan 61 West 62nd Street July, 1983
4. Manhattan 614 Second Avenue July, 1986
5. Manhattan 30 Cliff Street January, 1990
6. Manhattan 380 Madison Avenue January, 1990
7. Manhattan 151 Reade Street January, 1990
8. Manhattan 1601 Broadway September, 1991
9. Manhattan 50 West 34th Street August, 1992
10. Manhattan 349 East 76th Street April, 1994
11. Manhattan 248 West 80th Street May, 1994
12. Manhattan 502 Park Avenue February, 1995
13. Manhattan 117 Seventh Avenue South March, 1995
</TABLE>

43
<PAGE>
<TABLE>
<CAPTION>
DATE OPENED OR
MANAGEMENT
LOCATION ADDRESS ASSUMED
- ----------------------------------- ------------------------------------ -------------------
<S> <C> <C>
14. Manhattan 303 Park Avenue South December, 1995
15. Manhattan 30 Wall Street May, 1996
16. Manhattan 1635 Third Avenue October, 1996
17. Manhattan 575 Lexington Avenue November, 1996
18. Manhattan 278 Eighth Avenue December, 1996
19. Manhattan 200 Madison Avenue February, 1997
20. Manhattan 131 East 31st Street February, 1997
21. Manhattan 2162 Broadway November, 1997
22. Manhattan 633 Third Avenue April, 1998
23. Manhattan 1657 Broadway July, 1998
24. Manhattan+ 217 Broadway Opening 1998
25. Manhattan* 300 West 125th Street Opening 2000

26. Brooklyn, NY 110 Boerum Place October, 1985
27. Brooklyn, NY 1736 Shore Parkway June, 1998
28. Forest Hills, NY 69-33 Austin Street April, 1997
29. Queens, NY 153-67 A Cross Island Parkway June, 1998
30. Staten Island, NY 300 West Service Road June, 1998

31. Great Neck, NY 15 Barstow Road July, 1989
32. Scarsdale, NY 696 White Plains Road October, 1995
33. Mamaroneck, NY 124 Palmer Avenue January, 1997
34. White Plains, NY 1 North Broadway September, 1997
35. Croton-on-Hudson, NY 420 South Riverside Drive January, 1998
36. Nanuet, NY 58 Demarest Mill Road May, 1998
37. Oceanside, NY* 2909 Lincoln Avenue Opening 1999

38. Stamford, CT 6 Landmark Square December, 1997
39. Stamford, CT 106 Commerce Road January, 1998
40. Danbury, CT 38 Mill Plain Road January, 1998
41. Stamford, CT+ 1063 Hope Street Opening 1998
42. Norwalk, CT* 250 Westport Avenue Opening 1999

43. East Brunswick, NJ 8 Cornwall Court January, 1990
44. Princeton, NJ 301 North Harrison Street May, 1997
45. Freehold, NJ 200 Daniels Way April, 1998
46. Matawan, NJ 163 Route 34 April, 1998
47. Old Bridge, NJ Gaub Road and Route 516 April, 1998
48. Marlboro, NJ 34 Route 9 North April, 1998
49. Fort Lee, NJ 1355 15th Street June, 1998
50. Ramsey, NJ 1100 Route 17 North June, 1998
51. Mahwah, NJ 7 Leighton Place June, 1998
52. Parsippany, NJ 2651 Route 10 August, 1998
53. Springfield, NJ 215 Morris Avenue August, 1998
54. Colonia, NJ 1250 Route 27 August, 1998
55. Franklin Park, NJ 3911 Route 27 August, 1998
56. Plainsboro, NJ 10 Schalks Crossing August, 1998
57. Somerset, NJ 120 Cedar Grove Lane August, 1998
58. Hoboken, NJ+ 221 Washington Street Opening 1998
59. West Caldwell, NJ* Bloomfield Avenue Opening 1999
</TABLE>

44
<PAGE>
<TABLE>
<CAPTION>
DATE OPENED OR
MANAGEMENT
LOCATION ADDRESS ASSUMED
- ----------------------------------- ------------------------------------ -------------------
<S> <C> <C>
WASHINGTON SPORTS CLUBS:
60. Washington, DC 214 D Street, S.E. January, 1980
61. Washington, DC 1835 Connecticut Avenue, N.W. January, 1990
62. Washington, DC 1990 M Street, N.W. February, 1993
63. Washington, DC 2251 Wisconsin Avenue, N.W. May, 1994
64. Bethesda, MD 4903 Elm Street May, 1994
65. North Bethesda, MD 10400 Old Georgetown Road June, 1998
66. Germantown, MD 12623 Wisteria Drive July, 1998
67. Centreville, VA Old Centreville Crossing December, 1997
68. Alexandria, VA* 3654 King Street Opening 1999

BOSTON SPORTS CLUBS:
69. Boston, MA 561 Boylston Street November, 1991
70. Allston, MA 15 Gorham Street July, 1997
71. Weymouth, MA* 553 Washington Street Opening 1999
72. Boston, MA* 201 Brookline Avenue Opening 2000

PHILADELPHIA SPORTS CLUBS:
73. Philadelphia, PA+ 220 South 5th Street Opening 1998
74. Philadelphia, PA* 2000 Hamilton Street Opening 1999

SWISS SPORTS CLUBS:
75. Basel, Switzerland St. Johanns-Vorstadt 41 August, 1987
76. Zurich, Switzerland Glarnischstrasse 35 August, 1987
</TABLE>

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

+ Under construction, club in "pre-sales."

* Signed leases for greenfield club development.

CLUB OPERATIONS

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

MANAGEMENT. The Company believes that its success is largely dependent on
the selection and training of its staff and management. The Company's management
structure is designed, therefore, to support the professional development of
highly motivated managers who will execute the Company's directives and support
growth.

Corporate departments are responsible for each area of club services, such
as exercise classes, fitness programming, personal training, facility and
equipment maintenance, housekeeping and laundry. This centralization allows
local general managers at each club to focus on customer service, club staffing
and providing a high quality exercise experience. General managers are
responsible for the day-to-day management of each club, and directly report to
area managers, who liaise with corporate staff ensuring consistent service at
all locations.

The Company provides performance-based incentives to its management. Senior
management compensation, for example, is tied to overall Company performance.
Departmental directors, area managers and general managers have bonuses tied to
financial and member retention targets for a particular club or group of clubs.

45
<PAGE>
PERSONAL TRAINING. All of the Company's fitness clubs offer one-on-one
personal training, which is sold by the single session or in multi-session
packages, to assist the Company's members with their daily workouts. Personal
trainers are divided into three tiers: House Trainers, Professional Trainers and
Master Trainers. House Trainers are stationed on a club's fitness floor to
provide orientations to new members and to assist with the operation of
equipment. House Trainers who exhibit superior skills receive a commission on
personal training sessions. House Trainers become Professional Trainers once
they have completed the Company's advanced certification program. As a
Professional Trainer, the employee is entitled to a higher commission on
personal training. Finally, trainers, who have obtained national certification
and have developed an established client base, are permitted to collect the
highest commission and to move from club to club to service club members as a
Master Trainer. The Company believes that its personal training programs provide
valuable guidance to its members and a significant source of incremental revenue
from value-added services for the Company.

GROUP FITNESS. The Company's commitment to providing a quality workout
experience to its members extends to the employment of program instructors, who
teach aerobics, cycling, strength conditioning, boxing, yoga and step aerobics
classes, among others. The Company's clustering strategy enables it to staff
program instructors and professional personal trainers at more than one club. As
a result, the Company can vary a given club's instructors, while providing
instructors sufficient classes to effectively and economically treat these
instructors as full-time employees. Management believes the availability of
employee benefits provides the Company a strategic advantage in attracting and
retaining quality program instructors and professional personal trainers and
that this strategic advantage in turn translates into a more consistent and
higher quality workout experience for those members who utilize such services.
All program instructors report to a centralized management structure, headed by
the Director of Programming who is responsible for overseeing auditions and
providing in-house training to keep instructors current in the latest training
techniques and program offerings.

CLUB DEVELOPMENT

The Company's five person development team is headed by the Company's Chief
Executive Officer and its Executive Vice President, Development. The development
team meets weekly to discuss potential target areas and the best strategy by
which to enter these target areas. The Company establishes a presence in target
areas through both acquisition and greenfield openings. Important considerations
in analyzing a potential target area include but are not limited to: (i) density
of population, (ii) median household income, (iii) commuting patterns, (iv)
pre-existing industry participants, (v) availability of desirable real estate,
and (vi) zoning and permitting requirements. In selecting a specific site within
a target market, management also considers traffic patterns, pedestrian and
vehicular access and visibility of potential locations.

Historically, acquisitions of existing clubs have played a key role in the
Company's growth strategy. Since June 1, 1993, the Company has acquired 32
clubs, 20 of which were acquired from multi-site operators. Acquisitions allow
the Company to accelerate its growth relative to expansion solely through new
greenfield openings as acquisitions typically can be accomplished faster and can
include multiple club locations. Management believes acquisitions present a
lower risk profile because of the inherent cash flow and membership history
present in acquired clubs. In addition, acquisitions of underperforming fitness
clubs provide the Company with opportunities to improve operating performance
through the implementation of the Company's operating strategies and economies
of scale available through clustering. The Company maintains a list of potential
acquisition targets in its markets, and directly approaches clubs on this list.
The Company is also frequently approached by club owners, and representatives of
owners, who are interested in selling their businesses. The Company has and will
continue to pursue acquisitions of multi-site and individual operators of clubs
having a combination of attractive locations, below market leases, strong
management and/or significant growth potential.

46
<PAGE>
To complement its acquisition strategy, the Company also develops greenfield
clubs in appropriate locations. The Company has established a network of real
estate brokers to cover all geographic territories for expansion by the Company.
This brokerage network acts as the main source for greenfield opportunities.
Each new club project is reviewed and approved by the Chief Executive Officer
and Chief Financial Officer of the Company in addition to the Executive Vice
President, Development. The Company's construction department evaluates all club
sites prior to lease or purchase, and oversees all construction-related issues,
including planning, zoning and permitting. The initial development of a new club
costs approximately $100.00 per square foot. This cost includes all hard and
soft construction expenditures, fitness equipment, furniture and fixtures, and
all other start-up costs. In general, approximately 65.0% of the costs are for
construction, 25.0% for fitness equipment, furniture and fixtures, and the
remainder for miscellaneous and start-up costs. Developing greenfield club
locations allows the Company to control every aspect of the design and
construction of a club in accordance with the Company's operational philosophy.
The Company generally develops clubs on a greenfield club basis as a way of
expanding its presence in existing regions. Greenfield clubs typically take
three to four years to mature fully. In the Company's experience, greenfield
clubs typically generate higher long-term returns on investment than
acquisitions, but may exhibit less desirable near-term cash flow
characteristics.

PROPRIETARY CENTRALIZED INFORMATION SYSTEMS.

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

PROPRIETARY SOFTWARE AND INTELLECTUAL PROPERTY

Management believes it has been an industry leader in the use of computer
technology since the mid-1980's. The Company uses information technology in
virtually every area of the business, including business development, sales and
marketing, staffing and other operational systems. The Company has begun a
multi-year information technology project by which it has implemented, among
other things: (i) 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; (ii) a sales
compensation system; and (iii) a system that automatically updates existing
member records. Other elements of this project will include the development and
implementation of: (i) a computerized photo and card-swipe system for member
check-in; (ii) extensive club site development databases; (iii) a class exercise
scheduling and payroll system; and (iv) a personal training revenue tracking and
payroll system, as part of a larger fitness programming project. Management
believes that its information management systems, which are proprietary in many
respects, produce a substantial competitive advantage.

The Company has registered, and is in the process of registering, various
trademarks and service marks with the U.S. Patent and Trademark Office,
including NEW YORK SPORTS CLUBS, WASHINGTON SPORTS CLUBS, BOSTON SPORTS CLUBS,
PHILADELPHIA SPORTS CLUBS, TSI and TOWN SPORTS INTERNATIONAL, INC.

COMPETITION

The fitness club industry is highly competitive. The Company competes with
other fitness clubs, physical fitness and recreational facilities established by
local governments and hospitals and by businesses for their employees, amenity
and condominium clubs, the YMCA and similar organizations and, to a certain
extent, with racquet and tennis and other athletic clubs, country clubs, weight
reducing salons

47
<PAGE>
and the home-use fitness equipment industry. The Company also competes with
other entertainment and retail businesses for the discretionary income of its
target markets. There can be no assurance that the Company will be able to
compete effectively in the future in the markets in which it operates.
Competitors, which may include companies which are larger and have greater
resources than the Company, may enter these markets to the detriment of the
Company. These competitive conditions may limit the Company's ability to
increase dues without a material loss in membership, attract new members and
attract and retain qualified personnel. Additionally, consolidation in the
fitness club industry could result in increased competition among participants,
particularly large multi-facility operators that are able to compete for
attractive acquisition candidates, thereby increasing costs associated with
expansion through both acquisitions, and lease negotiation and real estate
availability for greenfields.

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

PROPERTIES

In addition to the club locations listed above, the Company owns the 151
East 86th Street location, which houses a Company club and a retail tenant that
generated approximately $500,000 of rental income for the Company during 1998.
All other clubs occupy leased space pursuant to long-term leases (generally 15
to 25 years, including options). In the next five fiscal years (ending December
31, 2004), only three of the Company's club leases will expire without any
renewal option.

The Company leases approximately 25,000 square feet of office space in New
York City, and 3,000 square feet of office space in Washington, DC, 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.

As of May 31, 1998, 45 of the existing clubs were wholly-owned by the
Company and four 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 40.0%. 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 $7.5 million per year) is not reflected in the
financial statements, because the Managed Clubs are not consolidated. The
Company acquired two Managed Clubs during fiscal 1995 and three Managed Clubs
during fiscal 1998 which were originally party to management agreements with the
Company. In the future, the Company may seek to acquire Managed Clubs, if such
opportunities arise.

INSURANCE

The Company maintains policies of insurance with coverages deemed sufficient
by management to protect the Company from losses, damages or claims suffered or
made in the operation of its business. No assurance can be given, however, that
one or more claims will not fall outside the limits of coverage of such
insurance policies or exhaust the coverage afforded by such policies, in which
case such a claim would have a material adverse effect on the Company's
financial condition and results of operations.

48
<PAGE>
EMPLOYEES

At May 31, 1998, the Company had approximately 2,600 employees, of which
approximately 840 were employed full-time. Approximately 150 employees were
corporate personnel working in the Manhattan or the Washington, DC offices. The
Company is not a party to any collective bargaining agreement with its
employees. The Company has never experienced any significant labor shortages nor
had any difficulty in obtaining adequate replacements for departing employees
and considers its relations with its employees to be good. Management believes
that it offers its employees benefits (including health, dental, disability,
life insurance and 401(k) plans) which are superior to those generally offered
by its competitors.

GOVERNMENT REGULATION

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

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

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

LEGAL PROCEEDINGS

A claim has been filed against the Company related to alleged copyright
infringement from the unauthorized use of photographs in advertisements. The
case was brought originally in federal court in June 1996 and was dismissed in
February 1998 because the plaintiffs had not registered copyrights to the
photographs. The claim was refiled in New York State Supreme Court on April 15,
1998. The Company has filed a motion to dismiss the state lawsuit which is
presently pending. The plaintiffs seek an unspecified amount of damages,
including the Company's profits attributable to the use of the photographs.
Based on the advice of outside counsel, management believes that it is unlikely
that the outcome of this matter will have a materially adverse effect on the
business, results of operations or financial condition of the Company.
Management is vigorously contesting this claim.

The Company is a party to various other lawsuits arising in the normal
course of business. Management believes that the ultimate outcome of these
matters will not have a material adverse effect on the Company's business,
results of operations or financial condition.

49
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the names, ages as of August 12, 1998, 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........................................... 39 Chief Executive Officer and Director
Robert Giardina...................................... 40 President and Chief Operating Officer
Alexander Alimanestianu.............................. 39 Executive Vice President, Development
Richard Pyle......................................... 39 Executive Vice President and Chief Financial Officer
Deborah Smith........................................ 39 Senior Vice President, Operations
Leslie Kimerling..................................... 36 Senior Vice President, Information Management and
Planning
Keith Alessi......................................... 43 Director
Paul Arnold.......................................... 52 Director
Bruce Bruckmann...................................... 44 Director
Stephen Edwards...................................... 35 Director
Jason Fish........................................... 40 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 September 1995. Mr. Smith has had
primary responsibility for the development and/or acquisition of the Company's
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 four clubs) after six years of employment with other fitness club companies.
With over 20 years of experience in the club industry, Mr. Giardina has
expertise in virtually every aspect of facility management and club operations.
In addition to operations, Mr. Giardina has primary responsibility for sales and
marketing.

ALEXANDER 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 over 40 of the Company's clubs.

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

DEBORAH SMITH joined the Company in 1987, and served as Vice President
before her appointment as a Senior Vice President of Operations in 1995. Ms.
Smith has been responsible for the startup and operation of Company clubs in New
York, Switzerland, Maryland and Washington, DC. She oversees club operations in
all U.S. geographic areas. Ms. Smith has been with the Company since 1985.

50
<PAGE>
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 Telespectrum
Worldwide, Inc., a position he has held since March 1998. From May 1996 to March
1998, Mr. Alessi served as Chairman, President and Chief Executive Officer of
Jackson Hewitt, Inc. Prior to that, Mr. Alessi held various positions with Farm
Fresh, Inc. including Chief Financial Officer and President. 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 has served as President and Chief Executive Officer of Cort Business
Services, Inc., a leading national supplier of high end rental furniture since
1992.

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 Mediq Inc., Penhall International, Inc., 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 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. ("FCM") and
Farallon Partners, L.L.C., the Farallon's two management entities, since April
1996. Mr. Fish was a General Partner of the Farallon investment partnerships and
a Managing Director of FCM's predecessor, Farallon Capital Management, Inc.,
from 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 of the Farallon Entities (as defined) 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.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

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

AUDIT COMMITTEE

The current members of the Audit Committee are Stephen Edwards, Keith Alessi
and Jason Fish, who are non-employee directors of the Company. The functions of
the Audit Committee include recommending to the Board of Directors the retention
of independent auditors, reviewing the scope of the annual audit undertaken by
the Company's independent auditors and the progress and results of their work,
and reviewing the Company's financial statements, internal accounting and
auditing procedures and corporate program to ensure compliance with applicable
laws.

51
<PAGE>
SUMMARY COMPENSATION TABLE

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

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------
OTHER ANNUAL LONG-TERM COMPENSATION
FISCAL SALARY BONUS(1) COMPENSATION AWARDS COMMON STOCK
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) UNDERLYING OPTIONS/ SARS (#)
- ------------------------------- --------- ----------- ----------- ----------------- -------------------------------
<S> <C> <C> <C> <C> <C>
Mark Smith, Chief Executive
Officer...................... 1998 360,500 330,000 -- --
1997 350,000 176,000 -- 8,830
Robert Giardina, President and
Chief Operating Officer...... 1998 341,906 250,000 -- --
1997 331,948 118,000 -- 8,829
Richard Pyle, Executive Vice
President and Chief Financial
Officer...................... 1998 187,399 187,500 -- --
1997 181,941 85,000 -- 8,828
Alexander Alimanestianu,
Executive Vice President,
Development.................. 1998 187,399 187,500 -- --
1997 178,711 85,000 -- 8,828
Deborah Smith, Senior Vice
President, Operations........ 1998 141,100 125,000 -- 400
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 1998

The following discloses options on the Company's Common Stock granted during
fiscal 1998 to the named executive officer.

<TABLE>
<CAPTION>
INDIVIDUAL GRANT POTENTIAL REALIZABLE VALUE
---------------------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS/SARS OPTION TERM
OPTIONS/ GRANTED TO ----------------------------
SAR'S EMPLOYEES IN 5% ANNUAL 10% ANNUAL
GRANTED FISCAL YEAR EXERCISE OR BASE EXPIRATION GROWTH RATE GROWTH RATE
NAME (#)(1) (%) PRICE ($) DATE ($) ($)
- -------------------------------- --------------- --------------- ----------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Deborah Smith................... 400 2.72 17.50 4-3-08 11,402 18,156
</TABLE>

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

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

52
<PAGE>
AGGREGATED OPTION/SAR EXERCISES DURING 1998 AND 1998 YEAR-END OPTION/SAR VALUES

The following summarizes exercises of stock options (granted in prior years)
by the named executive officers during fiscal 1998, as well as the number and
value of all unexercised options held by the named executive officers at the end
of fiscal 1998.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
OPTIONS/SARS AT FY-END
(#) VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS/SARS AT
SHARES ------------------------- FY-END($)(1)
ACQUIRED
ON VALUE EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
EXERCISE (#) REALIZED ------------------------- -------------------------------
NAME COMMON ($) COMMON COMMON PREFERRED COMMON PREFERRED
- --------------------- --------------- ----------------- ------------- ---------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark Smith........... -- -- 3,532/5,298 42,812/0 58,278/87,417 1,070,289/0
Robert Giardina...... -- -- 3,532/5,297 32,793/0 58,278/87,400 819,829/0
Richard Pyle......... -- -- 3,532/5,296 27,569/0 58,278/87,384 689,225/0
Alexander
Alimanestianu...... -- -- 3,532/5,296 27,199/0 58,278/87,384 679,983/0
Deborah Smith........ -- -- 2,220/3,530 9,530/0 35,310/52,965 238,257/0
</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.

