BALLY TOTAL FITNESS HOLDING CORP, 424B4, 1998-05-08

BALLY TOTAL FITNESS HOLDING CORP
424B4, 1998-05-08
MEMBERSHIP SPORTS & RECREATION CLUBS

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<PAGE> 1

Filed pursuant To Rule 424(b)(4)
P R O S P E C T U S Registration No. 333-48241

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

2,800,000 Shares

BALLY
LOGO

Bally Total Fitness Holding Corporation

Common Stock
------------------------

All of the 2,800,000 shares of common stock, $.01 par value per share (the
"Common Stock"), offered hereby (the "Offering") are being issued and sold by
Bally Total Fitness Holding Corporation, a Delaware corporation (the "Company"
or "Bally"). The Common Stock is traded on the New York Stock Exchange under the
symbol "BFT". On May 7, 1998, the last sale price of the Common Stock as
reported on the New York Stock Exchange was $31 3/8 per share. See "Price Range
of Common Stock and Dividend Policy".

SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
------------------------

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>
<S> <C> <C> <C>
===============================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------
Per Share........... $31.375 $1.645 $29.73
- -----------------------------------------------------------------------------------------------
Total (3)........... $87,850,000 $4,606,000 $83,244,000
===============================================================================================
</TABLE>

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

(2) Before deducting expenses payable by the Company estimated at $475,000.

(3) The Company has granted the several Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an additional 409,000
shares of the Common Stock, solely to cover over-allotments, if any. If all
such shares are purchased, the total Price to Public, Underwriting Discount
and Proceeds to Company will be $100,682,375, $5,278,805 and $95,403,570,
respectively. See "Underwriting".
------------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
the delivery of the shares of Common Stock will be made in New York, New York,
on or about May 13, 1998.
------------------------

MERRILL LYNCH & CO.
LADENBURG THALMANN & CO. INC.
CHASE SECURITIES INC.
------------------------

The date of this Prospectus is May 8, 1998.
<PAGE> 2

AVAILABLE INFORMATION

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). Reports, registration
statements, proxy statements and other information filed by the Company with the
Commission can be inspected and copied at the public reference facility
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and the Commission's Regional Offices, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a web site at http://www.sec.gov that contains reports, registration
statements, proxy statements and other information regarding registrants, such
as the Company, that file electronically with the Commission. The Common Stock
is listed on the New York Stock Exchange, and public filings by the Company are
available for inspection at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.

The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Commission under the Securities Act of 1933,
as amended (the "Securities Act"), in respect of the Common Stock offered
hereby. For purposes hereof, the term "Registration Statement" means the initial
Registration Statement and any and all amendments thereto. This Prospectus,
which constitutes a part of the Registration Statement, omits certain
information contained in the Registration Statement as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto. Statements herein
concerning the contents of any contract or other document are not necessarily
complete, and in each instance reference is made to such contract or other
document filed with the Commission as an exhibit to the Registration Statement,
or otherwise, each such statement being qualified by, and subject to, such
reference in all respects.
------------------------------

CERTAIN UNITED KINGDOM RELATED REGULATORY ISSUES

THE SHARES OF COMMON STOCK WILL ONLY BE OFFERED AND SOLD IN THE UNITED
KINGDOM TO PERSONS WHOSE ORDINARY ACTIVITIES INVOLVE THEM IN ACQUIRING, HOLDING,
MANAGING OR DISPOSING OF INVESTMENTS (AS PRINCIPAL OR AGENT) FOR THE PURPOSES OF
THEIR BUSINESS OR OTHERWISE IN CIRCUMSTANCES WHICH DO NOT CONSTITUTE AN OFFER TO
THE PUBLIC IN THE UNITED KINGDOM FOR PURPOSES OF THE PUBLIC OFFERS OF SECURITIES
REGULATIONS 1995.

THIS PROSPECTUS IS BEING DISTRIBUTED ON THE BASIS THAT EACH PERSON IN THE
UNITED KINGDOM TO WHOM THIS PROSPECTUS IS ISSUED OR PASSED ON IS REASONABLY
BELIEVED TO BE A PERSON FALLING WITHIN AN EXEMPTION TO SECTION 57 OF THE
FINANCIAL SERVICES ACT 1986, AS AMENDED, INCLUDING THOSE SET OUT IN THE
FINANCIAL SERVICES ACT 1986 (INVESTMENT ADVERTISEMENTS)(EXEMPTIONS) ORDER 1996,
AS AMENDED, OR THE FINANCIAL SERVICES ACT 1986 (INVESTMENT ADVERTISEMENTS)
(EXEMPTIONS) (NO 2) ORDER 1995, AS AMENDED, AND, ACCORDINGLY, BY ACCEPTING
DELIVERY OF THIS PROSPECTUS THE RECIPIENT WARRANTS AND ACKNOWLEDGES THAT IT IS A
PERSON FALLING WITHIN ANY SUCH EXEMPTION.

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING".

2
<PAGE> 3

PROSPECTUS SUMMARY

The following is a summary of certain information contained elsewhere in this
Prospectus and is qualified by the more detailed information set forth elsewhere
in this Prospectus which should be read in its entirety. Unless otherwise
indicated, capitalized terms used in this Prospectus Summary have the respective
meanings ascribed to them elsewhere in this Prospectus. The information
contained in this Prospectus Summary contains forward-looking statements which
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. See "Special Note Regarding
Forward-Looking Statements" on page 8.

THE COMPANY

The Company is the largest (and only nationwide) commercial operator of
fitness centers in the United States in terms of revenues, the number of
members, and the number and square footage of facilities. As of March 31, 1998,
the Company operated approximately 320 fitness centers concentrated in major
metropolitan areas in 27 states and Canada and had approximately four million
members. Bally's members made more than 100 million visits to its fitness
centers in each of 1996 and 1997.