MANAGEMENT EQUITY AGREEMENTS

Simultaneously with the Recapitalization, the Company entered into Executive
Stock Agreements with certain of the officers and other key employees of the
Company. Pursuant to the Executive Stock Agreements, the executives each have
purchased shares of Common Stock and/or shares of Series B Preferred of the
Company at a purchase price of $1.00 per share of Common Stock and $35.00 per
share of Series B Preferred Stock. Upon the consummation of the Offering, all
shares of Common Stock purchased by each such executive will be fully vested.

EQUITY INCENTIVE PLAN

In connection with the Offering, the Company intends to adopt the Long-Term
Equity Incentive Plan (the "Equity Incentive Plan"), designed to provide
incentives to present and future executive, managerial, marketing, technical and
other key employees, and consultants and advisors of the Company and its
subsidiaries ("Participants") as may be selected in the sole discretion of the
Company's Board of Directors. The Equity Incentive Plan will provide for the
granting to participants of the following types of incentive awards: stock
options, stock appreciation rights ("SARs"), restricted stock, performance
units, performance grants and other types of awards that the Compensation
Committee of the Board (the "Committee") deems to be consistent with the
purposes of the Equity Incentive Plan. An aggregate amount of shares of Common
Stock (which amount represents approximately 5.0% of the Company's authorized
Common Stock) are reserved for issuance under the Equity Incentive Plan. The
Equity Incentive Plan affords the Company latitude in tailoring incentive
compensation for the retention of key personnel, to support corporate and
business objectives, and to anticipate and respond to a changing business
environment and competitive compensation practices.

The Committee will have exclusive discretion to select the Participants and
to determine the type, size and terms of each award, to modify the terms of
awards, to determine when awards will be granted and paid, and to make all other
determinations which it deems necessary or desirable in the interpretation and
administration of the Equity Incentive Plan. The Equity Incentive Plan will
terminate ten years from the date that is approved and adopted by the
stockholders of the Company, unless extended for up to an additional five years
by action of the Board of Directors. With limited exceptions, including

53
<PAGE>
termination of employment as a result of death, disability or retirement, or
except as otherwise deter-
mined by the Committee, rights to these forms of contingent compensation will be
forfeited if a recipient's employment or performance of services terminates
within a specified period following the award. Generally, a Participant's rights
and interest under the Equity Incentive Plan will not be transferable except by
will or by the laws of descent and distribution or pursuant to a qualified
domestic relations order.

Options, which include nonqualified stock options and incentive stock
options, are rights to purchase a specified number of shares of Common Stock at
a price fixed by the Committee. The option price may be less than, equal to or
greater than the fair market value of the underlying shares of Common Stock, but
in no event shall the exercise price of an incentive stock option be less than
the fair market value on the date of grant. Options generally will expire not
later than ten years after the date on which they are granted. Options will
become exercisable at such times and in such installments as the Committee shall
determine. Payment of the option price must be made in full at the time of
exercise in such form (including, but not limited to, cash or Common Stock of
the Company) as the Committee may determine.

The Equity Incentive Plan will provide that an SAR may be granted alone, or
in connection with the grant of an option, either at the time of grant of the
related option or by amendment thereafter to an outstanding option. SARs granted
in connection with options shall be exercisable only when, to the extent and on
the condition that, any related option is exercisable. The exercise of an option
shall result in an immediate forfeiture of any related SAR to the extent the
option is exercised, and the exercise of an SAR shall cause an immediate
forfeiture of any related option to the extent the SAR is exercised.

Upon the exercise of an SAR, the Participant shall be entitled to a
distribution in an amount equal to the difference between the fair market value
of a share of Common Stock on the date of exercise and the exercise price of the
SAR or, in the case of SARs granted in tandem with options, any option to which
the SAR is related, multiplied by the number of shares of Common Stock as to
which the SAR is exercised. The Committee shall decide whether such distribution
shall be in cash, in shares of Common Stock having a fair market value equal to
such amount, in other securities having a fair market value equal to such amount
or in a combination thereof.

A restricted stock award will be an award of a given number of shares of
Common Stock which are subject to a restriction against transfer and to a risk
of forfeiture, during a period set by the Committee. During the restriction
period, the Participant generally will have the right to vote and receive
dividends on the shares. Dividends received while under restriction will be
treated as compensation.

The Equity Incentive Plan will provide that performance awards are those
whose final value, if any, is determined by the degree to which specified
performance objectives have been achieved during an award period set by the
Committee, subject to such adjustments as the Committee may approve based on
relevant factors. Performance objectives will be based on measures of Company,
unit or Participant performance, or any combination of these and other factors,
as the Committee may determine. The Committee will make such adjustments in the
computation of any performance measure as it deems appropriate. The Committee
shall determine the portion of each performance award that has been earned by a
participant on the basis of the Company's performance over the performance cycle
in relation to the performance goals for such cycle. The earned portion of a
performance award may be paid out in shares of Common Stock, cash, other
securities of the Company, or any combination thereof, as the Committee may
determine.

The Equity Incentive Plan will also provide that, upon the liquidation or
dissolution of the Company, all outstanding awards under the Equity Incentive
Plan shall terminate immediately prior to the consummation of such liquidation
or dissolution, unless otherwise provided by the Committee. In the event of a
reorganization, recapitalization, stock split, stock dividend, combination of
shares, merger, consolidation, distribution of assets, or any other change in
the corporate structure or shares of the Company, the Committee shall make such
adjustment as it deems appropriate in the number and kind of shares or

54
<PAGE>
other property reserved for issuance under the Equity Incentive Plan, in the
number and kind of shares or other property covered by grants previously made
under the Equity Incentive Plan, and in the exercise price of outstanding
options and SARs. In the event of any merger, consolidation or other
reorganization in which the Company is not the surviving or continuing entity or
in which a change in control is to occur, all of the Company's obligations
regarding options, SARs performance awards, and restricted stock that were
granted hereunder and that are outstanding on the date of such event shall, on
such terms as may be approved by the Committee prior to such event, be assumed
by the surviving or continuing entity or canceled in exchange for property
(including cash).

COMPANY BENEFIT PLANS

In April 1996, the Company implemented a 401(k) salary deferral plan (the
"401(k) Plan") which is available to eligible employees, as defined. The 401(k)
Plan provides for the Company to make discretionary contributions. The Company,
however, elected not to make contributions for either fiscal 1998, 1997 or 1996.

55
<PAGE>
SECURITY OWNERSHIP

The following table sets forth (as of May 31, 1998) certain information with
respect to the beneficial ownership of the Common Stock and Preferred Stock by:
(i) each person or entity who owns of record or beneficially more than 5% or
more of any class of the Company's voting securities; (ii) each named executive
officer and director of the Company; and (iii) all directors and named executive
officers of the Company as a group. The Company plans to effect a to
stock split on the consummation of the Offering.
<TABLE>
<CAPTION>
PERCENTAGE
OF COMMON
STOCK OUTSTANDING(1)
COMMON STOCK ------------------------------------ SERIES A
NAME BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING(2) PREFERRED STOCK
- ----------------------------------------- ---------------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
BRS (3)
126 East 56th Street, 29th Floor
New York, New York 10022............... 504,456 49.7% 104,330
The Farallon Entities (4)
One Maritime Plaza, Suite 1325
San Francisco, California 94111........ 198,461 19.5% 41,045
Canterbury Mezzanine Capital,
L.P. (5)
600 Fifth Avenue, 23rd Floor
New York, New York 10020............... 124,022 11.0% --

EXECUTIVE OFFICERS AND DIRECTORS:
Mark Smith (6)........................... 74,955 7.3% --
Robert Giardina (6)...................... 59,480 5.8% --
Richard Pyle (6)......................... 50,839 5.0% --
Alexander Alimanestianu (6).............. 51,410 5.0% --
Deborah Smith (6)........................ 21,338 2.1% --
Bruce C. Bruckmann (7)................... 517,642 51.0% 106,973
Stephen Edwards (8)...................... 504,456 49.7% 104,330
Jason Fish (9)........................... 198,461 19.5% 41,045
Paul Arnold.............................. * * 591
Keith Alessi............................. * * 591

EXECUTIVE OFFICERS AND DIRECTORS AS A
GROUP:
(10 persons)(10)......................... 974,125 92.7% 153,637

SERIES B
NAME PREFERRED STOCK
- ----------------------------------------- ----------------
<S> <C>
BRS (3)
126 East 56th Street, 29th Floor
New York, New York 10022............... --
The Farallon Entities (4)
One Maritime Plaza, Suite 1325
San Francisco, California 94111........ --
Canterbury Mezzanine Capital,
L.P. (5)
600 Fifth Avenue, 23rd Floor
New York, New York 10020............... --
EXECUTIVE OFFICERS AND DIRECTORS:
Mark Smith (6)........................... 42,812
Robert Giardina (6)...................... 32,793
Richard Pyle (6)......................... 27,569
Alexander Alimanestianu (6).............. 27,199
Deborah Smith (6)........................ 10,080
Bruce C. Bruckmann (7)................... --
Stephen Edwards (8)...................... --
Jason Fish (9)........................... --
Paul Arnold.............................. --
Keith Alessi............................. --
EXECUTIVE OFFICERS AND DIRECTORS AS A
GROUP:
(10 persons)(10)......................... 140,453
</TABLE>

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

* Represents less than 1%.

(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Exchange Act. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of Common Stock
subject to options held by that person that are currently exercisable or
exercisable within 60 days of August 12, 1998 are deemed outstanding. Such
shares, however, are not deemed outstanding for the purposes of computing
the percentage ownership of any other person.

(2) Includes shares of Common Stock issued pursuant to the Preferred Exchange.

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

(4) 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.

(5) 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. Upon the consummation of the Offering, the number of shares of Common
Stock issuable upon exercise of such warrant will be reduced to 75,714
shares of Common Stock in accordance with the terms of such warrant. See
"Description of Capital Stock--Warrant."

56
<PAGE>
(6) Includes options to acquire, exercisable within 60 days, Common Stock, and
Series B Preferred Stock options, exercisable within 60 days, pursuant to
the Old Option Plan and the Preferred Option Plan, respectively. Messrs.
Smith, Giardina, Pyle, Alimanestianu and Ms. Smith each hold such options on
8,830, 8,829, 8,828, 8,828 and 5,430 shares of Common Stock, respectively.
All shares of Series B Preferred Stock beneficially owned by such persons
are in the form of Series B Options, except with respect to Ms. Smith only,
9,530 shares are in the form of Series B Options. The address for each of
these named executive officers is the same as the address of the Company's
principal executive offices.

(7) Includes 504,456 shares held by BRS, and approximately 2,971 shares held by
certain other family members of Mr. Bruckmann. Mr. Bruckmann disclaims
beneficial ownership of such shares held by BRS.

(8) Includes shares held by BRS. Mr. Edwards disclaims beneficial ownership of
such shares.

(9) Includes shares held by each of the Farallon Entities. 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.

(10) Includes (i) shares held by BRS, which may be deemed to be owned
beneficially by Messrs. Bruckmann and Edwards, and (ii) shares held by the
Farallon Entities, which may be deemed to be owned beneficially by Mr. Fish.
Excludes the shares beneficially owned by BRS and the Farallon Entities, the
directors and named executive offices as a group beneficially own (i)
276,922 shares of Common Stock (which represents approximately 26.2% of the
Common Stock on a fully diluted basis), (ii) 3,909 shares of Series A
Preferred Stock, and (iii) 140,453 shares of Series B Preferred Stock.

57
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

THE RECAPITALIZATION

In December 1996, the Company consummated the Recapitalization pursuant to
which, among other things: (i) all shares of the Company's preferred stock
outstanding prior to the Recapitalization were redeemed or converted into shares
of the Company's then authorized common stock ("Old Common Stock"); (ii) all
shares of Old Common Stock (other than shares held by certain members of the
Company's management team) were exchanged for cash; and (iii) BRS and the
Farallon Entities acquired shares of the Company's Common Stock and Series A
Preferred Stock, representing approximately 73.0% of the Company's voting equity
interests on a fully-diluted basis. In addition, certain members of the
Company's management acquired shares of the Company's Common Stock and Series B
Preferred Stock representing approximately 27.0% of the Company's voting equity
interests on a fully-diluted basis. In addition, pursuant to the
Recapitalization, the Company instituted the Old Option Plan and the Preferred
Option Plan, which granted certain members of the Company's management, options
to acquire the Company's Common Stock and Series B Options, respectively.

REGISTRATION RIGHTS AGREEMENT

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

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

PROFESSIONAL SERVICES AGREEMENT AND TRANSACTION FEES

In connection with the Recapitalization, Bruckmann, Rosser, Sherrill & Co.,
Inc. ("BRS Co."), an affiliate of BRS, and the Company entered into a
Professional Services Agreement, whereby BRS Co. agreed to provide certain
advisory and consulting services to the Company. In exchange for such services,
BRS Co. receives an annual fee of $250,000 per calendar year while they own at
least 20.0% of the outstanding Common Stock of the Company. The Company also
paid BRS Co. and the Farallon Entities transaction fees of $584,000 and
$216,000, respectively for investment banking advisory services rendered to the
Company in connection with the Recapitalization.

AFFILIATE STOCK PURCHASE

58
<PAGE>
DESCRIPTION OF CAPITAL STOCK

GENERAL

Prior to the consummation of the Offering and the Affiliate Stock Purchase,
the total amount of authorized capital stock of the Company consists of
shares of Common Stock; 200,000 shares of Series A Preferred Stock and 200,000
shares of Series B Preferred Stock. Upon completion of the Offering and the
Affiliate Stock Purchase and the Preferred Exchange, shares of Common Stock
( shares if the Underwriters' over-allotment option is exercised in full), no
shares of Series A Preferred Stock and no shares of Series B Preferred Stock
will be issued and outstanding. As of May 31, 1998, there are approximately 35
holders of Common Stock. See "Security Ownership." The discussion herein
describes the Company's capital stock as it will exist subsequent to the
effectiveness of the Offering.

COMMON STOCK

The holders of Common Stock are generally entitled to one vote for each
share held on all matters voted upon by stockholders, including without
limitation, the election of directors and any proposed amendment to the Amended
and Restated Certificate of Incorporation. The holders of the Common Stock are
entitled to such dividends as may be declared at the discretion of the Board of
Directors out of funds legally available therefor. The holders of Common Stock
are entitled to share ratably in the net assets of the Company upon liquidation
after payment or provision for all liabilities. The holders of Common Stock have
no preemptive rights to purchase securities of the Company. Shares of Common
Stock are not subject to any redemption provisions. All outstanding shares of
Common Stock are, and the shares of Common Stock to be issued pursuant to the
Offering will be, upon payment therefor, fully paid and non-assessable.

Application will be made to list the Common Stock for trading on the Nasdaq
National Market, subject to official notice of issuance, under the symbol
"TOWN."

WARRANT

In connection with the Recapitalization, the Company issued a stock purchase
warrant (the "Warrant") to CMC. The Warrant is currently exercisable for 114,022
shares of Common Stock at an exercise price of $.01 per share, and contains
anti-dilution provisions which include adjustments to the Warrant for issuance
of Common Stock below fair market value. Upon the consummation of the Offering,
the number of shares of Common Stock issuable upon exercise of the Warrant will
be reduced to 75,714 shares of Common Stock in accordance with its terms.

OLD OPTION PLAN

In December 1996, the Company adopted the Old Option Plan, which version was
amended and restated in its entirety in April 1998. The Old Option Plan is
designed to advance the Company's best interests by providing additional
incentives to executives and other key employees of the Company. The Old Option
Plan provides option grants for 80,876 shares of Common Stock. Options for (i)
57,142 shares of Common Stock at an exercise price of $1.00 per share were
granted in December 1996 (the "1996 Options"), and (ii) 14,700 shares of Common
Stock at an exercise price of $17.50 per share were granted in April 1998 (the
"1998 Options"). Pursuant to the terms of the Old Option Plan, (i) all of the
1996 Options will become fully vested upon the consummation of the Offering, and
(ii) all of the 1998 Options will vest in April 2007; provided, that the 1998
Options will become fully vested upon a sale of the Company, and if the Company
achieves certain performance targets for fiscal 1999 through fiscal 2002, 20.0%
of the 1998 Options will vest as of the end of each such fiscal year. Twenty
percent of all 1998 Options have previously vested in accordance with the terms
of the Old Option Plan. The administration of the Old Option Plan, the selection
of participants, and form and amounts of the grants is within the

59
<PAGE>
sole discretion of the Compensation Committee of the Board, subject to the
limitations set forth in the Old Option Plan.

CERTAIN PROVISIONS OF THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION

The Company's Amended and Restated Certificate of Incorporation establishes
an advance notice procedure for stockholder nominations of persons for election
to the board of directors in advance of an annual meeting of stockholders of the
company. Stockholders at an annual meeting may only consider nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board, or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting, and who
has given to the Company's Secretary timely written notice, in proper form, of
the stockholder's intention to make such nomination before the annual meeting.
An amendment to this provision would require approval by an affirmative vote of
holders of 66.7% of the shares of voting stock of the Company.

In addition, the Company's Amended and Restated Certificate of Incorporation
provides for cumulative voting in the election of directors. The above two
provisions may have the effect of discouraging or deferring a potential acquiror
from conducting a solicitation of proxies to elect its own slate of directors or
otherwise attempting to obtain control of the Company.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is .

DESCRIPTION OF CERTAIN INDEBTEDNESS

CREDIT FACILITY

The following is a summary description of the principal terms of the Credit
Facility and is subject to, and qualified in its entirety by reference to, the
Credit Facility, copies of which are available upon request to the Company. The
Credit Facility was recently amended to allow for maximum borrowings of $25.0
million. As of August 12, 1998, the Company had approximately $17.0 million
available under the Credit Facility.

STRUCTURE. The Credit Facility provides for, subject to certain terms and
conditions, a $25.0 million revolving credit facility. The Credit Facility has a
final scheduled maturity date of October 15, 2002 and does not require scheduled
interim reductions. The Credit Facility requires, under certain circumstances,
the Company to make mandatory prepayments and commitment reductions. In
addition, the Company may make optional prepayments and commitment reductions
pursuant to the terms of the Credit Facility.

SECURITY. The 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 Credit Facility accrue interest at
either the Alternate Base Rate (as defined) plus 1.5% or a rate equal to the
Eurodollar borrowing rate plus 2.5% at the option of the Company. As of August
12, 1998, the effective interest rate on the Credit Facility was 8.1%.

COVENANTS. The Credit Facility contains certain covenants that, among other
things, restrict the ability of the Company 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 Recapitalizations or
consolidations, or engage in certain transactions with subsidiaries and
affiliates and otherwise restrict corporate activities. In addition, the Credit
Facility requires the Company to comply with certain financial ratios and
coverage tests.

60
<PAGE>
EVENTS OF DEFAULT. The Credit Facility also includes customary events of
default. The occurrence of any such events of default could result in
acceleration of the Company's obligations under the Credit Facility and
foreclosure on the collateral securing such obligations, which could have a
material adverse effect on the Company's stockholders.

SENIOR NOTES

The following is a summary description of the principal terms of the Senior
Notes and is subject to, and qualified in its entirety by reference to, the
Indenture dated as October 16, 1997 between the Company and United States Trust
Company of New York, as Trustee (the "Indenture"), copies of which are available
upon request to the Company.

RANKING AND SECURITY. The Senior Notes are general unsecured senior
obligations of the Company and 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.

INTEREST RATES. The Senior Notes bear interest at a rate of 9.75% payable
semi-annually on April 15 and October 15.

COVENANTS. The Indenture contains certain covenants that, among other
things, restrict the ability of the Company and its Restricted Subsidiaries (as
defined therein) to incur additional indebtedness, pay dividends or make certain
other restricted payments, engage in transactions with affiliates, incur liens
or engage in asset sales. The Indenture also restricts the ability of the
Company to consolidate or merge with, or transfer all or substantially all of
its assets to, another person.