The Company offers its members value by providing access to
state-of-the-art fitness facilities with affordable membership programs. Bally's
fitness centers feature an outstanding selection of cardiovascular, conditioning
and strength equipment and offer extensive aerobic training programs. In
addition, many of the Company's current fitness centers include pools, racquet
courts or other athletic facilities. The Company's new club prototype achieves
efficiency by focusing on those fitness services that receive a high degree of
member use. The Company has clustered its fitness centers in major metropolitan
areas in order to achieve marketing and operating efficiencies. These markets
include, among others, New York, Los Angeles, Chicago, Houston, Dallas, Detroit,
Baltimore, Washington, D.C., Philadelphia, Miami, Cleveland, Atlanta, Milwaukee,
Seattle, Minneapolis, Orlando, Denver, Phoenix, St. Louis, Boston, and Kansas
City. In 1996, the Company completed the process of renaming its fitness centers
so substantially all use the service mark "Bally Total Fitness", thereby
enhancing brand identity, concentrating advertising and eliminating the prior
practice of using more than 25 different regional service marks and trade names.

The Company's primary target market for new members is the 18 to 34-year
old, middle income segment of the population, with secondary target markets
including older and higher income segments. Bally markets itself to these
consumer segments through the use of a variety of membership options and payment
plans. The membership options offered by the Company range from single-club
memberships to premium memberships which provide additional amenities and access
to all of Bally's fitness centers nationwide. Similarly, the Company offers a
broad range of payment alternatives. Typically, members pay an initiation fee
which can either be financed (generally for up to 36 months and subject to
downpayment requirements) or paid-in-full at the time of joining. Members are
generally required to pay monthly membership dues in order to use the Company's
fitness facilities. Management believes the various membership and payment plans
offered, in addition to Bally's strong brand identity and the convenience of its
multiple locations, constitute distinct competitive advantages for the Company.

OPERATING STRATEGIES

In October 1996, Lee S. Hillman was named President and Chief Executive
Officer of the Company. This completed the transition of senior management of
the Company from predominantly marketing oriented managers, including the
original founders of the Company, to managers with a more financial and
operational orientation. The new management team quickly implemented a business
strategy designed to improve the operating results of the Company. These efforts
have contributed to recent increases in revenues and operating income, although
the Company reported a loss before extraordinary item of $23.5 million for the
year ended December 31, 1997.

3
<PAGE> 4

Core Business

During 1997, management developed and began implementing five strategies to
improve the underlying operations and the financial performance of the Company.
These strategies have already favorably impacted the Company's financial results
and management is committed to furthering their implementation.

- Emphasize the Sale of All-Club Membership Plans -- Prior to a public
offering of 8,000,000 shares of Common Stock in August 1997 which provided
net proceeds of $88.4 million to the Company (the "1997 Stock Offering"),
the Company managed its commission structure to emphasize the sale of
paid-in-full membership plans to generate immediate cash for short-term
liquidity at the expense of longer-term financial returns. The 1997 Stock
Offering provided additional working capital, allowing the Company to
emphasize the sale of all-club membership plans, which are typically
financed, rather than single-club membership plans. In 1997, this new
emphasis contributed to an 18% increase in the weighted-average price of
memberships sold to approximately $970 from approximately $820 in 1996.
Management believes that it can continue to increase new member revenues
through an emphasis on financed membership plans.

- Upgrade and Expand Fitness Centers -- Using a portion of the net
proceeds from the 1997 Stock Offering and cash flow from operations, the
Company has begun to expand and upgrade its existing facilities and
equipment in order to increase its membership base and more effectively
capitalize on its streamlined marketing and administrative functions. The
Company has budgeted approximately $15 million for this initiative (over
and above normal maintenance capital expenditures), most of which has been
spent or committed.

- Increase Dues Revenues -- The Company believes that its dues are
substantially less than those charged by its competitors and that it can
continue to increase dues for its members who are beyond their initial
financing period without any material loss in membership. In addition, the
Company has reduced promotions which discounted or waived dues. In 1997,
these initiatives contributed to an increase in dues collected of
approximately $11.2 million, or 6%, over 1996. Management believes that it
can continue to raise the dues charged to its members at a rate consistent
with past periods.

- Improve Collections on Financed Contracts -- The Company is
maintaining its focus on increasing downpayments on financed membership
plans and securing payments by electronic funds transfer ("EFT"), which the
Company's experience has shown results in higher quality receivables. This
effort yielded an increase of 11% in the average down payment, from $73 in
1996 to $81 in 1997. In addition to seeking higher down payments, the
Company continues to develop improved collection practices based on
information provided by "credit scoring" and behavioral modeling, which
management believes will also improve the yield from the receivables
portfolio.

- Continue to Leverage Fixed Cost Base -- A significant percentage of
the Company's operating costs are fixed in nature, both in terms of fitness
center operations and member processing and advertising. Over the past
several years, the Company has significantly reduced these operating costs
through aggressive cost management. As the Company pursues its growth
strategies described below, management will seek to leverage the Company's
fixed cost base to improve operating margins.

Growth Opportunities

In order to build upon the improved core operations and accelerate the
growth of the Company's business, management has identified the following
external growth opportunities:

- Develop New Fitness Centers -- Beginning in 1998, the Company
intends to increase its spending to approximately $20 million to $25
million per year to open 15 to 20 new facilities based on its new fitness
center prototype, which is designed to cost less to construct and maintain
than the Company's older facilities. The majority of the Company's new
fitness center facilities will be developed pursuant to long term lease
arrangements. The prototype model of new fitness centers developed over the
most recent years has required on average $1.3 million to fund leasehold
improvements and fitness equipment.

4
<PAGE> 5

- Selectively Acquire Club-Related Real Estate -- The Company operates
approximately 320 fitness centers, over 90% of which are leased.
Historically, the Company has not capitalized on opportunities to buy
leased properties at attractive terms due to capital constraints. The
Company's recently improved financial condition allows the Company to take
advantage of attractive opportunities to acquire leased properties. In
addition to pursuing these opportunities, the Company will also evaluate
purchasing parcels of land in strategic locations for new club expansion.
While the Company believes that from time to time there are attractive
opportunities to acquire real estate, either for existing club sites or new
locations, management intends only to pursue real estate transactions
following a very selective set of criteria, including strategic locale and
relative market values.