EVENTS OF DEFAULT. The Indenture also includes customary events of default.
The occurrence of any such event of default could result in acceleration of the
Company's obligations under the Indenture, which could have a material adverse
effect on the Company's stockholders.

61
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF COMMON STOCK

The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
beneficial owner thereof that is a "Non-U.S. Holder." A "Non-U.S. Holder" is a
person or entity other than (i) a citizen or resident of the United States, (ii)
a corporation, partnership, limited liability company or other business entity
created or organized in the United States or under the laws of the United States
or of any state (other than any partnership treated as foreign under U.S.
Treasury Regulations), (iii) an estate whose income is includable in gross
income for U.S. federal income tax purposes regardless of source, or (iv) a
trust if (a) a court within the United States is able to exercise primary
supervision over the administration of the trust and (b) one or more U.S.
persons have the authority to control all substantial decisions of the trust.

This discussion is based on the Company's understanding of the Internal
Revenue Code of 1986, as amended (the "Code"), U.S. Treasury Regulations, and
judicial and administrative interpretations as of the date hereof, all of which
are subject to change, including changes with retroactive effect. This
discussion does not address all aspects of U.S. federal income and estate
taxation that may be relevant to Non-U.S. Holders in light of their particular
circumstances and does not address any tax consequences arising under the laws
of any state, local or foreign jurisdiction. Prospective holders should consult
their tax advisors with respect to the particular tax consequences to them of
owning and disposing of Common Stock, including the consequences under the laws
of any state, local or foreign jurisdiction.

DIVIDENDS

Subject to the discussion below, dividends, if any, paid to a Non-U.S.
Holder of Common Stock will be subject to withholding tax at a rate of 30.0% of
the gross amount of the dividend or such lower rate as may be specified by an
applicable income tax treaty. For purposes of determining whether tax is to be
withheld, in accordance with currently applicable U.S. Treasury regulations, the
Company will presume that dividends paid to an address in a foreign country are
paid to a resident of such country absent actual knowledge to the contrary.
Under recently finalized U.S. Treasury regulations generally effective for
payments made after December 31, 1999 (the "Final Regulations"), however, a
Non-U.S. Holder of Common Stock who wishes to claim the benefit of an applicable
treaty rate generally will be required to satisfy applicable certification and
other requirements. In addition, under the Final Regulations, in the case of
Common Stock held by a foreign partnership, (x) the certification requirement
will generally be applied to the partners of the partnership and (y) the
partnership will be required to provide certain information, including a U.S.
taxpayer identification number. The Final Regulations also provide look-through
rules for tiered partnerships.

Generally, there will be no withholding tax on dividends paid to a Non-U.S.
Holder if such dividends are effectively connected with the Non-U.S. Holder's
conduct of a trade or business within the United States or, if an income tax
treaty applies, attributable to a permanent establishment in the United States
("effectively connected dividends"), provided the Non-U.S. Holder files the
appropriate U.S. Internal Revenue Service ("IRS") form with the payor (which
form, under the Final Regulations, will require the Non-U.S. Holder to provide a
U.S. taxpayer identification number). Instead, such effectively connected
dividends will be subject to regular U.S. net income tax at graduated rates, in
the same manner as if the Non-U.S. Holder were a U.S. resident. In addition to
the graduated tax described above, a non-U.S. corporation receiving effectively
connected dividends may be subject to a "branch profits tax" which is imposed,
under certain circumstances, at a rate of 30.0% (or such lower rate as may be
specified by an applicable treaty) of such corporation's effectively connected
earnings and profits, subject to certain adjustments.

62
<PAGE>
A Non-U.S. Holder of Common Stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amount withheld by filing an appropriate claim for a refund with the IRS.

GAIN ON DISPOSITION OF COMMON STOCK

A Non-U.S. Holder generally will not be subject to U.S. federal income tax
(and no tax will generally be withheld) with respect to gain realized on a sale
or other disposition of Common Stock unless (i) the gain is effectively
connected with the Non-U.S. Holder's conduct of a trade or business within the
United States or, if an income tax treaty applies, attributable to a permanent
establishment in the United States (in which case, the branch profits tax
described above may also apply to a corporate Non-U.S. Holder), (ii) in the case
of certain Non-U.S. Holders who are non-resident alien individuals and hold the
Common Stock as a capital asset, such individuals are present in the United
States for 183 or more days in the taxable year of the disposition and certain
other conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant
to the provisions of the Code regarding the taxation of U.S. expatriates, or
(iv) the Company is or has been a "U.S. real property holding corporation" for
U.S. federal income tax purposes and the Non-U.S. Holder owned directly or
indirectly more than 5.0% of the Company's Common Stock (assuming the Common
Stock is regularly traded on an established securities market) at any time
within the shorter of the five-year period preceding such disposition or such
holder's holding period. Generally, a corporation is a "U.S. real property
holding corporation" if the fair market value of its "U.S. real property
interests" equals or exceeds 50.0% of the sum of the fair market value of its
worldwide real property interests plus its other assets used or held for use in
a trade or business. The Company is not, and does not anticipate becoming, a
"U.S. real property holding corporation" for U.S. federal income tax purposes.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DISPOSITION OF
COMMON STOCK

Generally, the Company must report to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or certain
other agreements, the IRS may make its reports available to tax authorities in
the recipient's country of residence.

Under currently effective U.S. Treasury Regulations, dividends paid to a
Non-U.S. Holder at an address within the United States may be subject to backup
withholding imposed at a rate of 31.0% if the Non-U.S. Holder fails to establish
that it is entitled to an exemption or to provide a correct taxpayer
identification number and certain other information to the Company or its paying
agent. Under the Final Regulations, a Non-U.S. Holder of Common Stock that fails
to certify its Non-U.S. Holder status in accordance with the requirements of the
Final Regulations may be subject to U.S. backup withholding at a rate of 31.0%
on payment of dividends.

Under current U.S. federal income tax law, information reporting and backup
withholding imposed at a rate of 31.0% will apply to the proceeds of a
disposition of Common Stock paid to or through a U.S. office of a broker unless
the disposing holder certifies as to its non-U.S. status or otherwise
establishes an exemption. Generally, U.S. information reporting and backup
withholding will not apply to a payment of disposition proceeds if the payment
is made outside the United States through a non-U.S. office of a non-U.S.
broker. However, U.S. information reporting requirements (but not backup
withholding) will apply to a payment of disposition proceeds outside the United
States if the payment is made through an office outside the United States of a
broker that is (i) a U.S. person, (ii) a foreign person which derives 50.0% or
more of its gross income for certain periods from the conduct of a trade or
business in the United States or (iii) a "controlled foreign corporation" for
U.S. federal income tax purposes, unless the broker maintains documentary
evidence that the holder is a Non-U.S. Holder and that certain conditions are
met, or that the holder otherwise is entitled to an exemption.

63
<PAGE>
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.

FEDERAL ESTATE TAX

An individual Non-U.S. Holder who is treated as the owner of, or has made
certain lifetime transfers of, an interest in the Common Stock at the time of
death will be required to include the value thereof in his gross estate for U.S.
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise. Such individual's estate may be subject to U.S. federal estate tax on
the property includable in the gross estate for U.S. federal estate tax
purposes. Estates of non-resident aliens are generally allowed a statutory
credit which has the effect of offsetting the U.S. federal estate tax imposed on
the first $60,000 of the taxable estate.

64
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering and the Affiliate Stock Purchase, the
Company will have approximately shares of Common Stock outstanding
( shares if the Underwriters' over-allotment option is exercised in full),
assuming the exercise of all options granted by the Company. Of those shares,
only the shares of Common Stock sold in the Offering and the Affiliate
Stock Purchase ( shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without registration under the
Securities Act and without restriction by persons other than "affiliates" of the
Company (as such term is defined in the rules and regulations under the
Securities Act). The shares of Common Stock held by BRS, the shares of
Common Stock held by the Farallon Entities, the shares of Common Stock held
by CMC and the shares of Common Stock held by certain members of management
or their permitted transferees or issuable upon exercise of outstanding options
will be "restricted" securities within the meaning of Rule 144 under the
Securities Act ("Rule 144") and may not be sold in the absence of registration
under the Securities Act unless an exemption from registration is available,
including exemptions contained in Rule 144. Subject to the limitations described
below, such restricted securities will become eligible for sale in the public
market in reliance on Rule 144, generally upon the expiration of the applicable
holder's two year holding periods.

In general, under Rule 144 as currently in effect, if two years have elapsed
since the later of the date of acquisition of restricted shares from the Company
or any "affiliate" (as defined below) of the Company, the acquiror or subsequent
holder (including an affiliate) is entitled to sell, within any three-month
period, that number of shares that does not exceed the greater of 1.0% of the
then outstanding shares of Common Stock or the average weekly trading volume of
the shares of Common Stock on all exchanges and/or reported through the
automated quotation system of a registered securities association during the
four calendar weeks preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission. Sales under Rule 144 are also subject to
certain restrictions relating to manner of sale, notice requirements and the
availability of current public information about the Company. If three years
have elapsed since the later of the date of acquisition of restricted shares
from the Company or from any affiliate of the Company, and the acquiror or
subsequent holder thereof is deemed not to have been an affiliate of the Company
at any dime during the 90 days preceding a sale, such person would be entitled
to sell such shares in the public market under Rule 144(k) without regard to the
volume limitations, manner of sale provisions, public information requirements
or notice requirements. As defined in Rule 144, an "affiliate" of an issuer is a
person that directly, or indirectly through the use of one or more
intermediaries, controls, or is controlled by, or is under common control with,
such issuer.

The Company has agreed not to register for sale, and the Company, BRS, the
Farallon Entities, CMC and the Management Investors, have agreed not to offer,
sell, contract to sell or otherwise dispose of, any Common Stock, or any
securities convertible into or exercisable or exchangeable for Common Stock for
a period of 180 days after the date of this Prospectus without the prior written
consent of BT Alex. Brown Incorporated on behalf of the Underwriters, except for
the shares of Common Stock offered in connection with the Offering.

Pursuant to Rule 144 and after giving effect to the agreements described in
the immediately preceding paragraph, the shares held by BRS and,
shares held by the Farallon Entities, will be eligible for sale in the
public market beginning on the later of 180 days after the date of this
Prospectus and two years after the acquisition of the shares from the Company,
subject to the volume limitations and other requirements under Rule 144
described above. The two-year holding period expires in . The
shares held by the Management Investors and their permitted transferees and,
subject to the stock option agreements (and related subscription agreements)
with certain of the Optionees, the shares issuable upon exercise of options
issued to those Optionees will be eligible for sale in the public market
beginning on the later of 180 days after the date of this prospectus and two
years after the acquisition of shares from the Company or any affiliate of the
Company, subject to the volume limitations and other requirements under Rule 144
described above. The two-year holding

65
<PAGE>
period expires no earlier than with respect to the shares held by the
Management Investors. As of May 31, 1998, no such options had been exercised.

Since the Recapitalization, there has been no public market for the Common
Stock. Trading of the Common Stock is expected to commence following the
commencement of the Offering. No prediction can be made as to the effect, if
any, that future sales of shares, or the availability of shares for future sale,
will have on the market price prevailing from time to time. However, sales by
BRS, the Farallon Entities, CMC, the Management Investors or the Optionees of
substantial amounts of Common Stock, or the perception that such sales could
occur, could adversely affect prevailing market prices of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.

REGISTRATION RIGHTS

BRS, the Farallon Entities and CMC have the right, under certain
circumstances and subject to certain conditions, to require the Company to
register under the Securities Act shares of Common Stock held by them. Under the
agreements providing for registration rights, the Company will pay all expenses
in connection with any registrations made at the request of BRS, the Farallon
Entities and CMC and the Company will pay all expenses in connection with any
registration by BRS, the Farallon Entities, CMC, certain members of management,
the Optionees and all other parties to the Registration Rights Agreement
incidental to a registration by the Company. BRS has informed the Company that
it has no present intention of exercising its registration rights and it has
agreed not to exercise such rights for a period of 180 days after the date of
this Prospectus. The exercise by BRS of its registration rights could adversely
affect the market price of the Common Stock and could impair the Company's
future ability to raise capital through an offering of its equity securities.

None of certain members of management has an independent right to have
shares of Common Stock registered under the Securities Act, although they have
the right to participate in sales, including through registered public
offerings, of shares of Common Stock by BRS, the Farallon Entities, CMC and the
Company.

66
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representatives, BT Alex. Brown
Incorporated and Bear, Stearns & Co. Inc. (the "Representatives"), have
severally agreed to purchase from the Company the following respective number of
shares of Common Stock:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- -------------------------------------------------------------------------------------------------- --------------
<S> <C>
BT Alex. Brown Incorporated.......................................................................
Bear, Stearns & Co. Inc...........................................................................
--------------

Total.............................................................................................
--------------
--------------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of Common Stock offered hereby if any of such shares
are purchased.

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain other dealers. After commencement of this
Offering, the offering price and other selling terms may be changed by the
Representatives.

The Company and the Selling Stockholder have granted the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus, to
purchase up to additional shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof that the number of shares of Common
Stock to be purchased by it in the above table bears to , and the
Company and the Selling Stockholder will be obligated, pursuant to the option to
sell such shares to the Underwriters. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the Common
Stock offered hereby. If purchased, the Underwriters will offer such additional
shares on the same terms as those on which the shares are being offered.

The Underwriting Agreement contains covenants of indemnity and contribution
between the Underwriters, the Company and the Selling Stockholder regarding
certain liabilities, including liabilities under the Securities Act.

To facilitate the Offering, the Underwriters may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Specifically, the Underwriters may over-allot shares of the Common Stock in
connection with this Offering, thereby creating a short position in the
Underwriters' syndicate account. Additionally, to cover such over-allotments or
to stabilize the market price of the Common Stock, the Underwriters may bid for,
and purchase, shares of the Common Stock in

67
<PAGE>
the open market. Any of these activities may maintain the market price of the
Common Stock at a level above that which might otherwise prevail in the open
market. The Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
Representatives, on behalf of the Underwriters, also may reclaim selling
concessions allowed to an Underwriter or dealer, if the syndicate repurchases
shares distributed by that Underwriter or dealer.

The Company and its officers, directors and present stockholders and
optionholders have agreed that they will not offer, sell, contract to sell, or
otherwise dispose of, directly or indirectly, any shares of Common Stock, or any
interests therein, or any securities convertible into, or exchangeable for,
shares of Common Stock, or rights to acquire the same, for a period of 180 days
from the date of this Prospectus without the prior written consent of BT Alex.
Brown Incorporated on behalf of the Underwriters, except pursuant to the
Underwriting Agreement. Such consent may be given without any public notice.

From time to time, BT Alex. Brown Incorporated has provided investment
banking services to the Company, including acting as one of the Initial
Purchasers in the Company's Note Offering in October 1997, for which it has
received customary underwriting fees. Furthermore, Bankers Trust & Company, an
affiliate of BT Alex. Brown Incorporated, is both lender and agent under the
Credit Facility and receives customary fees for such services.

Pursuant to the repayment of the Credit Facility, Bankers Trust Company will
receive an amount greater than 10.0% of the net proceeds of the Offering. See
"Use of Proceeds." Bankers Trust Company is an affiliate of BT Alex. Brown
Incorporated, which is a member of the National Association of Securities
Dealers, Inc. (the "NASD"). Accordingly, the underwriting arrangements for the
Offering will be made in compliance with Rule 2710 (c)(8) and Rule 2720 of the
Conduct Rules of the NASD, which provides that, among other things, when an NASD
member is to receive an amount greater than 10.0% of the net proceeds of an
offering, the initial public offering price can be no higher than that
recommended by a "qualified independent underwriter" meeting certain standards.
Bear, Stearns & Co. Inc. will serve in such role and will recommend a price in
compliance with the requirements of Rule 2720. In connection with the Offering,
Bear, Stearns & Co. Inc. in its role as a qualified independent underwriter, has
performed due diligence investigations and reviewed and participated in the
preparation of the Prospectus and the Registration Statement of which this
Prospectus forms a part.

Concurrently with the consummation of the Offering, the Purchasing
Affiliates will purchase directly from the Company, at a price per share equal
to the initial public offering price, less the underwriting discount and
commission, shares of Common Stock, for an aggregate purchase price of
$ pursuant to the Affiliate Stock Purchase. The Underwriters will not
participate in, or receive any discount or commission on, the sale of Common
Stock to Purchasing Affiliates in the Affiliate Stock Purchase.

The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.

PRICE OF THIS OFFERING

Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock will
be determined by negotiations between the Company and the Representatives. Among
the facts to be considered in such negotiations are prevailing market
conditions, the results of operations of the Company in recent periods, the
market capitalization

68
<PAGE>
and stages of development of other companies which the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant by the Company and the
Representatives.

LEGAL MATTERS

Certain legal matters with respect to the validity of the Common Stock being
offered hereby will be passed upon for the Company by Kirkland & Ellis (a
partnership which includes professional corporations), New York, New York.
Certain legal matters relating to the Offering will be passed upon for the
Underwriters by Cahill Gordon & Reindel (a partnership including a professional
corporation), New York, New York.

EXPERTS

The consolidated balance sheets of the Company as of May 31, 1997 and 1998
and the related 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, 1998, included in this prospectus, have
been included herein in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.

The combined balance sheets of Ultrafit, Inc. and Affiliates as of December
31, 1996 and 1997 and the related combined statements of income, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
1997, included in this prospectus, have been included herein in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.

The combined balance sheet of Lifestyle Fitness of Springfield, Inc. and
Affiliates as of December 31, 1997 and the related combined statements of
income, stockholders' deficit and cash flows for the year then ended, included
in this prospectus, have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
the firm as experts in accounting and auditing.

69
<PAGE>
ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which are omitted as permitted by
the rules and regulations of the Commission. For further information pertaining
to the Company and the Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, Senior Notes and schedules filed as a part thereof. Statements
contained in this Prospectus regarding the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information, as well as the Registration Statement and the
exhibits and schedules thereto, may be inspected, without charge, at the public
reference facility maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, DC 20549, and at the Commission's regional
offices located at Seven World Trade Center, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, DC 20549, at prescribed rates. Such materials can also be inspected
on the Commission's site on the Internet at http://www.sec.gov.

70
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

Report of independent accountants.......................................................................... F-2

Consolidated balance sheets at May 31, 1997 and 1998....................................................... F-3

Consolidated statements of operations for the years ended May 31, 1996, 1997 and 1998...................... F-4

Consolidated statements of stockholders' equity (deficit) for the years ended May 31, 1996, 1997 and
1998..................................................................................................... F-5

Consolidated statements of cash flows for the years ended May 31, 1996, 1997 and 1998...................... F-6

Notes to consolidated financial statements................................................................. F-7

ULTRAFIT, INC. AND AFFILIATES

Report of independent accountants.......................................................................... F-27

Combined balance sheets at December 31, 1996 and 1997, and unaudited as of March 31, 1998.................. F-28

Combined statements of income for the years ended December 31, 1996 and 1997, and unaudited for the three
months ended March 31, 1997 and 1998..................................................................... F-29

Combined statements of stockholders' equity for the years ended December 31, 1996 and 1997, and unaudited
for the three months ended March 31, 1998................................................................ F-30

Combined statements of cash flows for the years ended December 31, 1996 and 1997, and unaudited for the
three months ended March 31, 1997 and 1998............................................................... F-31

Notes to combined financial statements..................................................................... F-32

LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES

Report of independent accountants.......................................................................... F-38

Combined balance sheets as of December 31, 1997 and unaudited as of June 30, 1998.......................... F-39

Combined statements of income for the year ended December 31, 1997 and unaudited for the six months ended
June 30, 1997 and 1998................................................................................... F-40

Combined statements of stockholders' deficit for the year ended December 31, 1997 and unaudited for the six
months ended June 30, 1998............................................................................... F-41

Combined statements of cash flows for the year ended December 31, 1997 and unaudited for the six months
ended June 30, 1997 and 1998............................................................................. F-42

Notes to combined financial statements..................................................................... F-43
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

New York, New York
July 9, 1998, except for the last
paragraph of
Note 6 and Note 17, as to which the
date is August 6, 1998

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

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of TOWN
SPORTS INTERNATIONAL, INC. and SUBSIDIARIES (the "Company") as of May 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended May 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

As discussed in Note 2(m) to the consolidated financial statements, the
Company changed its method of accounting for organizational costs effective June
1, 1997.

PRICEWATERHOUSECOOPERS LLP

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

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)
MAY 31, 1997 AND 1998

<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.............................................................. $ 2,468 $ 22,997
Accounts receivable.................................................................... 312 420
Inventory.............................................................................. 327 673
Prepaid expenses and other current assets.............................................. 493 677
Prepaid corporate income taxes......................................................... 202
--------- -----------
Total current assets................................................................. 3,802 24,767
Fixed assets, net........................................................................ 34,214 54,518
Intangible assets, net................................................................... 4,425 19,923
Deferred tax asset....................................................................... 5,972 7,159
Deferred membership costs................................................................ 3,530 4,933
Other assets............................................................................. 980 677
--------- -----------
Total assets......................................................................... $ 52,923 $ 111,977
--------- -----------
--------- -----------

LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Current portion of long-term debt and capital lease obligations........................ $ 1,924 $ 2,036
Accounts payable....................................................................... 1,802 2,451
Accrued expenses....................................................................... 4,017 7,869
Corporate income taxes payable......................................................... 122
Deferred revenue....................................................................... 4,599 6,391
--------- -----------
Total current liabilities............................................................ 12,342 18,869
Long-term debt and capital lease obligations............................................. 39,147 86,253
Deferred lease liabilities............................................................... 6,625 9,298
Deferred revenue......................................................................... 1,036 1,890
Other liabilities........................................................................ 724 774
--------- -----------
Total liabilities.................................................................... 59,874 117,084
--------- -----------
Commitments and contingencies (Notes 6, 7, 8, and 13)
Stockholders' deficit :
Series A preferred stock, $1.00 par value; at liquidation value; authorized 200,000
shares; issued and outstanding 152,455 shares at May 31, 1997 and 153,637 shares at
May 31, 1998......................................................................... 16,250 18,736
Series B preferred stock, $1.00 par value; at liquidation value; authorized 200,000
shares; issued and outstanding 3,857 shares at May 31, 1997 and 1998................. 144 164
Class A voting common stock, $.001 par value; authorized 1,150,000 shares; issued and
outstanding 1,010,000 shares at May 31, 1997 and 1,015,714 shares at May 31, 1998.... 1 1
Paid-in capital.......................................................................... 3,994
Unearned compensation.................................................................... (2,546)
Accumulated deficit...................................................................... (23,346) (25,456)
--------- -----------
Total stockholders' deficit.......................................................... (6,951) (5,107)
--------- -----------
Total liabilities and stockholders' deficit.......................................... $ 52,923 $ 111,977
--------- -----------
--------- -----------
</TABLE>

See notes to consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED MAY 31, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Club operations................................................................... $ 40,796 $ 54,164 $ 79,719
Management fees and other......................................................... 2,959 2,403 2,631
--------- --------- ---------
43,755 56,567 82,350
--------- --------- ---------
Operating expenses:
Payroll and related............................................................... 18,626 23,321 33,309
Club operating.................................................................... 14,542 18,044 25,858
General and administrative........................................................ 3,562 3,774 5,825
Depreciation and amortization..................................................... 2,929 4,219 7,736
Compensation expense in connection with stock options............................. 1,967 5,933 1,442
--------- --------- ---------
41,626 55,291 74,170
--------- --------- ---------
Operating income.............................................................. 2,129 1,276 8,180
Interest expense, net of interest income of $60, $115 and and $1,228,
respectively...................................................................... 952 2,455 5,902
--------- --------- ---------
Income (loss) before provision (benefit) for corporate income taxes........... 1,177 (1,179) 2,278
Provision (benefit) for corporate income taxes...................................... 628 (243) 1,131
--------- --------- ---------
Income (loss) before extraordinary item and cumulative effect of change in
accounting policy............................................................ 549 (936) 1,147
Extraordinary loss from early extinguishment of debt, net of income tax benefit of
$624.............................................................................. (782)
--------- --------- ---------
Income (loss) before cumulative effect of change in accounting policy......... 549 (936) 365
Cumulative effect on prior years of a change in accounting for club organizational
costs, net of income tax benefit of $70........................................... (88)
--------- --------- ---------
Net income (loss)............................................................. 549 (936) 277
Accreted dividends on preferred stock............................................... (400) (1,286) (2,387)
--------- --------- ---------
Net income (loss) attributable to common stockholders......................... $ 149 $ (2,222) $ (2,110)
--------- --------- ---------
--------- --------- ---------
Per common share data:
Basic:
Income (loss) before extraordinary item and change in accounting policy and
after deduction of preferred stock dividends................................... $ 0.18 $ (2.21) $ (1.22)
Extraordinary item.............................................................. (0.77)
Cumulative effect of change in accounting policy................................ (0.09)
--------- --------- ---------
Net income (loss) per common share............................................ $ 0.18 $ (2.21) $ (2.08)
--------- --------- ---------
--------- --------- ---------
Diluted:
Income (loss) before extraordinary item and change in accounting policy and
after deduction of preferred stock dividends................................... $ 0.16 $ (2.21) $ (1.22)
Extraordinary item.............................................................. (0.77)
Cumulative effect of change in accounting policy................................ (0.09)
--------- --------- ---------
Net income (loss) per common share............................................ $ 0.16 $ (2.21) $ (2.08)
--------- --------- ---------
--------- --------- ---------
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE>
TOWN SPORTS INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED MAY 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------------------------------------------------
SERIES A ($1.00 PAR) SERIES A ($.10 PAR) SERIES B ($1.00 PAR)
-------------------- ---------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 in connection with stock
options.............................................
Net Income............................................
----- ---------
Balance at May 31, 1996........................... 496
Liquidation of Series A Preferred Stock, for $1,000
per share, redemption Class A and B Common Stock for
a cash price of $35 per share and change in equity
related to exercise of stock options................ (496)
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 $ 135
Warrant exercise at $.01 per share....................
Original issue discount in connection with the
issuance of warrants and subordinated debt..........
Compensation expense in connection with common stock
options.............................................
Compensation expense in connection with Series B
Preferred Stock options.............................
Accretion of Series A and Series B preferred stock
dividend ($6.59 and $2.32 per share,
respectively.)...................................... 1,005 9
Net loss..............................................
--------- --------- ----- --------- ----- -----
Balance at May 31, 1997........................... 152,455 16,250 -- -- 3,857 144
----- ---------
----- ---------
Issuance of Series A Preferred Stock and Class A
Common Stock........................................ 1,182 119
Unearned Compensation in connection with common stock
options.............................................
Amortization of unearned compensation.................
Compensation expense in connection with Series B
Preferred stock options.............................
Accretion of Series A and Series B preferred stock
dividend ($15.14 and $5.44 per share,
respectively)....................................... 2,367 20
Net income............................................
--------- --------- ----- -----
Balance at May 31, 1998........................... 153,637 $ 18,736 3,857 $ 164
--------- --------- ----- -----
--------- --------- ----- -----

<CAPTION>
COMMON STOCK
---------------------------------------------------------------------------

CLASS A ($.001 PAR) CLASS A ($.01 PAR) CLASS B CONVERTIBLE
-------------------------- ------------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- ------------- --------- ---------
<S> <C> <C> <C> <C>
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 2,351
Accretion of Series B redeemable convertible preferred
stock dividends ($1.22 per share)...................
Compensation expense in connection with stock
options.............................................
Net Income............................................
--
---------- --------- ---------
Balance at May 31, 1996........................... 576,306 6 2,351
Liquidation of Series A Preferred Stock, for $1,000
per share, redemption Class A and B Common Stock for
a cash price of $35 per share and change in equity
related to exercise of stock options................ (576,306) (6) (2,351)
Issuance of Series A and B Preferred and Common Stock
at cash price of $100, $35 and $1, respectively..... 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..........
Compensation expense in connection with common stock
options.............................................
Compensation expense in connection with Series B
Preferred Stock options.............................
Accretion of Series A and Series B preferred stock
dividend ($6.59 and $2.32 per share,
respectively.)......................................
Net loss..............................................
-- --
----------- ---------- --------- ---------
Balance at May 31, 1997........................... 1,010,000 1 -- -- -- --
--
--
---------- --------- ---------
---------- --------- ---------
Issuance of Series A Preferred Stock and Class A
Common Stock........................................ 5,714 0
Unearned Compensation in connection with common stock
options.............................................
Amortization of unearned compensation.................
Compensation expense in connection with Series B
Preferred stock options.............................
Accretion of Series A and Series B preferred stock
dividend ($15.14 and $5.44 per share,
respectively).......................................
Net income............................................
--
-----------
Balance at May 31, 1998........................... 1,015,714 $ 1
--
--
-----------
-----------

(ACCUMULATED TOTAL
DEFICIT) STOCKHOLDERS'
PAID-IN UNEARNED RETAINED EQUITY
CAPITAL COMPENSATION EARNINGS (DEFICIT)
---------- -------------- -------------- ---------------
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................ 144 144
Accretion of Series B redeemable convertible preferred
stock dividends ($1.22 per share)................... (400) (400)
Compensation expense in connection with stock
options............................................. 1,823 1,823
Net Income............................................ 549 549

---------- -------------- -------
Balance at May 31, 1996........................... 5,126 342 5,474
Liquidation of Series A Preferred Stock, for $1,000
per share, redemption Class A and B Common Stock for
a cash price of $35 per share and change in equity
related to exercise of stock options................ (11,228) (21,466) (32,700)
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
Compensation expense in connection with common stock
options............................................. 5,660 5,660
Compensation expense in connection with Series B
Preferred Stock options............................. 273 273
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)

Issuance of Series A Preferred Stock and Class A
Common Stock........................................ 6 125
Unearned Compensation in connection with common stock
options............................................. 3,352 (3,352)
Amortization of unearned compensation................. 806 806
Compensation expense in connection with Series B
Preferred stock options............................. 636 636
Accretion of Series A and Series B preferred stock
dividend ($15.14 and $5.44 per share,
respectively)....................................... (2,387)
Net income............................................ 277 277

---------- ------- -------------- -------
Balance at May 31, 1998........................... $ 3,994 $ (2,546) $ (25,456) $ (5,107)

---------- ------- -------------- -------
---------- ------- -------------- -------
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED MAY 31, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.......................................................... $ 549 $ (936) $ 277
--------- ---------- ----------
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Compensation expense in connection with stock options.................... 1,967 5,933 1,442
Depreciation and amortization............................................ 2,929 4,219 7,736
Amortization of debt issuance costs...................................... -- 156 412
Loss from early extinguishment of debt................................... -- -- 1,406
Write-off of organization costs.......................................... -- -- 158
Noncash rental expense, net of noncash rental income..................... 1,277 1,620 2,670
Change in certain working capital components............................. 1,216 4,389 4,316
Increase in deferred tax asset........................................... (1,539) (2,058) (1,187)
Increase in deferred membership costs.................................... (926) (847) (1,403)
Other.................................................................... 222 (174) (94)
--------- ---------- ----------
Total adjustments...................................................... 5,146 13,238 15,456
--------- ---------- ----------
Net cash provided by operating activities.............................. 5,695 12,302 15,733
--------- ---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of effect of acquired businesses................. (5,380) (11,403) (16,170)
Acquisition of businesses.................................................. (35) (1,888) (19,733)
Intangible and other assets................................................ (72) (280) (137)
--------- ---------- ----------
Net cash used in investing activities.................................. (5,487) (13,571) (36,040)
--------- ---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock, net of expenses......................................... 2,000 15,155 125
Redemption and liquidation of stock, including expenses.................... -- (38,820) --
Proceeds from borrowings................................................... 5,365 42,092 89,372
Repayments of borrowings................................................... (7,221) (13,607) (45,130)
Debt issuance costs........................................................ -- (2,011) (3,531)
--------- ---------- ----------
Net cash provided by financing activities.............................. 144 2,809 40,836
--------- ---------- ----------
Net increase in cash and cash equivalents.............................. 352 1,540 20,529
Cash and cash equivalents at beginning of period............................. 576 928 2,468
--------- ---------- ----------
Cash and cash equivalents at end of period............................. $ 928 $ 2,468 $ 22,997
--------- ---------- ----------
--------- ---------- ----------
Summary of the change in certain working capital components, net of effects
of acquired businesses:
(Increase) decrease in accounts receivable................................. $ (19) $ 469 (108)
Increase in inventory...................................................... (135) (39) (343)
(Increase) decrease in prepaid expenses and other current assets........... (38) 631 30
Increase in accounts payable and accrued expenses.......................... 805 2,055 1,895
(Decrease) increase in prepaid corporate income taxes...................... (913) 156 324
Increase in deferred revenue............................................... 1,516 1,117 2,518
--------- ---------- ----------
Net change in certain working capital components....................... $ 1,216 $ 4,389 $ 4,316
--------- ---------- ----------
--------- ---------- ----------
</TABLE>

See notes to consolidated financial statements.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

1. NATURE OF BUSINESS:

Town Sports International, Inc. and Subsidiaries (the "Company") owns,
operates or manages thirty-nine fitness clubs ("clubs") and a physical therapy
facility in the New York metropolitan market, six clubs in Washington, D.C., two
clubs 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, real estate
costs and economic down turns.

On December 10, 1996, the Company completed a restructuring of its ownership
and debt capitalization. The restructuring was undertaken to increase
stockholder value by providing access to growth capital and financial advisory
skills thereby enabling the Company to optimize its competitive advantage in the
market place, and to present certain existing equity holders the opportunity to
diversify their respective equity interests in the Company. The restructuring
was accounted for as a leveraged recapitalization whereby new investors, on a
fully-diluted basis, effectively acquired 73% of the Company resulting in a
reduction of equity of $32,700. The reduction in equity included the liquidation
of Series A Preferred Stock of $496, and the redemption of stock and stock
options outstanding immediately prior to the recapitalization of $28,025 and
$4,179, respectively. In addition, 368,333 shares of Series B Redeemable
Preferred Stock, which had been accounted for as mezzanine financing, 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 repayment of existing bank facilities and to
provide growth capital.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

A. PRINCIPLES OF CONSOLIDATION:

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

B. REVENUE RECOGNITION:

The Company receives a one-time non-refundable initiation fee and monthly
dues from its members. Substantially all of the Company's members join on a
month-to-month basis and can therefore cancel their membership at any time with
30 days notice.

Initiation fees and related direct expenses, primarily sales commissions
payable to membership consultants, are deferred and recognized, on a
straight-line basis, in operations over an estimated membership period of twenty
four (24) months. Dues that are received in advance are recognized on a pro-rata
basis over the periods in which services are to be provided.

In connection with advance receipts of fees or dues, the Company is required
to maintain surety bonds totaling $1,035, pursuant to various state consumer
protection laws.

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 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 years ended May 31, 1996, 1997 and 1998 totaled $1,291,
$1,627 and $2,147, 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 and
recoverability of fixed and intangible assets, deferred income tax valuation and
expense in connection with stock options and warrants.

G. CORPORATE INCOME TAXES:

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

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

Supplemental disclosure of cash flow information:

<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash paid during the year for:
Interest (net of amounts capitalized)........................ $ 1,118 $ 1,603 $ 6,798
Taxes........................................................ 3,080 1,655 1,300
Noncash investing and financing activities:
Acquisition of fixed assets included in accounts payable..... 293 850 2,496
Acquisition of equipment financed by suppliers or lessors.... 1,475 1,411 562
</TABLE>

See Notes 9 and 10 for additional noncash investing and financing
activities.

I. CASH AND CASH EQUIVALENTS:

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

J. DEFERRED LEASE LIABILITIES AND NONCASH RENTAL EXPENSE:

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

K. FOREIGN CURRENCY:

Transactions denominated in a foreign currency have been translated into
U.S. dollars at the rates of exchange at the transaction dates. Assets and
liabilities have been translated at the respective year-end exchange rates. For
the years ended May 31, 1996, 1997 and 1998, the Company recognized foreign
exchange gains (losses) of approximately $20, ($65) and ($3), respectively.
These gains (losses) relate to certain management fees earned in Switzerland.

L. INVESTMENTS IN AFFILIATED COMPANIES:

The Company has investments in Capitol Hill Squash Club Associates and
Kalorama Sports Management Associates (collectively referred to as the
"Affiliates"). The Affiliates have operations, which are similar, or related to,
those of the Company. The Company accounts for these Affiliates in accordance
with the equity method. The assets, liabilities, equity and operating results of
the Affiliates and the Company's pro rata share of the Affiliates' net assets
and operating results were not material for all periods presented.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
M. INTANGIBLE ASSETS:

Intangible assets consist of acquired leasehold rights, membership lists,
debt issuance costs, goodwill and covenant-not-to compete. 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
amortized as additional interest expense over life of the underlying debt using
the interest method. Effective June 1, 1997, the Company changed the estimated
useful lives of membership lists from three to two years. The effect on
operating results for the year ended May 31, 1998 of decreasing the useful life
was to increase amortization expense by $234, $117 net of taxes. 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, five to seven years.

Prior to the year ended May 31, 1998, the Company capitalized direct costs
(legal fees and real-estate commissions) incurred to obtain leases for new clubs
to be constructed by the Company ("Organizational Costs"). Such amounts were
amortized over a five year period using the straight-line method. During the
quarter ended May 31, 1998, the Company adopted the provisions of Statement of
Position 98-5 REPORTING ON THE COSTS OF START-UP ACTIVITIES ("SOP 98-5") which
requires that Organizational Costs be expensed as incurred. In connection with
the adoption of SOP 98-5, the Company restated its first-quarter operating
results as if adoption had occurred on June 1, 1997 and recorded a pre-tax
charge of $158, $88 net of taxes, as the cumulative effect of this accounting
change.

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

Long-lived assets, such as fixed assets and intangible assets, including
goodwill, are reviewed when events or circumstances indicate that their carrying
value may not be recoverable. Estimated undiscounted expected future cash flows
are used to determine if an asset is impaired in which case the asset's carrying
value would be reduced to fair value. For all periods presented, no impairment
losses were recorded.

O. CONCENTRATIONS OF CREDIT RISK:

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

P. STOCK-BASED EMPLOYEE COMPENSATION:

For financial reporting purposes, the Company accounts for stock-based
compensation in accordance with the intrinsic value method ("APB No. 25"). In
accordance with this method, no compensation expense is recognized in the
accompanying financial statements in connection with the awarding of stock
option grants to employees provided that, as of the grant date, all terms
associated with the award are fixed and the fair value of the Company's stock,
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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
compensation expense. However, the fair value of options or warrants granted to
nonemployees for financing, goods or services are included in operating results
as an expense.

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

Q. OTHER RECENT ACCOUNTING PRONOUNCEMENTS:

In June 1997, the Financial Accounting Standards Board issued Statement No.
130 ("SFAS No. 130"), REPORTING COMPREHENSIVE INCOME. This statement, which is
effective for fiscal years beginning after December 15, 1997, establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. Based on current estimates, management does not believe
that the future adoption of SFAS No. 130 will have a material effect on the
Company's financial statements.

In June 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS No. 131"), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. SFAS No. 131 establishes standards for the way in which public
companies report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes the standards for related disclosure about products and services,
geographic areas and major customers. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. Based on current
estimates, management does not believe that the future adoption of SFAS No. 131
will have a material effect on the Company's financial statements.

In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS No. 133"), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. SFAS No. 133 standardizes the accounting for derivative instruments
by requiring that all derivatives be recognized as assets and liabilities and
measured at fair value. This statement is effective for fiscal years beginning
after June 15, 1999. Based on current estimates, management does not believe
that the future adoption of SFAS No. 133 will have an effect on the Company's
financial statements.

R. PER COMMON SHARE DATA:

The per common share data appearing herein has been prepared assuming the
capital structure adopted at the time of the leveraged recapitalization, as
discussed in Note 1 to the financial statements, was in place for all periods
presented. Accordingly, basic per common share amounts were computed by dividing
the respective income (loss) amounts, after deduction of the preferred stock
dividend where required, by the issued and outstanding shares of Class A Voting
Common Stock. As noted, for periods prior to the leveraged recapitalization, the
weighted average outstanding shares, including stock options, have been adjusted
to the equivalent number of shares/options outstanding upon the consummation of

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
the leveraged recapitalization. Diluted per common share amounts include, where
dilutive, the weighted average number of shares issuable upon the exercise of
outstanding options and warrants using the treasury stock method.

S. RECLASSIFICATIONS:

Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform with the 1998 presentation.

3. FIXED ASSETS:

Fixed assets as of May 31, 1997 and 1998 are shown at cost, less accumulated
depreciation and amortization, and are summarized below:

<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Leasehold improvements................................................. $ 26,309 $ 39,029
Club equipment......................................................... 8,581 13,394
Furniture, fixtures and computer equipment............................. 5,171 6,841
Building and improvements.............................................. 4,995 4,995
Land................................................................... 986 986
Construction in progress............................................... 1,284 6,937
--------- ---------
47,326 72,182
Less, Accumulated depreciation and amortization........................ 13,112 17,664
--------- ---------
$ 34,214 $ 54,518
--------- ---------
--------- ---------
</TABLE>

Depreciation and leasehold amortization expense for the years ended May 31,
1996, 1997 and 1998 was approximately $2,813, $3,843 and $6,130, respectively.