- Identify and Acquire Fitness Center Operators in Strategic
Geographic Locations -- The Company maintains an operating strategy of
clustering its clubs in major metropolitan areas in order to achieve
marketing and operating efficiencies. Consistent with this strategy,
management has identified major metropolitan areas where the Company is
absent or underrepresented. In an effort to establish a cluster of clubs
quickly in strategic locations, the Company plans to identify and acquire
fitness center operators where attractive opportunities exist and internal
growth would not be as effective due to various factors, including
timeliness and availability of prime real estate.

New Business Initiatives

Management believes that the Company can increase and diversify revenues by
leveraging its strong brand identity, extensive distribution infrastructure
(approximately 320 facilities), significant member base (approximately four
million members) and frequency of visitation (in excess of 100 million member
visits in each of 1996 and 1997) by offering a number of ancillary products and
services. In order to pursue these growth opportunities, the Company has
implemented the following initiatives:

- Personal Training -- In 1997, the Company introduced a newly
developed personal training program which is now offered at most of its
fitness centers. The value of this service to members, coupled with
decreased outsourcing of this service, represents a significant profit
opportunity for the Company. In the fourth quarter of 1997, the Company
generated $2.0 million in revenues from the sale of personal training
programs. To better introduce personal training services and Bally-branded
nutritional products to its members, the Company began offering System 30
memberships at most of its fitness centers in January 1998. Members
selecting the System 30 membership receive the benefits of an all-club
membership plan plus a complete fitness analysis, a supply of Bally-branded
nutritional products and three personal training sessions during the first
month of membership.

- Private-Label Nutritional Products -- During 1997, the Company
launched the sale of an exclusive line of Bally-branded nutritional
products to the Company's members. The current line of Bally-branded
nutritionals includes meal replacement drinks, multi-vitamins, fat-free
snack wafers, a creatine mix and fat-reducing supplements. While these
products were only being introduced in 1997, sales for the year totaled
$2.2 million, including $1.0 million in the fourth quarter of 1997. The
Company continues to test market other nutritional products.

- Retail Stores -- To date, the Company has opened more than 60 BFIT
Essentials(TM) retail stores in its fitness centers. These retail stores
sell Bally-branded and complementary products from other manufacturers,
including nutritional products, workout apparel and related accessories.
The Company plans to have approximately 100 BFIT Essentials(TM) retail
stores in its fitness centers by the end of 1998.

- Outpatient Rehabilitative and Physical Therapy Services -- The
Company believes numerous opportunities exist to contract with third party
providers and managers of health care programs and services to provide
affordable, comprehensive outpatient rehabilitative and physical therapy
services in its fitness centers, and expects to offer these services to
members and non-members alike in up to 100 of its facilities within the
next three years, primarily using existing facilities and equipment.
Pursuant to an agreement with Continucare Corporation, two such facilities
are currently in operation in the Florida market, with plans already
developed to have four additional facilities operating during 1998.

5
<PAGE> 6

THE OFFERING

Common Stock offered...................... 2,800,000 shares(1)

Common Stock to be outstanding after the
Offering................................ 23,643,012 shares(1)(2)

Use of proceeds........................... To develop new fitness
centers using the
Company's new club
prototype, to
selectively acquire
club-related real
estate, to acquire
fitness center
operators in strategic
locations and the
balance, if any, for
general corporate and
working capital
purposes.

New York Stock Exchange symbol............ BFT

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

(1) Assumes that the Underwriters' over-allotment option to purchase up to
409,000 shares of Common Stock is not exercised.

(2) Does not give effect to any future exercise of outstanding warrants to
purchase 3,192,805 shares of Common Stock, outstanding stock options to
purchase 1,908,250 shares of Common Stock and options to purchase an
additional 1,294,668 shares of Common Stock which the Company is able to
grant under its existing stock option and purchase plans.

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

The Company was a wholly-owned subsidiary of Bally Entertainment
Corporation ("Entertainment") until Entertainment spun-off the Company (the
"Spin-off") to its stockholders on January 9, 1996. The Company's executive
offices are located at 8700 West Bryn Mawr Avenue, Chicago, Illinois, 60631,
telephone number (773) 380-3000. As used in this Prospectus, unless the context
otherwise requires, the "Company" or "Bally" refers to Bally Total Fitness
Holding Corporation and its subsidiaries and their predecessors.

6
<PAGE> 7

SUMMARY FINANCIAL DATA

The following table presents summary consolidated financial data of the
Company. The financial data were derived from, and should be read in conjunction
with, financial information appearing elsewhere in this Prospectus. See
"Selected Consolidated Financial Data".

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- ---------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $661.0 $639.2 $653.4 $682.0 $ 666.7
Operating income (loss)................... 19.9 19.1 5.0 (16.1) (18.1)
Loss before extraordinary item and
cumulative effect on prior years of
change in accounting for income
taxes(a)(b)............................ (23.5) (24.9) (31.4) (39.5) (31.4)
Basic and diluted loss per common share
(pro forma for 1995)(c)................ (1.51) (2.04) (3.25)
BALANCE SHEET DATA (AT END OF YEAR):
Installment contracts receivable, net..... $343.6 $300.2 $303.4 $284.1 $ 322.7
Total assets.............................. 967.6 893.3 936.5 951.0 1,016.7
Long-term debt, less current maturities... 405.4 376.4 368.0 289.7 305.7
Stockholders' equity...................... 70.3 24.2 31.7 34.8 50.6
OTHER FINANCIAL DATA:
EBITDA(d)................................. $ 72.8 $ 75.0 $ 62.4 $ 42.8 $ 42.3
Cash provided by (used in):
Operating activities................... (35.9) (5.3) (9.9) 32.8 49.9
Investing activities................... (16.1) (9.8) (42.1) (21.4) (36.1)
Financing activities................... 97.2 10.4 60.4 (9.6) (13.6)
</TABLE>

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

(a) In 1997, the Company recognized an extraordinary loss on extinguishment of
debt of $21.4 million ($1.37 per share) resulting from a refinancing of the
Company's subordinated debt and credit facility. In 1996, the Company
recognized a net extraordinary gain on extinguishment of debt consisting of
(i) a gain of $9.9 million ($.81 per share) resulting from a $15.2 million
tax obligation to Entertainment which was forgiven as part of the December
1996 merger of Entertainment with and into Hilton Hotels Corporation
("Hilton") and (ii) a charge of $4.2 million ($.35 per share) resulting from
a refinancing of the Company's securitization facility. In 1993, the Company
recognized an extraordinary loss on extinguishment of debt of $6.0 million
resulting from a refinancing of certain indebtedness.

(b) In 1993, the Company changed its method of accounting for income taxes as
required by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." As permitted by SFAS No. 109, the Company
elected to use the cumulative effect approach rather than to restate the
consolidated financial statements of any prior years to apply the provisions
of SFAS No. 109, which resulted in a charge of $69.0 million in 1993.

(c) The net loss for 1995 reflects a federal income tax benefit arising from the
Company's prior tax sharing agreement with Entertainment of $7.1 million.
Pro forma loss per common share for 1995 (which is unaudited) has been
determined giving effect to (i) adjustments made to reflect the income tax
benefit as if the Company had filed its own separate consolidated income tax
return for the year, which results in a pro forma net loss of $38.5 million,
and (ii) the distribution of 11,845,161 shares of Common Stock to
Entertainment stockholders as if such distribution had taken place as of the
beginning of the year.

(d) EBITDA is defined as operating income (loss) before depreciation and
amortization. The Company has presented EBITDA supplementally because
management believes this information is useful given the significance of the
Company's depreciation and amortization and because of its highly leveraged
financial position. These data should not be considered as an alternative to
any measure of performance or liquidity as promulgated under generally
accepted accounting principles (such as net income/loss or cash provided
by/used in operating, investing and financing activities), nor should they
be considered as an indicator of the Company's overall financial
performance. Also, the EBITDA definition used herein may not be comparable
to similarly titled measures reported by other companies.

7
<PAGE> 8

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

CERTAIN STATEMENTS IN THE PROSPECTUS SUMMARY AND UNDER THE HEADINGS "RISK
FACTORS", "BUSINESS", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION", AND ELSEWHERE IN THIS PROSPECTUS CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT
FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, AMONG OTHERS, THE
FOLLOWING: GENERAL ECONOMIC AND BUSINESS CONDITIONS; COMPETITION; SUCCESS OF
OPERATING INITIATIVES, ADVERTISING AND PROMOTIONAL EFFORTS; EXISTENCE OF ADVERSE
PUBLICITY OR LITIGATION; ACCEPTANCE OF NEW PRODUCT OFFERINGS; CHANGES IN
BUSINESS STRATEGY OR PLANS; QUALITY OF MANAGEMENT; AVAILABILITY, TERMS, AND
DEVELOPMENT OF CAPITAL; BUSINESS ABILITIES AND JUDGMENT OF PERSONNEL; CHANGES
IN, OR THE FAILURE TO COMPLY WITH, GOVERNMENT REGULATIONS; REGIONAL WEATHER
CONDITIONS; THOSE ITEMS SET FORTH UNDER THE HEADING "RISK FACTORS"; AND OTHER
FACTORS REFERENCED IN THIS PROSPECTUS.

RISK FACTORS

Prior to making an investment decision, prospective investors should
consider carefully all of the information set forth in this Prospectus and,
particularly, should evaluate the following risk factors.

NET LOSSES

The Company reported losses before extraordinary item of $23.5 million,
$24.9 million and $31.4 million for the years ended December 31, 1997, 1996 and
1995, respectively. On a pro forma basis, adjusting the income tax benefit as if
the Company had filed its own separate consolidated tax return, the loss for
1995 would have been $38.5 million.

RISKS ASSOCIATED WITH HIGHLY-LEVERAGED FINANCIAL POSITION

In December 1996, the Company issued $160.0 million of asset-backed
securities (the "Securitization") by selling undivided interests in the H&T
Master Trust (the "Trust"). The Trust consists primarily of a portfolio of
installment contracts receivable from membership plans and the proceeds thereof.
The Company plans to refinance the Securitization in the second or third quarter
of 1999; however, there can be no assurance that the Company will be able to
refinance the Securitization or that the terms of such refinancing will be as
favorable as those of the Securitization.

The Company's long-term debt includes the Securitization, $225 million
principal amount of 9 7/8% Senior Subordinated Notes due 2007 (the "9 7/8%
Notes") and a $70 million revolving credit facility which expires in November
2000, which was unused at December 31, 1997 except for outstanding letters of
credit totaling $7.2 million. At December 31, 1997, the Company had total
indebtedness of approximately $432.6 million and a ratio of long-term debt (less
current maturities) to total capitalization of approximately 85%. In addition,
interest paid for the year ended December 31, 1997 totaled $48.4 million. The
Company's recent losses, total indebtedness and provisions of existing debt
instruments limit the Company's ability to raise capital or borrow money. The
provisions in the Company's existing debt instruments limit the Company's
ability to borrow additional funds and to grant security interests and require
the Company to maintain certain financial ratios, including those relating to
cash flow and interest expense. As a result of the limitations, the Company may
be more vulnerable to economic downturns, may not be able to exploit certain
business opportunities when they arise and may have less flexibility to respond
to changing economic conditions, each of which could have a material adverse
effect on the Company's financial condition and results of operations.