4. INTANGIBLE ASSETS:

Intangible assets as of May 31, 1997 and 1998 are shown at cost, less
accumulated amortization, and are summarized below:

<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Goodwill arising on acquisition of businesses........................... $ 2,798 $ 14,755
Deferred financing costs................................................ 2,150 4,103
Membership lists........................................................ 176 3,154
Organizational expenses................................................. 158 --
Covenant-not-to compete................................................. -- 400
--------- ---------
5,282 22,412
Less, Accumulated amortization.......................................... 857 2,489
--------- ---------
$ 4,425 $ 19,923
--------- ---------
--------- ---------
</TABLE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

4. INTANGIBLE ASSETS: (CONTINUED)
Amortization expense of intangible assets for the years ended May 31, 1996,
1997 and 1998 was approximately $116, $532 and $2,018, respectively. Such amount
includes amortization expense of deferred financing costs of $0, $156, and $412,
respectively, which has been classified as interest expense for financial
reporting purposes.

5. ACCRUED EXPENSES:

<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Accrued payroll......................................................... $ 1,882 $ 3,359
Accrued interest........................................................ 839 1,171
Accrued other........................................................... 1,296 2,089
Amounts payable under agreement to purchase a club...................... -- 1,250
--------- ---------
$ 4,017 $ 7,869
--------- ---------
--------- ---------
</TABLE>

6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:

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

<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Series B 9 3/4% Senior Notes, due 2004................................. $ 85,000
Term Loan.............................................................. $ 30,000
Subordinated note payable--face value of $7,500. Note shown net of
original issue discount arising out of issuance of warrants to buy
common stock......................................................... 7,384
Capital lease obligations.............................................. 2,317 1,463
Notes payable for acquired business.................................... 1,370 1,826
--------- ---------
41,071 88,289
Less, Current portion due within one year........................ 1,924 2,036
--------- ---------
Long-term portion................................................ $ 39,147 $ 86,253
--------- ---------
--------- ---------
</TABLE>

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>
1999........................................................................... $ 2,036
2000........................................................................... 568
2001........................................................................... 349
2002........................................................................... 291
2003........................................................................... 45
Thereafter..................................................................... 85,000
-------------
$ 88,289
-------------
-------------
</TABLE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (CONTINUED)
On October 16, 1997, the Company issued $85,000 of Series B 9 3/4% Senior
Notes ("Senior Notes"), due October 2004. The net proceeds from the Senior Notes
totaled approximately $81,700 of which $41,500 was used to repay the term loan,
the line of credit and the subordinated note payable. The transaction fees of
approximately $3,300, were accounted for as deferred financing costs. The Senior
Notes bear interest at an annual rate of 9 3/4%, payable semi-annually. The
notes are redeemable at the option of the Company on or after October 15, 2001.
The Senior Notes are non-collateralized and rank "PARI PASSU" with all
unsubordinated debt and senior in right of payment with all subordinated
indebtedness of the Company. The note indenture under which the Senior Notes
were issued contains certain covenants that, among other things, limit the
Company's ability to incur additional indebtedness, pay dividends or make
certain other restricted payments, engage in transactions with affiliates, incur
liens and engage in asset sales.

As of May 31, 1998, 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 2.50% or the bank's prime rate plus 1.50%, as defined and the Company
is required to pay a commitment commission of 0.38% per annum based upon the
daily unutilized amount. There were no outstanding borrowings against this line
of credit as of May 31, 1998; however the amount available for borrowing has
been reduced by outstanding letters of credit totaling $1,993 (see Note 8). This
line of credit expires on October 15, 2002. The line of credit contains various
covenants including interest coverage and a leverage ratio as well as
restrictions on the payment of dividends. The line of credit is collateralized
by a mortgage on land, building and equipment, which, as of May 31, 1998, had an
aggregate book value of approximately $3,585, and by all other assets of the
Company.

The Term Loan, prior to repayment, carried interest based upon Eurodollar
borrowing rate plus 3.25%, or the base prime rate plus 2.00% as determined by
the Company.

The Subordinated note, prior to repayment, carried interest of 11.5%.

Notes payable were incurred upon the acquisition of various fitness clubs
and are subject to the Company's right of offset for possible post acquisition
adjustments arising out of operations of the acquired clubs. These notes are
stated at a discount from face value at rates of between 6% and 7%, and are
non-collateralized.

The carrying value of long-term debt, other than the Senior Notes,
approximates fair market value as of May 31, 1997 and 1998 as the interest rate
charged on the debt is variable or are generally short term. The Senior Notes
have a fair value which approximates carrying value as of May 31, 1998, based on
the quoted market price.

The Company's interest expense and capitalized interest related to club
facilities under construction for the years ended May 31, 1996, 1997 and 1998
are as follows:

<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Interest costs expensed........................................ $ 1,012 $ 2,570 $ 7,130
Interest costs capitalized..................................... 46 28 526
--------- --------- ---------
$ 1,058 $ 2,598 $ 7,656
--------- --------- ---------
--------- --------- ---------
</TABLE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (CONTINUED)

The Company leases equipment under noncancelable capital leases. The initial
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, 1998, 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>
1999.......................................................................... $ 1,124
2000.......................................................................... 358
2001.......................................................................... 98
2002.......................................................................... 15
-------
1,595
Less, Amounts representing interest........................................... 132
-------
Present value of minimum capital lease payments............................... $ 1,463
-------
-------
</TABLE>

The cost of leased equipment included in club equipment was approximately
$4,190 and $5,033 at May 31, 1997 and 1998, respectively; related accumulated
depreciation was $1,283 and $2,234, respectively.

On August 6, 1998, the Company amended its line of credit with its principal
bank whereby the credit limit was increased to $25,000.

7. RELATED PARTY TRANSACTIONS:

a. The Company entered into a management agreement with Town Squash AG
("TSAG"). The Company, together with the shareholders of TSAG, is contingently
liable to fund shortfalls in operating cash flow of TSAG, as defined. The terms
of the agreement provide for the Company to fund a maximum amount of operating
cash flow of approximately $135 ("Advances"). As of May 31, 1997 and 1998, the
Company had no outstanding Advances to TSAG. Amounts due the Company at May 31,
1997 and 1998 of $84 and $36, respectively, represented earned management fees
payable after year-end. Such amounts have been included in accounts receivable.

Management fees earned during the years ended May 31, 1996, 1997 and 1998
amounted to approximately $695, $223 and $239, respectively.

b. The Company entered into a professional service agreement with Bruckmann,
Rosser, Sherrill & Co., Inc. ("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. Amounts due BRS on May 31, 1997 and 1998, which are included in
accounts payable, were $104.

c. Prior to May 1998, the Company was obligated by the terms of a management
agreement with Great Neck Fitness Club Ltd. ("GNFC") to fund defined shortfalls
in operating cash flows of GNFC. On April 1, 1998 the Company acquired the
assets of GNFC and the management agreement was cancelled.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

7. RELATED PARTY TRANSACTIONS: (CONTINUED)
No management fees were recognized as income during the year ended May 31, 1997
and $75 and $130 was recognized in the year ended May 31, 1996 and 1998,
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 give the Company
the right to acquire the leased facility at defined prices based on fair value
and provide for additional rent based upon defined formulas of revenue, cash
flow or operating results of the respective facilities. Under the provisions of
certain of these leases, the Company is required to maintain irrevocable letters
of credit, which total $1,993.

The leases expire at various times through May 31, 2019, and certain leases
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>
1999................................................................ $ 14,542
2000................................................................ 15,145
2001................................................................ 15,253
2002................................................................ 15,298
2003................................................................ 14,737
Aggregate thereafter................................................ 119,053
----------
$ 194,028
----------
----------
</TABLE>

Rent expense, including deferred lease liabilities, for the years ended May
31, 1996, 1997 and 1998 was approximately $8,653, $10,169 and $15,493,
respectively. Such amounts include additional rent of $1,863, $2,146 and $2,590,
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 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>
1999................................................................ $ 440
2000................................................................ 409
2001................................................................ 409
2002................................................................ 372
2003................................................................ 313
Aggregate thereafter................................................ 350
-------
$ 2,293
-------
-------
</TABLE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

8. LEASES: (CONTINUED)
Rental income, including noncash rental income, for the years ended May 31,
1996, 1997, and 1998, was approximately $882, $936 and $963, respectively. Such
amounts included additional rental charges above the base rent of $570, $620 and
$651, respectively.

9. STOCKHOLDERS' EQUITY:

A. CAPITALIZATION:

The Company's certificate of incorporation, as amended, 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
$0.001 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 (collectively "Preferred Stock").

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 $3,372 as of May 31, 1998. 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 $29 as of May 31, 1998. Series B stockholders are entitled
to a cumulative 14% annual dividend based upon the per share price of $35.

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

COMMON STOCK

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

9. STOCKHOLDERS' EQUITY: (CONTINUED)
B. STOCK OPTIONS AND WARRANTS:

The following table summarizes the stock option activity for the years ended
May 31, 1996, 1997 and 1998:

<TABLE>
<CAPTION>
CLASS A CLASS A
COMMON COMMON SERIES B
($0.01 PAR ($.001 PAR CLASS B REDEEMABLE SERIES B
STOCK OPTIONS VALUE) VALUE) COMMON PREFERRED PREFERRED
- ------------------------------------------ ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Number of shares under option:
Outstanding at June 1, 1995............. 150,000 121,000 21,251
Options exercised....................... (13,358) (2,351)
Options cancelled....................... (6,642) (349)
----------- ----------- -------------
Outstanding at May 31, 1996......... 130,000 118,300 21,251
Options granted......................... -- 57,142 20,000 -- 164,783
Options exercised....................... (130,000) -- (138,300) (21,251) --
----------- ----------- ----------- ------------- -----------
Outstanding at May 31, 1997......... -- 57,142 -- -- 164,783
----------- ----------- -------------
----------- ----------- -------------
Options granted......................... -- 14,700 --
----------- -----------
Outstanding at May 31, 1998......... 71,842 164,783
----------- -----------
----------- -----------
Exercise price:
Outstanding at June 1, 1995............. $ 3.40 $ 10.00 $ 3.00
Options exercised....................... 2.40 9.89 --
Options cancelled....................... 2.40 9.89
----------- ----------- -------------
Weighted average price of outstanding
options at May 31, 1996................. 3.55 10.06 3.00
Options granted......................... -- $ 1.00(i) 6.00(ii) -- $ 10.00(ii)
Options exercised....................... 3.55 -- 9.47 3.00 --
----------- ----------- ----------- ------------- -----------
Weighted average price of outstanding
options at May 31, 1997................. -- 1.00 -- -- 10.00
----------- ----------- -------------
----------- ----------- -------------
Options granted......................... 17.50(ii) --
----------- -----------
Weighted average price of outstanding
options at May 31, 1998................. $ 4.38 $ 10.00
----------- -----------
----------- -----------
</TABLE>

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

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

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

As of May 31, 1996, all outstanding options were exercisable. As of May 31,
1997, all outstanding options for Series B Redeemable Preferred Stock were
exercisable and 11,428 options of Class A stock were exercisable.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

9. STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes stock option information as of May 31, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------ -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Class A Common:
1997 Grants................................ 57,142 106 months $ 1.00 22,857 $ 1.00
1998 Grants................................ 14,700 106 months $ 17.50 2,940 $ 17.50
Series B Preferred:
Exercise price $10.00...................... 164,783 282 months $ 10.00 164,783 $ 10.00
</TABLE>

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

During the year ended May 31, 1997 the Company adopted the Town Sports
International Inc. 1997 Common Stock Option Plan (the "1997 Plan"). The
provisions of the 1997 Plan, as amended and restated, provide for the Company's
Board of Directors to grant to executives and key employees options to acquire
80,876 share of Class A stock.

The Company granted 57,142 options ("1997 Grants") with an exercise price of
$1.00 on December 10, 1996. The 1997 Grants have a term of 10 years and
originally vested based on the achievement of annual equity values as defined.
During the year ended May 31, 1998, the 1997 Grants were amended. The amendment
impacted 45,714 options, which had not previously vested (the "Amended Grants")
by adding a provision whereby unvested outstanding options would automatically
vest on December 10, 2005. Vesting will be accelerated in the event that certain
defined events occur including the achievement of certain equity values, the
sale of the Company, or an initial public offering of equity securities as
defined.

During the year ended May 31, 1998, the Company granted 14,700 options
("1998 Grants") with an exercise price of $17.50 and a term of 10 years. This
exercise price was below the estimated fair value of the Class A stock of $60.50
on the date of grant. The 1998 Grants vest in full on December 10, 2005;
however, vesting will be accelerated in the event that certain defined events
occur including the achievement of annual equity values or the sale of the
Company.

In accordance with APB No. 25, the Company recorded unearned compensation in
connection with the Amended Grants and the 1998 Grants. Such amount is included
within stockholders' deficit and represented the difference between the
estimated fair value of the Class A stock on the date of amendment or grant,
respectively, and the exercise price. Unearned compensation will be amortized as
compensation expense over the vesting period. During the year ended May 31,
1998, amortization of unearned compensation totaled $806.

As of May 31, 1998, shares reserved for future option awards totaled 9,034.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

9. STOCKHOLDERS' EQUITY: (CONTINUED)
SERIES B PREFERRED STOCK OPTIONS:

During the year ended May 31, 1997, the Company granted 164,783 options
("Series B Options") to certain employees which entitle the holders to purchase
an equal number of shares of Series B stock at an exercise price of $10.00 per
share. The estimated fair value of the Series B Preferred Stock on the date of
grant was $35.00. Accordingly, the Company recognized an aggregate charge for
the difference between the Series B Options' exercise price and the estimated
fair value of the Series B Preferred Stock, which totaled $4,120. Series B
Options were fully vested on the date of grant and expire on December 31, 2021.
The terms of the Series B Options also contain provisions whereby the exercise
price will be reduced or in certain cases, the option holder will receive cash
in accordance with a formula as defined. The aggregate value of either a
reduction in exercise price or the distribution of cash will be deemed
compensatory and accordingly the Company will record compensation expense. For
the years ended May 31, 1997 and 1998, compensation expense recognized in
connection with Series B Options totaled $273 and $636 respectively. There are
no shares of Series B Preferred Stock reserved for future option grants.

CLASS A ($0.01 PAR VALUE) AND CLASS B CONVERTIBLE OPTIONS:

During the years ended May 31, 1996 and 1997, in connection with the
granting of Class A Common Stock ($0.01 par value) and Class B Convertible
Common Stock Options, the Company recognized a compensation charge of
approximately $1,967 and $5,933, respectively. Such charges represented the
difference between the exercise price of the respective options and the fair
market value of the underlying stock as determined by the Board of Directors.

PRO FORMA OPERATING RESULTS:

The following table summarizes the pro forma operating results of the
Company had compensation costs for the outstanding options been determined in
accordance with the fair value based method of accounting for stock-based
compensation. There were no options granted during the year ended May 31, 1996.

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

<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Pro forma amounts:
Net loss to common stockholder........................................ $ (1,826) $ (1,804)
--------- ---------
--------- ---------
Net loss per common share, basic and diluted.......................... $ (1.82) $ (1.78)
--------- ---------
--------- ---------
</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. For the years ending May 31, 1997 and 1998, the weighted-average
fair value of the option grants was approximately $26.00 and $44.00,
respectively. The following weighted-average assumptions were used in computing
the fair value of options grants: expected volatility of 60% for both years;
risk-free interest rate of approximately

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

9. STOCKHOLDERS' EQUITY: (CONTINUED)
6.5% for 1997 and 5.5% for 1998; expected lives of five years for 1997 and three
to five years for 1998; and a zero dividend yield for both years.

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. 10,000 warrants were exercised on December
10, 1996 with the remaining warrants outstanding and fully exercisable until
expiration on December 10, 2006. In the event that certain defined events occur,
the number of warrants exercisable may be reduced.

10. ASSET ACQUISITIONS:

During the years ended May 31, 1996, 1997 and 1998, the Company completed
the acquisition of twenty fitness clubs. With the exception of the Ultrafit,
Inc. and Affiliates acquisition, as discussed below, the individual acquisitions
were not material to the financial position or results of operations of the
Company. The table below summarizes the aggregate purchase price and the
purchase price allocation to assets acquired:

<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Number of clubs acquired........................................ 1 3 16
Purchase prices payable in cash at closing...................... $ 35 $ 1,888 $ 19,733
Issuance and assumption of notes payable........................ 269 2,250 4,110
--------- --------- ---------
Total purchase prices..................................... $ 304 $ 4,138 $ 23,843
--------- --------- ---------
--------- --------- ---------
Allocation of purchase prices:
Fixed assets.................................................... $ 299 $ 2,462 $ 9,011
Membership lists................................................ 177 2,978
Goodwill........................................................ 1,484 11,557
Other net assets acquired....................................... 5 15 297
--------- --------- ---------
Total allocation of purchase prices....................... $ 304 $ 4,138 $ 23,843
--------- --------- ---------
--------- --------- ---------
</TABLE>

For financial reporting purposes, these acquisitions have been accounted for
under the purchase method and, accordingly, the purchase prices have been
assigned to the assets and liabilities acquired on the basis of their respective
fair values on the date of acquisition. The excess of purchase prices over the
net tangible assets acquired has been allocated to membership listings acquired,
covenant-not-to compete and goodwill. Intangible assets are amortized by the
straight-line basis over the estimated life of the asset. Acquired membership
lists are amortized over a 2 year period and goodwill is amortized over
remaining lives of the leases of the acquired fitness club which range from 6 to
15 years. The results of operations of the clubs have been included in the
Company's consolidated financial statements from the respective dates of
acquisition and the impact of these acquisitions on the consolidated financial
statements of the Company was not material, with the exception of the following
acquisition.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

10. ASSET ACQUISITIONS: (CONTINUED)
On April 6, 1998, the Company acquired Ultrafit, Inc. and Affiliates
(collectively referred to herein as "Ovox"). Ovox's operations consisted of four
fitness clubs in New Jersey which were owned and operated by a common group of
investors. The purchase price totaled $8,177, which included $7,750 of cash and
notes payable of $236. Transaction costs amounted to $191. The excess of the
purchase price over the net fair value of the assets acquired was $6,589, and
has been allocated to the membership lists acquired and goodwill. The following
unaudited pro forma information has been prepared assuming the Ovox Acquisition
had taken place at the beginning of the respective periods. The pro forma
adjustments give effect to amortization of goodwill, interest expense on
acquisition debt, and related income tax effects:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MAY 31,
--------------------------
<S> <C> <C>
1997 1998
(UNAUDITED) (UNAUDITED)
------------ ------------
Revenues......................................................... $ 60,898 $ 87,158
Operating income................................................. 1,436 8,425
Proforma net loss to common stockholders......................... (2,148) (1,982)
Proforma net loss per common share............................... $ (2.14) $ (1.95)
</TABLE>

This unaudited pro forma financial information is presented for
informational purposes only and may not be indicative of the results of
operations as they would have been if the Company and the acquired clubs had
been a single entity during 1997 and 1998, nor is it indicative of the results
of operations which may occur in the future. Anticipated efficiencies from the
consolidation of the acquired clubs and the Company have been excluded from the
amounts included in the pro forma summary presented above.

11. REVENUE FROM CLUB OPERATIONS:

Revenues from club operations for the years ended May 31, 1996, 1997 and
1998 are summarized below:

<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Membership dues............................................ $ 35,800 $ 45,916 $ 66,878
Initiation Fees............................................ 1,849 3,308 4,408
Other club revenues........................................ 3,147 4,940 8,433
--------- --------- ---------
$ 40,796 $ 54,164 $ 79,719
--------- --------- ---------
--------- --------- ---------
</TABLE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

12. CORPORATE INCOME TAXES:

The (benefit) provision for income taxes for the years ended May 31, 1996,
1997 and 1998 consists of the following:
<TABLE>
<CAPTION>
1996
---------------------------------
STATE
FEDERAL AND LOCAL TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Current..................................................... $ 1,256 $ 911 $ 2,167
Deferred.................................................... (964) (575) (1,539)
--------- ----------- ---------
$ 292 $ 336 $ 628
--------- ----------- ---------
--------- ----------- ---------

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

1998
---------------------------------
STATE
FEDERAL AND LOCAL TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Current..................................................... $ 1,383 $ 935 $ 2,318
Deferred.................................................... (751) (436) (1,187)
--------- ----------- ---------
$ 632 $ 499 $ 1,131
--------- ----------- ---------
--------- ----------- ---------
</TABLE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

12. CORPORATE INCOME TAXES: (CONTINUED)
The components of the net deferred tax asset as of May 31, 1997 and 1998 are
summarized below:

<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Deferred lease liabilities............................................ $ 2,966 $ 4,106
Compensation expense incurred in connection with stock options........ 1,846 2,445
Fixed assets.......................................................... 1,153 358
State net operating loss carry-forwards............................... 100 214
Deferred revenue...................................................... 1,835 2,349
Other................................................................. 33 56
--------- ---------
7,933 9,528
--------- ---------
Deferred tax liabilities:
Accrued expenses...................................................... (153) (150)
Deferred costs........................................................ (1,624) (2,035)
--------- ---------
(1,777) (2,185)
--------- ---------
Net deferred tax asset, prior to valuation allowance.................. 6,156 7,343
Valuation allowance................................................... (184) (184)
--------- ---------
Net deferred tax asset................................................ $ 5,972 $ 7,159
--------- ---------
--------- ---------
</TABLE>

As of May 31, 1998, the Company has state net operating loss carry-forwards
of approximately $1,000. Such amounts expire between May 31, 1999 and May 31,
2005.