RISKS ASSOCIATED WITH NEW INITIATIVES

The Company has introduced a number of new initiatives to capitalize on its
strong brand identity, extensive distribution infrastructure (approximately 320
facilities), significant member base (approximately

8
<PAGE> 9

four million members) and frequency of visitation. These initiatives include
selling and marketing nutritional products, workout apparel and related
accessories to its members in its clubs as well as making comprehensive
outpatient rehabilitative and physical therapy services available to both
members and non-members. The Company has not previously generated significant
revenues from any of these new initiatives and there can be no assurance that
such initiatives will be successful. In addition, the Company has limited
experience in marketing new products to its members. The sale and marketing of
nutritional products, workout apparel and related accessories and the provision
of rehabilitative and physical therapy services involve significant risks of
competition. See "-- Competition". The provision of rehabilitative and physical
therapy services also involves risks of government regulation. See
"-- Government Regulation".

RISKS ASSOCIATED WITH PRICING STRATEGY

Competitive conditions in certain markets in which the Company operates may
limit the Company's ability to reduce discount pricing on paid-in-full
memberships and to increase dues significantly without a material loss in
membership.

RISKS RELATING TO ACQUISITIONS

A component of the Company's business strategy is to identify and acquire
fitness center operators in strategic geographic locations. The success of this
strategy will depend upon a number of factors, including the Company's ability
to identify acceptable acquisition candidates in suitable locations, consummate
acquisitions on favorable terms, successfully integrate acquired businesses with
the Company's existing operations and expand its membership base at acquired
locations. There can be no assurance that the Company will successfully expand
or that any expansion will result in profitability. The failure to identify,
evaluate and effectively integrate acquired businesses could adversely affect
the Company's operating results.

COMPETITION

The Company is the largest operator, or among the largest operators, of
fitness centers in every major market in which it has fitness centers. Within
each market, the Company competes with other fitness centers, physical fitness
and recreational facilities established by local governments and hospitals and
by businesses for their employees, the YMCA and similar organizations and, to a
certain extent, with racquet and other athletic clubs, country clubs,
weight-reducing salons and the home-use fitness equipment industry. The Company
believes competition has increased to some extent in certain markets, reflecting
the public's enthusiasm for fitness and a decrease in the cost of entry into the
market due to financing available from landlords and equipment manufacturers.
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.

As the Company pursues new business initiatives, particularly the sale of
nutritional products and apparel, the Company competes against large,
established companies with more experience selling such products on a retail
basis and, in some instances, with substantially greater financial resources
than the Company. There can be no assurance the Company will be able to compete
effectively with such established companies.

SEASONAL MEMBERSHIP FEE ORIGINATIONS

Historically, the Company has experienced greater membership fee
originations in the first quarter and lower membership fee originations in the
fourth quarter. The new initiatives the Company has implemented may have the
effect of increasing the seasonality of the Company's business.

GOVERNMENT REGULATION

The operations and business practices of the Company are subject to
regulation at federal, state and, in some cases, local levels. General rules and
regulations of the Federal Trade Commission (the "FTC"), and of state and local
consumer protection agencies, and state statutes apply to the Company's
advertising, sales and other trade practices, including the sale, financing and
collection of memberships. Although management is not aware of any proposed
changes in any statutes, rules or regulations affecting the Company, any such

9
<PAGE> 10

changes could have a material adverse effect on the Company's financial
condition and results of operations. In addition, the provision of
rehabilitative and physical therapy services and payments for such services are
subject to government regulation. See "Business -- Government Regulation" and
" -- Legal Proceedings".

DILUTION

At the public offering price of $31 3/8 per share, purchasers of shares of
Common Stock offered hereby will experience an immediate dilution of $29.16 per
share. See "Dilution".

POTENTIAL IMPACT OF CERTAIN ANTITAKEOVER PROVISIONS

Certain provisions of the Company's Restated Certificate of Incorporation
(the "Company Certificate") and the Company's Amended and Restated By-Laws may
inhibit changes in control of the Company not approved by the Board of Directors
of the Company (the "Board"). These provisions include a stockholder rights
plan, a classified Board, advance notice provisions for nominations for election
of candidates to the Board and a "fair-price" provision. The stockholder rights
plan, under which one right entitling the holder to purchase one one-hundredth
of a share of the Company's Series A Junior Participating Preferred Stock at a
price of $40 per share (subject to adjustment) is attached to each outstanding
share of Common Stock, renders an acquisition of control of the Company in a
transaction not approved by the Board more difficult. The Company's 1996
Long-Term Incentive Plan provides for acceleration of stock options and
restricted stock awards upon a change in control of the Company which has the
effect of making an acquisition of control of the Company more expensive. These
agreements may also inhibit a change in control of the Company and may have a
negative effect on the market price of the Common Stock. The indenture governing
the 9 7/8% Notes also includes change in control provisions which provide, among
other things, that upon a change in control of the Company, the holders of the
9 7/8% Notes may require the Company to repurchase the 9 7/8% Notes at 101% of
the principal amount thereof, together with accrued and unpaid interest to the
repurchase date. A change in control of the Company constitutes a default under
the Company's revolving credit agreement. In addition, certain Company officers
have severance compensation agreements with the Company that provide for
substantial cash payments and acceleration of other benefits in the event of
specified corporate changes related to the Company, including a change in
control of the Company.

DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS

The Company has not made cash dividend payments on the Common Stock since
the Spin-off and does not anticipate paying dividends on the Common Stock for
the foreseeable future. The terms of the Company's revolving credit agreement
provide that the Company is restricted from paying dividends without the consent
of the lenders during the term of the agreement. In addition, the indenture for
the 9 7/8% Notes generally limits dividends paid by the Company to the aggregate
of 50% of consolidated net income, as defined, earned after January 1, 1998 and
the net proceeds to the Company from any stock offerings and the exercise of
outstanding stock options and warrants.

FUTURE SALE AND PRICE OF COMMON STOCK

After the Offering, 23,643,012 shares of Common Stock will be outstanding
(assuming the Underwriters' over-allotment option is not exercised). At that
time, the Company will also have (i) outstanding options to purchase 1,908,250
shares of Common Stock with a weighted-average exercise price of $9.21 per
share, and (ii) the ability to grant options to purchase an additional 1,294,668
shares of Common Stock under the Company's stock option and purchase plans. In
addition, the Company has outstanding warrants to purchase 2,942,805 shares of
Common Stock at an exercise price of $5.26 per share. The warrants are held by
the Chairman of the Board and the President and Chief Executive Officer of the
Company and are exercisable until December 31, 2005. Further, the Company has
issued warrants to purchase 250,000 shares of Common Stock at an exercise price
of $10.05 per share to an affiliate of one of the Underwriters in connection
with a loan to the Company of $7.5 million in July 1997. See "Underwriting". The
effect, if any, on the market price of the Common Stock prevailing from time to
time as a result of the additional shares of Common Stock that would be
outstanding upon the exercise of stock options and warrants is unpredictable,
and no assurance can be given that the effect will not be adverse.

10
<PAGE> 11

USE OF PROCEEDS

At the public offering price of $31 3/8 per share, the net proceeds to be
received by the Company from the sale of shares of Common Stock (after deducting
the underwriting discount and estimated expenses payable by the Company) are
approximately $82.8 million ($94.9 million if the Underwriters' over-allotment
option is exercised in full). The Company intends to use all of the net proceeds
from this Offering to fund its growth strategy to open new fitness centers based
on the new club prototype, to selectively acquire club-related real estate both
currently leased and for the development of new clubs and to acquire fitness
center operators in strategic geographic markets. The Company has not yet
allocated the net proceeds among the contemplated uses. The Company will
determine the allocation of the net proceeds among the development of new
fitness centers, the acquisition of real estate and the acquisition of fitness
center operators based on business opportunities available to the Company and
prevailing market conditions. The Company is not currently involved in any
negotiations for the material acquisition of fitness centers or the purchase of
any material real estate. The balance of the net proceeds to the Company, if
any, will be used for general corporate and working capital purposes and,
pending such uses, the Company may temporarily invest available funds from this
Offering in short-term securities.

DILUTION

The net tangible book value of the Company at December 31, 1997 was a
deficit of approximately $30.9 million, or $1.50 per share. The deficit in net
tangible book value per share represents the amount by which the Company's total
liabilities (including deferred revenues) exceed the Company's net tangible
assets at December 31, 1997, divided by 20,575,092 shares of Common Stock
outstanding at December 31, 1997. After giving effect to the sale by the Company
of 2,800,000 shares of Common Stock offered hereby (assuming the Underwriters'
over-allotment option is not exercised) at the public offering price of $31 3/8
per share and after deducting the underwriting discount and estimated offering
expenses, the Company's net tangible book value at December 31, 1997 would have
been approximately $51.9 million, or $2.22 per share. This represents an
immediate increase in the net tangible book value of $3.72 per share to existing
stockholders and an immediate dilution of $29.16 per share to new investors
purchasing shares in the Offering. The following table illustrates this
dilution:

<TABLE>
<S> <C> <C>
Public offering price per share............................. $31.38
Deficit in net tangible book value per share at December 31,
1997...................................................... $ 1.50
Increase in net tangible book value per share attributable
to new
investors................................................. 3.72
------
Net tangible book value per share after the Offering........ 2.22
------
Dilution per share to new investors......................... $29.16
======
</TABLE>

11
<PAGE> 12

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock is traded on the New York Stock Exchange under the symbol
"BFT". Prior to the commencement of trading on the New York Stock Exchange on
April 2, 1998, the Common Stock was quoted on the Nasdaq National Market under
the symbol "BFIT". The following table sets forth for the periods indicated the
high and low quarterly sales prices for a share of Common Stock as reported on
the New York Stock Exchange or the Nasdaq National Market, as applicable, since
trading began on January 4, 1996, the date the Company's initial Registration
Statement on Form S-1 was declared effective. The Company was a wholly-owned
subsidiary of Entertainment until January 9, 1996, the date on which 11,845,161
shares of Common Stock were distributed by Entertainment in the Spin-off.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C> <C> <C>
1996:
First Quarter (from January 4, 1996)...................... $ 7 $ 3 3/4
Second Quarter............................................ 5 3/4 3 15/16
Third Quarter............................................. 5 1/8 4
Fourth Quarter............................................ 9 1/16 4 1/2
1997:
First Quarter............................................. $ 8 13/16 $ 6
Second Quarter............................................ 10 7/16 5 5/8
Third Quarter............................................. 17 1/2 8 1/2
Fourth Quarter............................................ 22 14 3/4
1998:
First Quarter............................................. $31 9/16 $19 1/16
Second Quarter (through May 7, 1998)...................... 34 1/4 28
</TABLE>

The last reported sale price of a share of Common Stock on the New York
Stock Exchange on May 7, 1998 is set forth on the cover page of this Prospectus.
As of March 31, 1998, there were 10,148 holders of record of the Common Stock.

The Company does not anticipate paying dividends for the foreseeable
future. Currently, the Company is restricted from paying dividends by the terms
of its revolving credit agreement and the 9 7/8% Notes. See "Risk
Factors -- Dividend Policy; Restrictions on Payment of Dividends".