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>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate............................................. 34% (34)% 34%
State and local income taxes, net of federal tax benefit............... 19 (6) 13
Reduction in valuation allowance....................................... -- (8) --
Adjustment of prior year's tax refund.................................. -- 25 --
Change in state and local tax rates.................................... -- -- 2
Other.................................................................. -- 2 1
-- -- --
53% (21)% 50%
-- -- --
-- -- --
</TABLE>

13. CONTINGENCIES:

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

13. CONTINGENCIES: (CONTINUED)
Company has filed a motion to dismiss the state lawsuit which is presently
pending. The plaintiffs seek an unspecified amount of damages, including the
Company's profits attributable to the use of the photographs. Based on the
advice of outside counsel, management believes that it is unlikely that the
outcome of this matter will have a materially adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
Management is vigorously contesting this claim.

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

14. EMPLOYEE BENEFIT PLAN:

The Company maintains a 401(k) defined contribution plan (the "401(k) Plan")
and is subject to the provisions of the Employee Retirement Income Security Act
of 1974 ("ERISA"). The 401(k) Plan provides for the Company to make
discretionary contributions; however, the Company elected not to make
contributions for the years ended May 31, 1996, 1997 and 1998.

15. INCOME (LOSS) PER COMMON SHARE:

The following table reconciles the numerators and denominators used in
computing basic and diluted per common share amounts. For the years ended May
31, 1997 and 1998, the Company reported losses available to common stockholders
and accordingly common stock equivalents were excluded from the calculation
since such inclusion would have been anti-dilutive.

<TABLE>
<CAPTION>
INCOME (LOSS) SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- --------------- -----------
<S> <C> <C> <C>
1996:
Income before extraordinary item and cumulative effect of change
in accounting policy............................................ $ 549
Less preferred stock dividend..................................... (400)
-------
Basic........................................................... 149 847,994 $ 0.18
------- -----------
------- -----------
Effect of dilutive securities..................................... 57,650
---------------
Dilutive........................................................ $ 149 905,644 $ 0.16
------- --------------- -----------
------- --------------- -----------
1997:
Loss before extraordinary item and cumulative effect of change in
accounting policy............................................... $ (936)
Less preferred stock dividend..................................... (1,286)
-------
Basic and dilutive.............................................. $ (2,222) 1,004,583 $ (2.21)
------- --------------- -----------
------- --------------- -----------
1998:
Income before extraordinary item and cumulative effect of change
in accounting policy............................................ $ 1,147
Less preferred stock dividend..................................... (2,387)
-------
Basic and dilutive................................................ $ (1,240) 1,014,286 $ (1.22)
------- --------------- -----------
------- --------------- -----------
</TABLE>

For the years ended May 31, 1997 and 1998, common stock equivalents which
have been excluded from diluted per share amounts because their effect would
have been anti-dilutive include 171,164 and

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

15. INCOME (LOSS) PER COMMON SHARE: (CONTINUED)
185,864 options and warrants with a weighted average exercise prices of $0.34
and $1.69 respectively. For the year ended May 31, 1996, no common stock
equivalents were excluded from the computation of diluted per share amounts.

16. EXTRAORDINARY ITEM:

During the year ended May 31, 1998, the Company completed an $85,000
financing. As part of this financing, an existing term loan, a line of credit
and a subordinated note were repaid. Accordingly, previously capitalized fees
and expenses relating to obtaining such financing of $1,406 were written off,
net of taxes of $624.

17. SUBSEQUENT EVENTS:

Subsequent to May 31, 1998, the Company acquired thirteen fitness clubs,
including seven clubs from Lifestyle, one of which is under development. These
acquisitions will be accounted for in accordance with the purchase method. The
aggregate purchase price totaled $19,479 which included $18,435 payable at
closing and the issuance of notes payable totaling $1,044. In addition, the
Company has entered into noncancelable operating leases which expire at various
dates through May 31, 2013. Future minimum rental payables required under the
leases total approximately $51,518. Future minimum rental receivables on space
that the Company will sublease totals $1,275.

F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

New York, New York
March 11, 1998, except for Note 11
as to which the date is April 6, 1998

To the Board of Directors and Stockholders of
Ultrafit, Inc. and Affiliates:

In our opinion, the accompanying combined balance sheets and the related
combined statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of ULTRAFIT, INC. and
AFFILIATES (as defined in note 1 to the financial statements) (collectively
"Ovox") as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of Ovox's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PRICEWATERHOUSECOOPERS LLP

F-27
<PAGE>
ULTRAFIT, INC. AND AFFILIATES

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents.......................................... $ 440,048 $ 489,425 $ 767,591
Inventory.......................................................... 34,966 22,876 22,876
Prepaid expenses and other current assets.......................... 24,534 26,322 67,564
Advances due from Ovox Corporation................................. 110,374
------------- ------------- -------------
Total current assets............................................. 499,548 648,997 858,031
Fixed assets, net.................................................... 749,598 1,519,651 1,510,585
Deferred membership costs............................................ 123,002 263,559 260,100
Other assets......................................................... 41,461 41,126 41,125
------------- ------------- -------------
Total assets..................................................... $ 1,413,609 $ 2,473,333 $ 2,669,841
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Bank overdraft..................................................... $ 1,778 $ 21,297
Current portion of long-term debt.................................. 47,887 $ 47,887
Accrued expenses................................................... 92,029 264,525 109,216
Deferred revenue................................................... 349,651 293,322 371,800
------------- ------------- -------------
Total current liabilities........................................ 443,458 627,031 528,903
Long-term debt....................................................... 184,564 177,870
Deferred lease liabilities........................................... 12,116 60,697 59,182
Deferred revenue..................................................... 40,626 84,361 83,837
Loan from stockholder................................................ 122,019 128,366
------------- ------------- -------------
Total liabilities................................................ 496,200 1,078,672 978,158
------------- ------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock......................................................... 400 400 400
Retained earnings.................................................... 917,009 1,394,261 1,691,283
------------- ------------- -------------
Total stockholders' equity....................................... 917,409 1,394,661 1,691,683
------------- ------------- -------------
Total liabilities and stockholders' equity....................... $ 1,413,609 $ 2,473,333 $ 2,669,841
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

See notes to combined financial statements.

F-28
<PAGE>
ULTRAFIT, INC. AND AFFILIATES

COMBINED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------- ----------------------------
1996 1997 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Membership dues--including initiation fees of
$143,139, $124,189, $22,521 and $39,782
respectively..................................... $ 3,292,175 $ 4,788,983 $ 1,077,839 $ 1,504,801
Merchandise........................................ 238,806 254,405 80,027 64,896
Other services to members.......................... 194,942 203,027 72,784 30,030
Rental income...................................... 78,200 69,790 19,583 16,501
------------- ------------- ------------- -------------
3,804,123 5,316,205 1,250,233 1,616,228
------------- ------------- ------------- -------------
Operating expenses:
Payroll and related................................ 1,132,220 1,955,568 443,147 724,184
Other club operating............................... 416,921 566,061 109,674 96,962
Depreciation and amortization...................... 242,000 312,099 51,277 71,073
General and administrative......................... 243,068 402,912 110,916 85,472
Rent and other occupancy cost...................... 507,237 708,806 148,832 167,220
Cost of merchandise sold........................... 184,616 202,576 42,029 40,919
------------- ------------- ------------- -------------
2,726,062 4,148,022 905,875 1,185,830
------------- ------------- ------------- -------------
Operating income................................. 1,078,061 1,168,183 344,358 430,398
Interest income (expense), net of interest expense
(income) of $516, $15,461, $(7,763) and $6,196,
respectively....................................... 7,369 9,137 (13,374) 21,865
------------- ------------- ------------- -------------
Income before provision for corporate income taxes... 1,085,430 1,177,320 330,984 452,263
Provision for corporate income taxes................. 28,509 30,915 9,930 13,568
------------- ------------- ------------- -------------
Net income....................................... $ 1,056,921 $ 1,146,405 $ 321,054 $ 438,695
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>

See notes to combined financial statements.

F-29
<PAGE>
ULTRAFIT, INC. AND AFFILIATES

COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997, AND UNAUDITED
FOR THE THREE MONTHS ENDED MARCH 31, 1998

<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
----------- ------------- --------------
<S> <C> <C> <C>
Balance as of January 1, 1996.......................................... $ 300 $ 435,559 $ 435,859
Net income for the year................................................ 1,056,921 1,056,921
Dividend distribution to stockholders.................................. 575,471 575,471
Issuance of stock...................................................... 100 100
----- ------------- --------------
Balance as of December 31, 1996........................................ 400 917,009 917,409
Net income for the year................................................ 1,146,405 1,146,405
Dividend distribution to stockholders.................................. 669,153 669,153
----- ------------- --------------
Balance as of December 31, 1997........................................ 400 1,394,261 1,394,661
Net income for the three months ended March 31, 1998 (unaudited)....... 438,695 438,695
Dividend distribution to stockholders (unaudited)...................... 141,673 141,673
----- ------------- --------------
Balance as of March 31, 1998 (unaudited) $ 400 $ 1,691,283 $ 1,691,683
----- ------------- --------------
----- ------------- --------------
</TABLE>

See notes to combined financial statements.

F-30
<PAGE>
ULTRAFIT, INC. AND AFFILIATES

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------- --------------------------
1996 1997 1997 1998
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income.................................................. $ 1,056,921 $ 1,146,405 $ 321,054 $ 438,695
------------- ------------- ------------ ------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 242,000 312,099 51,277 71,073
Change in certain working capital components.............. (12,654) (18,968) (65,634) (9,738)
Decrease (increase) in deferred membership costs.......... (58,165) (140,557) (17,867) 3,460
Other..................................................... (428) (25)
------------- ------------- ------------ ------------
Total adjustments....................................... 170,753 152,549 (32,224) 64,795
------------- ------------- ------------ ------------
Net cash provided by operating activities............... 1,227,674 1,298,954 288,830 503,490
------------- ------------- ------------ ------------

Cash flows from investing activities:
Capital expenditures........................................ (183,504) (954,413) (31,260) (62,007)
------------- ------------- ------------ ------------
Net cash used in investing activities................... (183,504) (954,413) (31,260) (62,007)
------------- ------------- ------------ ------------

Cash flows from financing activities:
Increase (decrease) in bank overdraft....................... (39,117) 19,519 (21,297)
Issuance of stock........................................... 100
Proceeds from borrowings.................................... 485,000 50,000 50,000
Repayments of borrowings.................................... (54,904) (130,530) (16,302) (50,347)
Dividend distribution to shareholders....................... (575,471) (669,153) (170,741) (141,673)
------------- ------------- ------------ ------------
Net cash used in financing activities................... (669,392) (295,164) (137,043) (163,317)
------------- ------------- ------------ ------------
Net increase in cash and cash equivalents............... 374,778 49,377 120,527 278,166
Cash and cash equivalents at beginning of period............ 65,270 440,048 440,048 489,425
------------- ------------- ------------ ------------
Cash and cash equivalents at end of period.............. $ 440,048 $ 489,425 $ 560,575 $ 767,591
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------

Summary of the change in certain working capital components:
Decrease (increase) in inventory............................ $ (15,148) $ 12,090
Decrease (increase) in prepaid expenses..................... 2,567 (1,788) $ 16,302 $ (41,242)
Decrease (increase) in amounts due from affiliated
companies................................................. (110,374) 110,374
Increase (decrease) in accounts payable and accrued
expenses.................................................. 7,476 93,698 (26,385) (156,824)
Increase (decrease) in deferred revenue..................... (7,549) (12,594) (55,551) 77,954
------------- ------------- ------------ ------------
Net change in certain working capital components........ $ (12,654) $ (18,968) $ (65,634) $ (9,738)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>

See notes to combined financial statements.

F-31
<PAGE>
ULTRAFIT, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS

(INTERIM DATA IS UNAUDITED)

1. NATURE OF BUSINESS:

The combined financial statements of Ultrafit, Inc. and affiliates include
the accounts of Ultrafit, Inc., Maxifit Ltd., Exercise, Inc. and VIP Fitness,
Inc. (collectively referred to as "Ovox"). Ovox owns and operate four fitness
clubs in New Jersey. Ovox is owned and operated by a common group of investors.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

A. PRINCIPLES OF COMBINATION:

The accompanying combined financial statements include the accounts of Ovox.
All significant intercompany accounts and transactions have been eliminated in
combination.

B. REVENUE RECOGNITION:

Ovox receives a one-time non-refundable initiation fee and dues from its
members. With the exception of special short-term memberships, substantially all
of Ovox's members sign membership contracts for one year after which the
membership is automatically extended for another year unless notice of
cancellation is given 30 days prior to expiration date. Initiation fees and
related expenses (referred to herein as membership costs), including sales
commissions payable to membership consultants, are deferred and recognized, on a
straight-line basis over an estimated membership period of two years. Dues are
recognized on a pro-rata basis over the periods in which services are to be
provided.

Revenues from merchandise sales and other membership services are recognized
as income at the time of sale or upon performance of the services, respectively.

C. INVENTORY:

Inventory consists primarily of athletic equipment, refreshments 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. Ovox records depreciation in accordance
with methods permissible for tax purposes. These methods approximate the
straight-line basis over the estimated useful lives of the assets, which are
five years for equipment and the shorter of their estimated useful lives or the
remaining period of the lease for leasehold improvements. 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 COSTS

Advertising costs are charged to operations during the period in which they
are incurred. Total advertising costs incurred by Ovox during the years ended
December 31, 1996 and 1997 totaled $108,583 and $115,738, respectively.

F-32
<PAGE>
ULTRAFIT, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(INTERIM DATA IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
F. USE OF ESTIMATES

The most significant assumptions and estimates relate to the useful lives of
fixed assets and the estimated membership period.

G. CORPORATE INCOME TAXES:

Ovox has filed elections with the federal and state taxing authorities to be
treated as S Corporations for tax purposes. Accordingly, the tax obligations of
Ovox flow through to the individual stockholders. Ovox is subject to a corporate
income tax in New Jersey of approximately 3% for the years ending December 31,
1996 and 1997. Deferred taxes were not material.

H. STATEMENTS OF CASH FLOWS:

Supplemental disclosure of cash flow information:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Cash paid during the year for:
Interest............................................................. $ 516 $ 15,461
Taxes................................................................ 31,973 48,538

Noncash investing activities:
Fixed asset additions included in accounts payable at December 31.... 41,306 169,045
</TABLE>

I. CASH AND CASH EQUIVALENTS:

Ovox considers all highly liquid investments 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.

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

J. DEFERRED LEASE LIABILITIES:

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

F-33
<PAGE>
ULTRAFIT, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(INTERIM DATA IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
K. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS:

Long-lived assets, such as fixed assets, are reviewed when events or
circumstances indicate that their carrying value may not be recoverable.
Estimated undiscounted expected future cash flows are used to determine if an
asset is impaired in which case the asset's carrying value would be reduced to
fair value. For all periods presented, no impairment losses were recorded.

3. FIXED ASSETS:

Fixed assets as of December 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.......................................... $ 81,508 $ 443,430
Club and office equipment....................................... 1,525,747 2,218,602
------------- -------------
1,607,255 2,662,032
Less, Accumulated depreciation and amortization................. 857,657 1,142,381
------------- -------------
$ 749,598 $ 1,519,651
------------- -------------
------------- -------------
</TABLE>

4. ACCRUED EXPENSES:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1997
--------- -----------
Other accrued expenses............................................... $ 62,076 $ 199,265
Accrued payroll...................................................... 29,953 65,260
--------- -----------
$ 92,029 $ 264,525
--------- -----------
--------- -----------
</TABLE>

5. LONG-TERM DEBT:

During 1997, Ovox borrowed $250,000 (the "Note") from its principal bank.
Outstanding borrowings accrue interest at a rate of 8.75%. The Note is payable
in monthly installments of principal and interest of $3,990 through April 2002.
The Note is collateralized by Ovox's equipment and other assets. Additionally,
the repayment of the note has been personally guaranteed by the stockholders of
Ovox. The estimated fair value of Ovox's Note as of December 31, 1997
approximated its carrying value. The fair value was estimated based on the
current rate offered to Ovox for debt with similar terms.

F-34
<PAGE>
ULTRAFIT, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(INTERIM DATA IS UNAUDITED)

5. LONG-TERM DEBT: (CONTINUED)
As of December 31, 1997, minimum payments on the Note during the next five
years are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT DUE
- ------------------------------------------------------------------------------- -------------
<S> <C>
1998........................................................................... $ 47,887
1999........................................................................... 47,887
2000........................................................................... 47,887
2001........................................................................... 47,887
2002........................................................................... 40,903
-------------
$ 232,451
-------------
-------------
</TABLE>

As of December 31, 1997, Ovox has a line of credit with its principal bank
for direct borrowings and letters of credit of up to $150,000. The line of
credit bears interest at prevailing interest rates based upon the bank's prime
rates. There were no outstanding borrowings against this line of credit as of
December 31, 1997. The line of credit expires on August 1, 1998.

6. RELATED PARTY TRANSACTIONS:

Advances and amounts due from related parties and employees and loans from
shareholders as of December 31, 1996 and 1997 consist of the following:

<TABLE>
<CAPTION>
1997
-----------
<S> <C> <C>
Advances due from Ovox Corporation........................................ (a) $ 110,374
-----------
Loan from Stockholder, net of receivables of $15,273...................... (b) $ 122,019
-----------
-----------
</TABLE>

a. In 1997, Ovox Corporation was formed as the management company and
franchiser for Ovox. Starting in 1998, all payroll and payroll related
expenses as well as other general and administrative expenses will be
administered by the management company and Ovox will be allocated its share
of expenses incurred by the management company. Advances to Ovox
Corporation, which are held primarily in cash as of December 31, 1997,
represent the initial funding provided by Ovox to cover payroll payments to
be made by Ovox Corporation on behalf of Ovox during 1998.

b. In connection with the opening of Exercise, Inc. in late 1997, Ovox received
a non-interest bearing stockholder loan. The loan has no specific due date
and will be repaid from operating cash flows of Ovox. For 1996 and 1997, an
entity which is owned by a stockholder of the Company occupies space at
Ultrafit, Inc. and pays rent in the amount of $2,500 per month.

Starting in 1997, Ovox began to pay salaries to two of the stockholders for
their services provided to Ovox as Chief Executive Officer and as President
totaling $116,185.

7. LEASES:

Ovox leases office and multi-recreational facilities 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. One lease provides for additional rent based upon defined formulas of
revenue. Leases are guaranteed by stockholders of Ovox.

F-35
<PAGE>
ULTRAFIT, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(INTERIM DATA IS UNAUDITED)

7. LEASES: (CONTINUED)
The leases expire at various times through December 13, 2006, and some may
be extended at Ovox's option for periods ranging from 5 to 10 years. VIP
Fitness, Inc. has the option to purchase the leased property during the lease
term at fixed prices stated in the lease or at prices to be determined by the
parties at "arm's length" after the lease has expired.

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

<TABLE>
<CAPTION>
YEAR ENDING MAY 31, MINIMUM ANNUAL RENTAL
- -------------------------------------------------------------------- ------------------------
<S> <C>
1998................................................................ $ 643,738
1999................................................................ 643,738
2000................................................................ 528,928
2001................................................................ 471,523
2002................................................................ 471,523
Aggregate thereafter................................................ 1,432,744
-----------
$ 4,192,194
-----------
-----------
</TABLE>

Rent expense for the years ended December 31, 1996 and 1997 was $507,237 and
$708,806, respectively, including other occupancy cost of $145,104 and $201,603,
respectively.