12
<PAGE> 13

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company at December 31, 1997 and as adjusted to give effect to the sale by the
Company of 2,800,000 shares of Common Stock offered hereby (assuming the
Underwriters' over-allotment option is not exercised) at the public offering
price of $31 3/8 per share and after deducting the underwriting discount and
estimated offering expenses, as if such transaction had occurred as of December
31, 1997.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN MILLIONS)
<S> <C> <C>
Cash and equivalents....................................... $ 61.7 $ 144.5
======= ===========
Current maturities of long-term debt(1).................... $ 27.1 $ 27.1
======= ===========
Long-term debt, less current maturities(1)................. $ 405.4 $ 405.4
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares
authorized; none issued --
Series A Junior Participating; 300,000 shares
authorized; none issued..........................
Common Stock, $.01 par value; 60,200,000 shares
authorized; 20,575,092 and 23,375,092 shares issued
and outstanding....................................... .2 .2
Contributed capital...................................... 392.7 475.5
Accumulated deficit...................................... (322.6) (322.6)
------- -----------
Total stockholders' equity............................... 70.3 153.1
------- -----------
Total capitalization................................ $ 475.7 $ 558.5
======= ===========
</TABLE>

(1) See "Consolidated Financial Statements" and "Management's Discussion
and Analysis of Results of Operations and Financial Condition" for
additional information with respect to the Company's consolidated
indebtedness.

13
<PAGE> 14

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data of the Company presented below for
and as of the end of each of the four years ended December 31, 1997 were derived
from the audited consolidated financial statements of the Company. The data
presented below for and as of the end of the year ended December 31, 1993 are
unaudited. The data presented should be read in conjunction with financial
information appearing elsewhere in this Prospectus. See "Consolidated Financial
Statements" and "Management's Discussion and Analysis of Results of Operations
and Financial Condition".

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

Net revenues................................. $ 661.0 $ 639.2 $ 653.4 $ 682.0 $ 666.7
Depreciation and amortization................ 52.9 55.9 57.4 58.9 60.4
Operating income (loss)...................... 19.9 19.1 5.0 (16.1) (18.1)
Loss before extraordinary item and cumulative
effect on prior years of change in
accounting for income taxes (a) (b)....... (23.5) (24.9) (31.4) (39.5) (31.4)
Basic and diluted loss per common share (pro
forma for 1995) (c)....................... (1.51) (2.04) (3.25)
BALANCE SHEET DATA (AT END OF YEAR):
Cash and equivalents......................... $ 61.7 $ 16.5 $ 21.3 $ 12.8 $ 11.0
Installment contracts receivable, net........ 343.6 300.2 303.4 284.1 322.7
Total assets................................. 967.6 893.3 936.5 951.0 1,016.7
Long-term debt, less current maturities...... 405.4 376.4 368.0 289.7 305.7
Stockholders' equity......................... 70.3 24.2 31.7 34.8 50.6
OTHER FINANCIAL DATA:
EBITDA (d)................................... $ 72.8 $ 75.0 $ 62.4 $ 42.8 $ 42.3
Cash provided by (used in):
Operating activities...................... (35.9) (5.3) (9.9) 32.8 49.9
Investing activities...................... (16.1) (9.8) (42.1) (21.4) (36.1)
Financing activities...................... 97.2 10.4 60.4 (9.6) (13.6)
</TABLE>

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

(a) In 1997, the Company recognized an extraordinary loss on extinguishment of
debt of $21.4 million ($1.37 per share) resulting from a refinancing of the
Company's subordinated debt and credit facility. In 1996, the Company
recognized a net extraordinary gain on extinguishment of debt consisting of
(i) a gain of $9.9 million ($.81 per share) resulting from a $15.2 million
tax obligation to Entertainment which was forgiven as part of the December
1996 merger of Entertainment with and into Hilton and (ii) a charge of $4.2
million ($.35 per share) resulting from a refinancing of the Company's
securitization facility. In 1993, the Company recognized an extraordinary
loss on extinguishment of debt of $6.0 million resulting from a refinancing
of certain indebtedness.

(b) In 1993, the Company changed its method of accounting for income taxes as
required by SFAS No. 109, "Accounting for Income Taxes." As permitted by
SFAS No. 109, the Company elected to use the cumulative effect approach
rather than to restate the consolidated financial statements of any prior
years to apply the provisions of SFAS No. 109, which resulted in a charge of
$69.0 million in 1993.

14
<PAGE> 15

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

GENERAL

The primary strategic initiative of management involves improving the
results of the Company's core business and, as capital is available, increasing
the number of fitness centers it operates through the replication of its
profitable new fitness center prototype. In 1993, the Company began building
more efficient fitness centers by eliminating pools and other wet areas and
racquet sports (all of which are costly to build and maintain and which have
significantly lower utilization rates), and replacing much of that space with
expanded workout areas which receive a higher degree of member use. At
approximately the same time, the Company emphasized member payment plans using
EFT for financed memberships by adjusting sales commissions and member
incentives. The Company's experience has indicated better collection results for
financed memberships sold under EFT plans compared to those sold with standard
coupon book payment plans. EFT-financed memberships represented approximately
60% of the total membership contracts in the receivables portfolio at December
31, 1997. Over the past several years, membership types and pricing options were
standardized, making the selling process less complicated for both the customer
and sales personnel. In August 1994, the Company implemented a program to
increase monthly dues for contracts sold after that date and in late 1995, began
to curtail the practice of discounting dues for multiple year renewal offers.
Following the 1997 Stock Offering, the Company began emphasizing the sale of
all-club memberships, which are typically financed, rather than the sale of
single-club memberships. The Company believes all of these actions, certain of
which reduced new membership unit sales and revenues, will ultimately improve
cash flows and operating income.

In addition, management made certain changes designed to integrate
operations and reduce operating costs, including personnel costs, advertising
expenses and other operating expenses. As part of its continuing cost reduction
program, the Company began a long-term consolidation project in 1991 and
computer conversion in 1994 for its regional service centers which process data
for membership accounts ("RSCs"). The consolidation of five RSCs into two
remaining RSCs was completed in the third quarter of 1995, and the elimination
of cost redundancies continued throughout 1996 and 1997. The primary phase of
the computer conversion was completed in the fourth quarter of 1995. With the
addition of new hardware and software, the Company streamlined its processing
procedures and developed efficiencies that enable the RSCs to service members
better while reducing costs. The Company has completed an assessment of whether
its computer systems will function properly with respect to dates in 2000 and
thereafter and has determined that only two existing software applications
require modification, with such modifications expected to be completed in 1998
at an aggregate cost to the Company of less than $.1 million.