8. STOCKHOLDERS' EQUITY:

Common stock issued has no par value and a stated value of $0.5 per share.
Common stock at December 31, 1996 and 1997 is as follows:

<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SHARES
SHARES ISSUED AND COMMON
AUTHORIZED OUTSTANDING STOCK
----------- --------------- -----------
<S> <C> <C> <C>
Ultrafit, Inc......................................... 2,500 200 $ 100
Maxifit, Ltd.......................................... 2,500 200 100
VIP Fitness, Inc...................................... 2,500 200 100
Exercise, Inc......................................... 2,500 200 100
----------- --- -----
10,000 800 $ 400
----------- --- -----
----------- --- -----
</TABLE>

9. CONTINGENCIES:

As of December 31, 1997, Ovox was party to a number of claims arising in the
ordinary course of business. Management believes that these claims are covered
by Ovox's insurance policies and that the ultimate outcome of these matters will
not have a material effect on the Ovox's combined financial position or results
of operations.

10. EMPLOYEE BENEFIT PLAN:

During 1997, Ovox implemented a 401(k) salary deferral plan (the "Ovox
Plan") which is available to eligible employees, as defined. The Ovox Plan
provides for Ovox to make discretionary contributions, however, Ovox elected not
to make contributions for the year ended December 31, 1997.

F-36
<PAGE>
ULTRAFIT, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(INTERIM DATA IS UNAUDITED)

11. SUBSEQUENT EVENTS:

During 1998, the stockholders of Ovox entered into an agreement with Town
Sports International, Inc. to sell all the assets of its clubs and assign rights
and obligations under certain leases.

12. NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED):

BASIS OF PRESENTATION

The interim financial statements are unaudited and reflect Ovox's
adjustments, consisting of only normal recurring accruals, which are, in the
opinion of management, necessary for a fair presentation of the financial
position and results of operations for the periods presented. Operating results
for any interim period are not necessarily indicative of the results for the
full year.

STATEMENT OF CASH FLOWS

Supplemental disclosure of cash flow information:

<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------------
<S> <C> <C>
1997 1998
--------------- ---------------
Cash paid during the period for:
Interest............................................... $ 21,137 $ 6,196
--------------- ---------------
--------------- ---------------
Taxes.................................................. $ 1,473 $ 11,156
--------------- ---------------
--------------- ---------------
</TABLE>

F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

New York, New York

August 6, 1998

To the Board of Directors and Stockholders of
Lifestyle Fitness of Springfield, Inc.:

In our opinion, the accompanying combined balance sheet and the related
combined statements of income, stockholders' deficit and cash flows present
fairly, in all material respects, the financial position of LIFESTYLE FITNESS of
SPRINGFIELD, INC. and AFFILIATES (as defined in Note 1 to the financial
statements) (collectively, "Lifestyle") at December 31, 1997, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of Lifestyle's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion expressed above.

As disclosed in Note 1, on August 6, 1998, the stockholders of Lifestyle
entered into an agreement with Town Sports International, Inc. to sell the
tangible and intangible assets, as well as the rights and obligations under
certain leases.

PRICEWATERHOUSECOOPERS LLP

F-38
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
-------------- --------------
<S> <C> <C>
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents....................................................... $ 1,257 $ 68,727
Prepaid rent.................................................................... 120,743 --
Other current assets............................................................ 34,115 19,646
-------------- --------------
Total current assets........................................................ 156,115 88,373
Fixed assets, net................................................................. 1,734,445 1,562,150
Deferred membership costs......................................................... 1,047,154 1,124,573
Other assets...................................................................... 149,770 245,403
-------------- --------------
Total assets................................................................ $ 3,087,484 $ 3,020,499
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Book overdraft.................................................................. $ 65,455 $ --
Current portion of long-term debt............................................... 172,495 98,750
Notes payable to a related party................................................ 78,669 35,710
Accounts payable................................................................ 181,732 144,763
Accrued expenses................................................................ 108,078 121,015
Accrued payroll and related payroll taxes....................................... 98,409 102,291
Deferred revenue................................................................ 2,655,967 2,440,102
-------------- --------------
Total current liabilities................................................... 3,360,805 2,942,631
Long-term debt.................................................................... 183,926 140,700
Deferred lease liabilities........................................................ 521,423 373,798
Deferred revenue.................................................................. 290,397 520,945
-------------- --------------
Total liabilities........................................................... 4,356,551 3,978,074
-------------- --------------
Commitments and contingencies
Stockholders' deficit:
Common stock.................................................................... 86,000 86,000
Accumulated deficit............................................................. (1,355,067) (1,043,575)
-------------- --------------
Total stockholders' deficit................................................. (1,269,067) (957,575)
-------------- --------------
Total liabilities and stockholders' deficit................................. $ 3,087,484 $ 3,020,499
-------------- --------------
-------------- --------------
</TABLE>

See notes to combined financial statements.

F-39
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES

COMBINED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ----------------------------
1997 1997 1998
-------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Membership dues--including initiation fees of $2,051,558,
$993,276 and $1,193,690, respectively.......................... $ 6,748,621 $ 3,135,844 $ 4,249,159
-------------- ------------- -------------
Operating expenses:
Payroll and related.............................................. 2,613,472 1,255,746 1,324,090
Club operating................................................... 1,671,977 745,897 936,238
General and administrative....................................... 1,466,217 764,138 685,475
Depreciation and amortization.................................... 381,401 183,300 210,853
-------------- ------------- -------------
6,133,067 2,949,081 3,156,656
-------------- ------------- -------------
Operating Income............................................. 615,554 186,763 1,092,503
Interest expense................................................... 51,272 21,072 27,047
-------------- ------------- -------------
Income before provision for corporate income taxes............... 564,282 165,691 1,065,456
Provision for corporate income taxes............................... 31,369 4,971 31,964
-------------- ------------- -------------
Net income................................................... $ 532,913 $ 160,720 $ 1,033,492
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>

See notes to combined financial statements.

F-40
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES

COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT

FOR THE YEAR ENDED DECEMBER 31, 1997, AND UNAUDITED

FOR THE SIX MONTHS ENDED JUNE 30, 1998

<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
STOCK DEFICIT DEFICIT
--------- -------------- --------------
<S> <C> <C> <C>
Balance at January 1, 1997............................................ $ 86,000 $ (924,800) $ (838,800)
Net income for the year ended December 31, 1997....................... 532,913 532,913
Distributions to stockholders......................................... (963,180) (963,180)
--------- -------------- --------------
Balance at December 31, 1997........................................ 86,000 (1,355,067) (1,269,067)
Net income for the six months ended June 30, 1998 (unaudited)......... 1,033,492 1,033,492
Distributions to stockholders (unaudited)............................. (722,000) (722,000)
--------- -------------- --------------
Balance at June 30, 1998 (unaudited)................................ $ 86,000 $ (1,043,575) $ (957,575)
--------- -------------- --------------
--------- -------------- --------------
</TABLE>

See notes to combined financial statements.

F-41
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------------
1997 1997 1998
-------------- ------------ -------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income........................................................ $ 532,913 $ 160,720 $ 1,033,492
-------------- ------------ -------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 381,401 183,300 210,853
Increase in deferred lease liability.......................... 97,444 2,878 14,133
Change in certain working capital components.................. 800,947 759,563 (127,646)
Increase in deferred membership costs......................... (136,079) (130,468) (77,419)
-------------- ------------ -------------
Total adjustments........................................... 1,143,713 815,273 19,921
-------------- ------------ -------------
Net cash provided by operating activities................... 1,676,626 975,993 1,053,413
-------------- ------------ -------------
Cash flows from investing activities:
Additions to fixed assets......................................... (504,024) (427,110) (39,258)
-------------- ------------ -------------
Net cash used in investing activities....................... (504,024) (427,110) (39,258)
-------------- ------------ -------------
Cash flows from financing activities:
Increase (decrease) in book overdraft............................. 65,455 -- (65,455)
Repayment of notes payable to a related party..................... (184,175) (84,207) (92,959)
Proceeds from line of credit...................................... 300,000 600,000 --
Proceeds received from landlord in connection with lease
incentive....................................................... -- -- 50,700
Repayment of bank borrowings...................................... (44,794) (8,306) (92,702)
Repayment of capital lease obligations............................ (49,005) (23,955) (24,269)
Repayment of stockholder loans.................................... (365,429) (365,429) --
Distribution to stockholders...................................... (963,180) (408,017) (722,000)
-------------- ------------ -------------
Net cash used in financing activities....................... (1,241,128) (289,914) (946,685)
-------------- ------------ -------------
Net (decrease) increase in cash and cash equivalents........ (68,526) 258,969 67,470
Cash and cash equivalents at beginning of period.................... 69,783 69,783 1,257
-------------- ------------ -------------
Cash and cash equivalents at end of period.................. $ 1,257 $ 328,752 $ 68,727
-------------- ------------ -------------
-------------- ------------ -------------
Summary of the change in certain working capital components:
Decrease (increase) in prepaid rent............................... $ (23,766) $ 96,977 $ 120,743
Decrease (increase) in other current assets....................... (7,871) (2,922) 14,469
Increase in other assets.......................................... (16,758) -- (95,633)
Increase (decrease) in accounts payable and accrued expenses...... 121,518 40,500 (34,761)
Increase (decrease) in deferred revenue........................... 727,824 625,008 (132,464)
-------------- ------------ -------------
Net change in certain working capital components............ $ 800,947 $ 759,563 $ (127,646)
-------------- ------------ -------------
-------------- ------------ -------------
</TABLE>

See notes to combined financial statements.

F-42
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS

(INTERIM DATA IS UNAUDITED)

1. NATURE OF BUSINESS:

The Combined Financial Statements of Lifestyle Fitness of Springfield, Inc.
and Affiliates include the accounts of Lifestyle Fitness of Springfield, Inc.,
Lifestyle Fitness of Parsippany, Inc., Lifestyle Fitness of Franklin, Inc.,
Lifestyle Fitness of Woodbridge, Inc., Lifestyle Fitness of Plainsboro, Inc. and
Lifestyle Fitness of Somerset, Inc., (collectively referred to as "Lifestyle").
Lifestyle owns and operates six fitness clubs in New Jersey. Lifestyle is owned
and operated by a common group of investors.

On August 6, 1998, the stockholders of Lifestyle entered into an agreement
to sell its tangible and intangible assets, as well as the rights and
obligations under certain leases of its clubs to Town Sports International, Inc.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

A. PRINCIPLES OF COMBINATION:

The accompanying combined financial statements include the accounts of
Lifestyle. All significant intercompany accounts and transactions have been
eliminated in combination.

B. REVENUE RECOGNITION:

Lifestyle receives a one-time non-refundable initiation fee and dues from
its members. With the exception of special short-term memberships, substantially
all of Lifestyle's members sign membership contracts for one year after which
the membership is automatically extended for another year unless notice of
cancellation is given 30 days prior to expiration date. Initiation fees and
related expenses (referred to herein as membership costs), including sales
commissions payable to membership consultants, are deferred and recognized, on a
straight-line basis over an estimated membership period of two years. Dues are
recognized on a pro-rata basis over the periods in which services are to be
provided.

C. 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 five years for
equipment and the shorter of their estimated useful lives or the remaining
period of the lease for leasehold improvements. 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.

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

Long-lived assets, such as fixed assets are reviewed when events or
circumstances indicate that their carrying value may not be recoverable.
Estimated undiscounted expected future cash flows are used to determine if an
asset is impaired in which case the asset's carrying value would be reduced to
fair value. For the period presented, no impairment losses were recorded.

E. ADVERTISING COSTS:

Advertising costs are charged to operations during the period in which they
are incurred. Total advertising costs incurred by Lifestyle during the year
ended December 31, 1997 totaled $217,573.

F-43
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(INTERIM DATA IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
F. USE OF ESTIMATES:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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 and
recoverability of fixed assets and the estimated membership period.

G. CORPORATE INCOME TAXES:

Lifestyle has filed elections with the federal and state taxing authorities
to be treated as S Corporations for tax purposes. Accordingly, the tax
obligations of Lifestyle flow through to the individual stockholders. Deferred
taxes were not material.

H. STATEMENT OF CASH FLOWS:

Supplemental disclosure of cash flow information:

<TABLE>
<CAPTION>
DECEMBER 31,
1997
--------------
<S> <C>
Cash paid during the year for:
Interest.................................................................... $ 49,614
--------------
--------------
Taxes....................................................................... $ 32,255
--------------
--------------
Noncash investing activities:
Fixed asset additions....................................................... $ 210,000
--------------
--------------
</TABLE>

I. CASH AND CASH EQUIVALENTS:

Lifestyle considers all highly liquid investments 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. Financial instruments which potentially subject Lifestyle to
concentrations of credit risk are cash and cash equivalents. Such amounts are
held, primarily, in a single commercial bank. Lifestyle holds no collateral for
these financial instruments.

J. DEFERRED LEASE LIABILITIES:

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

F-44
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(INTERIM DATA IS UNAUDITED)

3. FIXED ASSETS:

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

<TABLE>
<S> <C>
Leasehold improvements......................................... $1,408,144
Club equipment................................................. 1,932,566
Office equipment............................................... 31,912
----------
3,372,622
Less, Accumulated depreciation and amortization.............. 1,638,177
----------
$1,734,445
----------
----------
</TABLE>

4. LONG-TERM DEBT:

Long-term debt as of December 31, 1997 consists of the following:

<TABLE>
<S> <C>
Line of credit with a bank--The line of credit bears interest at
the bank's prime plus 1/2% (9% at December 31, 1997), payable
monthly. Repayment of the line of credit is guaranteed by the
stockholders of Lifestyle. (see Note 9(a))..................... $ 279,132
Note payable to a bank--bearing interest at the bank's prime plus
2.75% (11.25% at December 31, 1997), payable in 120 monthly
installments of $1,040 including interest through June 25,
2003. Repayment of the note is guaranteed by the stockholders
and collateralized by all club equipment, inventories and
accounts receivable. On May 8, 1998 this note was repaid....... 27,470
Capital lease obligations........................................ 49,819
---------
356,421
Less, Current portion due within one year.................... 172,495
---------
Long-term portion.......................................... $ 183,926
---------
---------
</TABLE>

Lifestyle's line of credit provides for borrowings of up to $300,000. As of
December 31, 1997, the unused line of credit amounted to $20,868.

The carrying value of long-term debt approximates fair market value as of
December 31, 1997 as the interest rate charged on the debt is variable.

Lifestyle leases equipment under noncancelable capital leases. Lease terms
range up to three years, after which Lifestyle may purchase the equipment at
amounts defined by the agreements.

F-45
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(INTERIM DATA IS UNAUDITED)

4. LONG-TERM DEBT: (CONTINUED)
As of December 31, 1997, minimum rental payments, under all capital leases,
including payments to acquire leased equipment, are as follows:

<TABLE>
<CAPTION>
YEAR ENDING MINIMUM
DECEMBER 31, ANNUAL RENTAL
- ------------------------------------------------------------------------------ --------------
<S> <C>
1998.......................................................................... $ 46,465
1999.......................................................................... 6,725
--------------
53,190
Less, Amounts representing interest......................................... 3,371
--------------
Present value of minimum capital lease payments........................... $ 49,819
--------------
--------------
</TABLE>

The cost of club equipment under capital leases is approximately $149,500 at
December 31, 1997; related accumulated amortization is approximately $54,700.

The aggregate maturity of long term debt during the next four years is as
follows:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT DUE
- ------------------------------------------------------------------------------- -------------
<S> <C>
1998........................................................................... $ 172,495
1999........................................................................... 79,826
2000........................................................................... 73,200
2001........................................................................... 30,900
-------------
$ 356,421
-------------
-------------
</TABLE>

5. RELATED PARTY TRANSACTIONS:

(a) During the year ended December 31, 1997, Lifestyle repaid $365,429 of
non-interest bearing loans to its stockholders which were previously payable
on demand.

(b) Lifestyle entered into a consulting agreement with a corporation which is
solely owned by a Consultant (the "Consultant") who performs services for
Lifestyle. The Consultant advises Lifestyle with respect to its club
operations, sales operations and promotions. For such services, the
Consultant receives a monthly fee of $2,000 plus one-third of the profits,
as defined, for each health club. In the event of a sale or transfer of the
ownership of any of Lifestyle's health clubs, the Consultant is entitled to
share up to 33% of the profit from the sale of a health club, as defined.
The consulting agreement for each health club expires on January 31, 2007.
For the year ended December 31, 1997, Lifestyle incurred consulting fees to
the Consultant amounting to $491,169.

(c) Lifestyle entered into eight notes payable to a corporation owned by the
Consultant. Each note bears interest at either 12% or 15% per annum and is
payable in varying monthly principal and interest installments over a period
of one year. As of December 31, 1997, the notes payable amounted to $78,669.

F-46
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(INTERIM DATA IS UNAUDITED)

6. LEASES:

Lifestyle leases office and multi-recreational facilities 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. One lease provides for additional rent based upon a percentage
of the facility's gross revenue per annum. Certain leases are guaranteed by
stockholders of Lifestyle.

The leases expire at various times through October, 2007, and some may be
extended at Lifestyle's option for periods ranging from 5 to 10 years.

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

<TABLE>
<CAPTION>
YEAR ENDING MINIMUM
DECEMBER 31, ANNUAL RENTAL
- ------------------------------------------------------------------------------ --------------
<S> <C>
1998.......................................................................... $ 870,665
1999.......................................................................... 916,874
2000.......................................................................... 969,375
2001.......................................................................... 965,291
2002.......................................................................... 649,869
Thereafter.................................................................... 1,626,748
--------------
$ 5,998,822
--------------
--------------
</TABLE>

Rent expense for the year ended December 31, 1997 was $1,330,881, including
other additional rent of $288,292.

7. COMMON STOCK:

Common Stock issued has no par value. Common Stock at December 31, 1997 is
as follows:

<TABLE>
<CAPTION>
NUMBER OF
NUMBER SHARES
OF SHARES ISSUED AND COMMON
AUTHORIZED OUTSTANDING STOCK
------------- --------------- ---------
<S> <C> <C> <C>
Lifestyle Fitness of Springfield, Inc................. 1,000 100 $ 8,000
Lifestyle Fitness of Parsippany, Inc.................. 100 100 8,000
Lifestyle Fitness of Franklin, Inc.................... 2,500 100 46,000
Lifestyle Fitness of Woodbridge, Inc.................. 2,500 100 8,000
Lifestyle Fitness of Plainsboro, Inc.................. 2,500 100 8,000
Lifestyle Fitness of Somerset, Inc.................... 100 100 8,000
----- --- ---------
8,700 600 $ 86,000
----- --- ---------
----- --- ---------
</TABLE>

8. CONTINGENCIES:

As of December 31, 1997, Lifestyle was party to a number of claims arising
in the ordinary course of business. Management believes that these claims are
covered by Lifestyle's insurance policies and that the ultimate outcome of these
matters will not have a material effect on Lifestyle's combined financial
position, results of operations and cash flows in the future.

F-47
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(INTERIM DATA IS UNAUDITED)

9. SUBSEQUENT EVENTS:

(a) On May 1, 1998, Lifestyle refinanced its line of credit by converting it
into a term loan with the same bank. The term loan bears interest at the
bank's prime rate plus 1/2% per annum (9% at May 1, 1998), payable in 35
monthly principal installments of $6,100 plus interest commencing on May 30,
1998 with a final payment on April 30, 2001. Repayment of the term loan is
guaranteed by the stockholders of Lifestyle.

(b) During January 1998, Lifestyle entered into a note payable for $50,000 with
the Consultant. The note bears interest at 15% per annum, payable in twelve
equal monthly installments of principal and interest amounting to $4,513.

(c) On April 29, 1998, Lifestyle Fitness of West Caldwell, Inc. was formed by
the same stockholders of Lifestyle for the purpose of developing a new club.
On July 1, 1998, Lifestyle entered into a fifteen year non-cancelable
operating lease for its club in West Caldwell, New Jersey. The lease
includes escalating rentals plus escalation charges and a two year renewal
option. The future minimum annual rentals will be $249,698 for years one
through five, $291,068 for years six through ten, and $336,870 for years
eleven through fifteen.

10. NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED):

BASIS OF PRESENTATION

The interim financial statements are unaudited and reflect adjustments,
consisting of only normal recurring accruals, which are, in the opinion of
Lifestyle's management, necessary for a fair presentation of the financial
position and results of operations for the periods presented. Operating results
for any interim period are not necessarily indicative of the results for the
full year.

STATEMENT OF CASH FLOWS

Supplemental disclosure of cash flow information:

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-------------------------
JUNE 30, 1998
-------------------------
<S> <C>
Cash paid during the period for:
Interest......................................................... $ 28,694
--------
--------
Taxes............................................................ $ 31,989
--------
--------
Noncash investing activities:
Fixed assets additions........................................... $ 50,000
--------
--------
</TABLE>

F-48
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT
CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY
PERSON 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. NEITHER THE DELIVERY OF THIS PROSPECTUS 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 HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 7
Use of Proceeds................................ 13
The Recapitalization........................... 13
The Preferred Exchange......................... 13
Dividend Policy................................ 14
Capitalization................................. 15
Dilution....................................... 16
Selected Historical and Pro Forma Consolidated
Financial Data............................... 17
Unaudited Pro Forma Condensed Combined
Financial Data............................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 29
Business....................................... 36
Management..................................... 50
Security Ownership............................. 56
Certain Relationships and Related
Transactions................................. 58
Description of Capital Stock................... 59
Description of Certain Indebtedness............ 60
Certain United States Federal Income Tax
Consequences to Non-United States Holders of
Common Stock................................. 62
Shares Eligible for Future Sale................ 65
Underwriting................................... 67
Legal Matters.................................. 69
Experts........................................ 69
Additional Information......................... 70
Index to Financial Statements.................. F-1
</TABLE>

THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

Town Sports
International

[LOGO]

COMMON STOCK

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

PROSPECTUS

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

BT ALEX. BROWN

BEAR, STEARNS & CO. INC.

, 1998

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following is a statement of estimated expenses of the issuance and
distribution of the securities being registered other than underwriting
compensation:

<TABLE>
<S> <C>
SEC registration fee........................................... $16,962.50
NASD filing fee................................................ 6,250.00
Nasdaq National Market original listing fee.................... *
Blue sky fees and expenses (including attorneys' fees and
expenses).................................................... *
Printing and engraving expenses................................ *
Transfer agent's fees and expenses............................. *
Accounting fees and expenses................................... *
Legal fees and expenses........................................ *
Miscellaneous expenses......................................... *
----------
Total...................................................... $ *
----------
----------
</TABLE>

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

* To be provided by amendment.

All amounts are estimated except for the SEC registration fee and the NASD
filing fee.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company is incorporated under the laws of the State of New York.
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 15. RECENT SALES OF UNREGISTERED SECURITIES.

Over the past three years, the Company sold shares of its capital stock as
follows in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act or Rule 701 pursuant to Section 3(b) of the
Securities Act.

SERIES A PREFERRED STOCK, PAR VALUE $1.00 PER SHARE.

Shares of Series A Preferred Stock of the Company were sold to the following
persons on the following dates. Such shares were converted immediately prior to
the Offering into either (a) shares of Common Stock pursuant to the
Recapitalization described herein. See "Certain Relationships and Related
Transactions--The Recapitalization."

SERIES B PREFERRED STOCK, PAR VALUE $1.00 PER SHARE.

Shares of Series B Preferred Stock of the Company were sold to the following
persons on the following dates. Such shares were converted into Common Stock
immediately prior to the Offering pursuant to the Recapitalization described
herein. See "Certain Relationships and Related Transactions--The
Recapitalization."

<TABLE>
<CAPTION>
NUMBER AGGREGATE
DATE NAME OF SHARES PURCHASE PRICE
- ---------- ----------------------------------------------------------------------- ----------- ---------------
<C> <S> <C> <C>
12/10/96 Edward Trainor 1.29 45.15
12/10/96 Deborah Smith 549.34 19,226.90
12/10/96 Leslie Kimerling 33.03 1,156.05
12/10/96 Margaret Stevens 271.11 9,488.85
12/10/96 Robert Calvo 573.86 20,085.10
12/10/96 Mona Guzman 1.49 52.15
12/10/96 Heinz Ritschard 1,078.42 37,744.70
12/10/96 Raymond Dewhirst 808.83 28,309.05
12/10/96 Peter Bazzell 539.23 18,873.05
08/03/97 Paul Arnold 591.00 20,685.00
08/03/97 Keith Alessi 591.00 20,685.00
</TABLE>

II-2
<PAGE>
COMMON STOCK, PAR VALUE $0.001 PER SHARE.

Shares of Common Stock of the Company were sold to the following persons on
the following dates. See "Certain Relationships and Related Transactions--The
Recapitalization."

<TABLE>
<CAPTION>
NUMBER AGGREGATE
DATE NAME OF SHARES PURCHASE PRICE
- ---------- --------------------------------------------------------------------- ------------- ---------------
<C> <S> <C> <C>
12/10/96 Bruckmann, Rosser, Sherrill & Co., L.P. 504,456.01 $ 504,456.01
12/10/96 Bruce Bruckmann 10,214.93 10,214.93
12/10/96 Elizabeth MoShane 159.97 159.97
12/10/96 Beverly Place 159.97 159.97
12/10/96 D. Bruckmann 1,367.96 1,367.96
12/10/96 BCB Partnership 588.48 588.48
12/10/96 NAZ Partnership 283.97 283.97
12/10/96 Harold O. Rosser 2,052.23 2,052.23
12/10/96 V. Sherrill 6,839.79 6,839.79
12/10/96 Stephen Sherrill 10,534.87 10,534.87
12/10/96 N. Zwang 410.56 410.56
12/10/96 Paul D. Kaminaki 1,153.04 1,153.04
12/10/96 MLPF & S Custodian FBO 461.22 461.22
12/10/96 Farallon Capital Partners, L.P. 69,461.33 69,461.33
12/10/96 Farallon Capital Institutional Partners, L.P. 79,384.40 79,384.40
12/10/96 RR Capital Partners, L.P. 9,923.05 9,923.05
12/10/96 Farallon Capital Institutional Partners II, L.P. 39,692.20 39,692.20
12/10/96 Mark Smith 66,125.00 66,125.00
12/10/96 Robert Giardina 50,651.00 50,651.00
12/10/96 Alexander Alimanestianu 42,011.00 42,011.00
12/10/96 Richard Pyle 42,582.00 42,582.00
12/10/96 Carol Cornbill 13,428.00 13,428.00
12/10/96 Edward Trainor 8,091.00 8,091.00
12/10/96 Deborah Smith 15,908.00 15,908.00
12/10/96 Leslie Kimerling 8,388.00 8,388.00
12/10/96 Nina Duchaine 3,603.00 3,603.00
12/10/96 Margaret Stevens 2,274.00 2,274.00
12/10/96 Robert Calvo 2,857.00 2,857.00
12/10/96 Mona Guzman 1,691.00 1,691.00
12/10/96 Heinz Ritschard 2,332.00 2,332.00
12/10/96 Raymond Dewhirst 1,749.00 1,749.00
12/10/96 Peter Bazzell 1,166.00 1,166.00
08/03/97 Paul Arnold 591.00 591.00
08/03/97 Keith Alessi 591.00 591.00
</TABLE>

II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement by and among the Company, BT Alex. Brown
Incorporated and Bear, Stearns & Co. Inc.**
2.1 Agreement and Plan of Merger dated as of November 8, 1996 by and among the Company,
various Sellers and Option Holders and TSI Recapitalization Sub, Inc.+
2.2 Amendment to Agreement and Plan of Merger dated as of December 10, 1996 among TSI
Merger Sub, Inc., the Company and certain stockholders and option holders of the
Company.+
3.1 Amended and Restated Certificate of Incorporation of the Company.+
3.2 By-Laws of the Company.+
4.1 Indenture dated as of October 16, 1997 between the Company and United States Trust
Company of New York.+
4.2 Purchase Agreement dated as of October 9, 1997 among the Company and BT Alex. Brown
Incorporated.+
4.3 Registration Rights Agreement dated as of October 16, 1997 among the Company, and
BT Alex. Brown Incorporated.+
4.4 Registration Rights Agreement dated as of December 10, 1996 by and among the
Company, BRS and various investors, the Farallon Entities, CMC, and certain Town
Sports stockholders.+
5.1 Opinion of Kirkland & Ellis.**
10.1 Amended and Restated Credit Agreement among the Company, Various Lending
Institutions and Bankers Trust Company, as Administrative Agent dated as of October
16, 1997.+
10.2 First Amendment to the Amended and Restated Credit Agreement among the Company,
various Lending Institutions and Bankers Trust Company, as Administrative Agent
dated as of August 6, 1998.*
10.5 Shareholders Agreement dated as of December 10, 1996 by and among the Company, BRS,
the Farallon Entities, CMC and certain other stockholders of the Company.+
21.1 Subsidiaries of the Company*
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.*
23.2 Consent of PricewaterhouseCoopers LLP, independent accountants.*
23.3 Consent of PricewaterhouseCoopers LLP, independent accountants.*
23.4 Consent of Kirkland & Ellis (included in Exhibit 5.1).**
24.1 Powers of Attorney (included in signature page).*
27.1 Financial Data Schedule.*
</TABLE>

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

+ Incorporated by reference to the Company's registration statement on Form
S-4, Registration No. 333-40907, dated November 24, 1997.

* Filed herewith.

** To be filed by amendment.

(b) Financial Statement Schedules

The following financial statement schedule for the Company is included in
this Registration Statement:

Schedule II--Valuation and Qualifications Accounts

II-4
<PAGE>
ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes:

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

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

(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 this
registration statement;

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

provided, however, that the undertakings set forth in paragraph (i) and (ii)
above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
registration statement.

(2) That, for the purpose of determining any liability under the Securities
Act, 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 that 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.

In addition, the undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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.

The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act 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 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-5
<PAGE>
The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, 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.

(2) For the purpose of determining any liability under the Securities Act,
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.

II-6
<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 August 13, 1998.

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

By: /s/ MARK SMITH
-----------------------------------------
Mark Smith
CHIEF EXECUTIVE OFFICER
</TABLE>

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Mark Smith and Richard Pyle his 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, 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, this Registration
Statement and power of attorney have been signed by the following persons on
August 13, 1998 in the capacities indicated:

<TABLE>
<S> <C> <C>
By: /s/ MARK SMITH
-----------------------------------------
Mark Smith
CHIEF EXECUTIVE OFFICER
(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
</TABLE>

II-7
<PAGE>
<TABLE>
<S> <C> <C>
By: /s/ PAUL ARNOLD
-----------------------------------------
Paul Arnold
DIRECTOR

By: /s/ BRUCE BRUCKMANN
-----------------------------------------
Bruce Bruckmann
DIRECTOR

By: /s/ STEPHEN EDWARDS
-----------------------------------------
Stephen Edwards
DIRECTOR

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

II-8
<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

New York, New York
July 9, 1998

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-1. 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-1.

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

PRICEWATERHOUSECOOPERS LLP

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

SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS

(IN THOUSANDS)

FOR EACH OF THE YEARS ENDED MAY 31, 1996, 1997 AND 1998

<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:
1996......................................... $ 284 $ 284
1997......................................... 284 $ (100 (1) 184
1998......................................... 184 184
</TABLE>

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

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

S-3
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------ -----
<C> <S> <C>
1.1 Form of Underwriting Agreement by and among the Company, BT Alex. Brown Incorporated and Bear,
Stearns & Co. Inc.**
2.1 Agreement and Plan of Merger dated as of November 8, 1996 by and among the Company, various
Sellers and Option Holders and TSI Recapitalization Sub, Inc.+
2.2 Amendment to Agreement and Plan of Merger dated as of December 10, 1996 among TSI Merger Sub,
Inc., the Company and certain stockholders and option holders of the Company.+
3.1 Amended and Restated Certificate of Incorporation of the Company.+
3.2 By-Laws of the Company.+
4.1 Indenture dated as of October 16, 1997 between the Company and United States Trust Company of
New York.+
4.2 Purchase Agreement dated as of October 9, 1997 among the Company and BT Alex. Brown
Incorporated.+
4.3 Registration Rights Agreement dated as of October 16, 1997 among the Company, and BT Alex. Brown
Incorporated.+
4.4 Registration Rights Agreement dated as of December 10, 1996 by and among the Company, BRS and
various investors, the Farallon Entities, CMC, and certain Town Sports stockholders.+
5.1 Opinion of Kirkland & Ellis.**
10.1 Amended and Restated Credit Agreement among the Company, Various Lending Institutions and
Bankers Trust Company, as Administrative Agent dated as of October 16, 1997.+
10.2 First Amendment to the Amended and Restated Credit Agreement among the Company, various Lending
Institutions and Bankers Trust Company, as Administrative Agent dated as of August 6, 1998.*
10.5 Shareholders Agreement dated as of December 10, 1996 by and among the Company, BRS, the Farallon
Entities, CMC and certain other stockholders of the Company.+
21.1 Subsidiaries of the Company*
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.*
23.2 Consent of PricewaterhouseCoopers LLP, independent accountants.*
23.3 Consent of PricewaterhouseCoopers LLP, independent accountants.*
23.4 Consent of Kirkland & Ellis (included in Exhibit 5.1).**
24.1 Powers of Attorney (included in signature page).*
27.1 Financial Data Schedule.*
</TABLE>

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

+ Incorporated by reference to the Company's registration statement on Form
S-4, Registration No. 333-40907, dated November 24, 1997.

* Filed herewith.

** To be filed by amendment.

<PAGE>

Exhibit 10.2

FIRST AMENDMENT
---------------

FIRST AMENDMENT (this "Amendment"), dated as of August 5, 1998, among
TOWN SPORTS INTERNATIONAL, INC., a New York corporation (the "Borrower"), the
various lending institutions party to the Credit Agreement referred to below
(the "Banks"), and BANKERS TRUST COMPANY, as administrative agent (the
"Administrative Agent"). All capitalized terms used herein and not otherwise
defined shall have the respective meanings provided such terms in the Credit
Agreement referred to below.

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

WHEREAS, the Borrower, the Banks and the Administrative Agent are
parties to an Amended and Restated Credit Agreement, dated as of October 16,
1997, (the "Credit Agreement");

WHEREAS, the parties hereto wish to amend the Credit Agreement to
increase the Total Commitment thereunder to $25,000,000; and

NOW, THEREFORE, it is agreed that as of the First Amendment Effective
Date (as defined below):

1. ANNEX I to the Credit Agreement is hereby deleted in its entirety
and replaced by ANNEX I attached hereto and made a part hereof and thereof.

2. Section 8.10 of the Credit Agreement is hereby amended by (i)
deleting Section 8.10 in its entirety and (ii) replacing it with a new Section
8.10 as set forth below:

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 Fiscal quarter ending November 30, 1998 5:5:1
November 30, 1998 through December 31, 1998 5.4:1
December 31, 1998 through January 31, 1999 5.3:1
January 31, 1999 through February 28, 1999 5.2:1
February 28, 1999 through March 31, 1999 5.0:1

<PAGE>

March 31, 1999 through April 30, 1999 4.8:1
April 30, 1999 through May 31, 1999 4.6:1

May 31, 1999 through Fiscal quarter ending August 31, 1999 4.5:1
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, 20001 3.80:1
Each Fiscal Quarter Thereafter 3.75:1

3. The definition of "Consolidated EBITDAD" in Section 10 of the
Credit Agreement shall be amended by adding the following proviso to the end
thereof:
"; provided that Consolidated EBITDAD shall include, on a pro forma
basis for any period for the calculation thereof, EBITDAD of any
Person or business acquired during such period for which the Borrower
provides audited financial evidence thereof, so long as for any
calculation of Consolidated EBITDAD, (x) no more than 15% of such
amount shall be included as a result of this proviso and (y) no more
than $5 million shall be included as a result of this proviso."

4. In order to induce the Banks to enter into this First Amendment,
the Borrower hereby represents and warrants that on the First Amendment
Effective Date, both before and after giving effect to this First Amendment and
the transactions contemplated hereby, (1) no Default or Event of Default shall
exist and (2) all of the representations and warranties contained in the Credit
Documents 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 First Amendment Effective Date (it being understood that any representation
or warranty made as of a specific date shall be true and correct in all material
respects as of such specific date).

5. This First Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement or any other Credit Document.

6. This First Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Agent.

7. THIS FIRST AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.

-2-

<PAGE>

8. This First Amendment shall become effective as of the date hereof
(the "First Amendment Effective Date") when the Borrower, the Required Banks
(including each Bank whose Commitment is increased pursuant hereto) and the
Administrative Agent shall have signed a copy hereof (whether the same or
different copies) and shall have delivered (including by way of telecopier) the
same to the Administrative Agent.

-3-

<PAGE>

IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment 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: Richard Pyle Title:

One Bankers Trust Plaza - 34th Floor BANKERS TRUST COMPANY,
New York, New York 10006 Individually and as Administrative Agent
Telephone: (212) 250-5175
Facsimile: (212) 250-7218

By
-------------------------------------
Attention: Patricia M. Hogan Title:

565 Fifth Avenue BANK OF SCOTLAND
New York, New York 10017
Telephone: (212) 450-0871
Facsimile: (212) 557-9460

By
-------------------------------------
Attention: Annie Chin Tat Title:

<PAGE>

ANNEX I

COMMITMENTS
-----------

BANK
----
COMMITMENT
----------

Bankers Trust Company $12,500,000

Bank of Scotland $12,500,000

-----------
$25,000,000

<PAGE>

Exhibit 21.1

Town Sports International, Inc.
TSI Alexandria, LLC
TSI Allston, Inc.
TSI Arthro Fitness Services, Inc.
TSI Holdings (MD), Inc.
TSI Bethesda, Inc.
TSI Broadway, Inc.
TSI Brooklyn Belt, Inc.
TSI Brunswick, Inc.
TSI Cash Management, Inc.
TSI Centreville, Inc.
TSI Cobble Hill, Inc.
TSI Copley, Inc.
TSI Croton, Inc.
TSI Danbury, Inc.
TSI Dupont Circle, Inc.
TSI Dupont II, Inc.
TSI East 76, Inc.
TSI East 59, Inc.
TSI East 34, Inc.
TSI East 91, Inc.
TSI East 94, Inc.
TSI East 23, Inc.
TSI East 51, Inc.
TSI East 36, Inc.
TSI East 41, Inc.
TSI Fenway, Inc.
TSI Fifth Avenue, Inc.
TSI First Avenue, Inc.
TSI Forest Hills, Inc.
TSI Fort Lee, Llc.
TSI Freshold, Inc.
TSI Germantown, LLC
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 Holdings (NJ), Inc.
TSI Holdings (VA), Inc.
TSI International, Inc.
TSI Lexington, Inc.
TSI Lincoln, Inc.
TSI Madison, Inc.
TSI Mahwah, LLC
TSI Mamaroneck, Inc.
TSI Marlboro, Inc.
TSI Matawan, Inc.
TSI Merrifield, Inc.
TSI M Street, Inc.
TSI Nanuet, Inc.
TSI Oceanside, Inc.
TSI Old Bridge, Inc.
TSI Princeton, LLC
TSI Norwalk, Inc.
TSI Ramsey, Inc.
TSI Rockville, Inc.
TSI Rodin Place, Inc.
TSI Seaport, Inc.
TSI Scarsdale, Inc.
TSI Sheridan, Inc.
TSI Stamford Downtown, Inc.
TSI Stamford Post, Inc.
TSI Stamford Rinks, Inc.
TSI Staten Island, Inc.
TSI Society Hill, Inc.
TSI 217 Broadway, Inc.
TSI Washington, Inc.
TSI West 20, Inc.
TSI West 23, Inc.
TSI West 52, Inc.
TSI West 76, Inc.
TSI West 125, Inc.
TSI Weymouth, Inc.
TSI Wall Street, Inc.
TSI Whitestone, Inc.
TSI White Plains, Inc.
TSI Franklin Park, LLC
TSI Springfield, LLC
TSI Somerset, LLC
TSI Plainsboro, LLC
TSI Colonia, LLC
TSI Parsippany, LLC
TSI West Caldwell, LLC
TSI Boylston, Inc.
TSI Bulfinch, Inc.

<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

New York, New York
August 7, 1998

We consent to the inclusion in this registration statement on Form S-1 of
our reports dated July 9, 1998, except for the last paragraph of Note 6 and Note
17, as to which the date is August 6, 1998, 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."

PRICEWATERHOUSECOOPERS LLP

<PAGE>
EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

New York, New York

August 7, 1998

We consent to the inclusion in this registration statement on Form S-1 of
our reports dated March 11, 1998, except for Note 11 as to which the date is
April 6, 1998, on our audits of the financial statements of Ultrafit, Inc. and
Affiliates. We also consent to the reference to our firm under the caption
"Experts."

PRICEWATERHOUSECOOPERS LLP

<PAGE>
EXHIBIT 23.3

CONSENT OF INDEPENDENT ACCOUNTANTS

New York, New York

August 7, 1998

We consent to the inclusion in this registration statement on Form S-1 of
our report dated August 6, 1998, on our audit of the financial statements of
Lifestyle Fitness of Springfield, Inc. and Affiliates. We also consent to the
reference to our firm under the caption "Experts."

PRICEWATERHOUSECOOPERS LLP

<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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ENDED MAY 31, 1998.
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