The provision for doubtful receivables was $96.1 million, $80.4 million and
$72.1 million for 1997, 1996 and 1995, respectively. The rate of the Company's
provision for doubtful receivables can vary from year to year. The Company
estimates the ultimate realization of initial membership fees originated on
financed memberships based upon a number of factors such as method of payment
(EFT vs. coupon books) and amount of downpayment, among others. The Company
continually analyzes the provision because initial membership fees can be paid
to the Company in installments. Updated collection experience trends are
reviewed each reporting period and, if necessary, the allowance is adjusted
accordingly. Changes in the allowance as a percentage of gross receivables may
result from various factors including significant near-term fluctuations in
amounts of initial membership fees originated for financed memberships or the
timing of write-offs. The Company believes, based on its experience, that the
qualitative profile of its receivables portfolio at December 31, 1997 is
generally improved from that in recent years due to more accounts paying by EFT
and higher average downpayments.

Management also believes significant opportunities exist to increase
revenues beyond those generated by the sale of membership plans and receipt of
dues without significant capital expenditures. To capitalize on the Company's
strong brand identity, extensive distribution infrastructure (approximately 320
facilities), significant member base (approximately four million members) and
frequency of visitation (more than 100 million member visits in each of 1996 and
1997), management has implemented the following new initiatives: (i) the
introduction of a newly developed personal training program now offered at most
of its fitness centers; (ii) the

15
<PAGE> 16

sale of an exclusive line of Bally-branded nutritional products to the Company's
members; (iii) the sale of nutritional products, workout apparel and related
accessories in BFIT Essentials(TM) retail stores currently located in over 60 of
its fitness centers; and (iv) the provision of affordable, comprehensive
outpatient rehabilitative and physical therapy services to both members and
non-members, presently in two of its fitness centers. These new initiatives had
a limited effect on the 1997 results, but beginning with 1998, management
expects their effect to be more meaningful.

RESULTS OF OPERATIONS

Comparison of the years ended December 31, 1997 and December 31, 1996

Net revenues for 1997 were $661.0 million compared to $639.2 million in
1996, an increase of $21.8 million (3%). This increase is substantially a result
of an increase in initial membership fees originated of $34.8 million (9%) in
1997, consisting of a $62.3 million (21%) increase in financed memberships
originated offset, in part, by a $27.5 million (32%) decrease in paid-in-full
memberships originated. These results generally reflect management's current
strategy of selling more all-club membership plans (which typically have been
financed and generate better long-term returns for the Company) and fewer
single-club membership plans. Accordingly, the average selling price of
contracts sold increased 18% and the number of contracts sold decreased 10%.
Further, these results were achieved while the average number of fitness centers
selling memberships decreased from 322 in 1996 to 317 in 1997, reflecting
management's continuing strategy to improve the quality of the Company's
facilities. During 1997 and 1996, the Company closed 19 older, typically smaller
and less profitable facilities and sold a fitness center to a franchisee while
opening 8 new, larger facilities, generally based on its new prototype. In
addition, deferred revenue accounting added only $1.0 million to revenues in
1997 compared to $29.8 million in 1996. Dues collected increased $11.2 million
(6%) over 1996, reflecting the Company's continuing strategy of increasing
renewal dues. Finance charges earned increased $2.8 million (8%) in 1997 due
primarily to the increase in the size of the receivables portfolio. Fees and
other revenues increased $1.9 million (14%) over 1996, primarily reflecting the
sale of nutritional and other retail products which the Company began selling in
1997 in certain of its fitness centers and the 1997 introduction of the new
personal training program.

Operating income for 1997 was $19.9 million compared to $19.1 million in
1996. The increase of $.8 million (4%) was due to the aforementioned increase in
revenues substantially offset by a $21.0 million (3%) increase in operating
costs and expenses, which included a $15.7 million increase in the provision for
doubtful receivables. Operating expenses include charges of $5.9 million and
$5.1 million in 1997 and 1996, respectively ($2.1 million and $2.3 million of
which is amortization of unearned compensation in 1997 and 1996, respectively)
relating to restricted stock awards issued in conjunction with the Spin-off for
which restrictions lapsed in 1997 and 1996 and final vesting occurred in August
1997. Excluding the provision for doubtful receivables and charges related to
restricted stock awards, operating costs and expenses increased $4.5 million
(1%) from 1996. Fitness center operating expenses increased $17.7 million (5%)
due, in part, to increased spending to improve club operations and appearance,
additional commissions (a substantial portion of which are deferred through the
change in deferred membership origination costs) from the growth in initial
membership fees originated, and certain operating costs associated with the new
initiatives described above. General and administrative expenses increased $5.4
million (23%) and primarily reflects fees paid to Hilton in 1997 under a license
agreement to use the name "Bally" (a similar payment was not required in 1996),
an increase of tax gross-up expense in 1997 from 1996 relating to the restricted
stock awards described above and increased corporate personnel and other
overhead incurred in 1997 relating principally to the new initiatives. Member
processing and collection center expenses decreased $3.6 million (9%),
reflecting decreases in telephone expenses (as a result of renegotiated rates
and fewer member service calls), printing and equipment rental costs. In
addition, advertising expenses decreased $2.4 million (5%) due to reduced
spending on television advertisements and the elimination of certain agency fees
in 1997 offset, in part, by increases in production costs and local promotional
activities.

The provision for doubtful receivables for 1997 was $96.1 million compared
to $80.4 million in 1996, an increase of $15.7 million (20%) primarily due to
the increase in financed memberships originated.

16
<PAGE> 17

Interest expense was $45.0 million in 1997 compared to $47.6 million in
1996, a decrease of $2.6 million (5%) primarily due to lower average interest
rates and an increase in the amount of capitalized interest offset, in part, by
a higher average level of debt.

The income tax provision for 1997 reflects state income taxes only, as no
federal benefit has been provided because the ultimate realization of additional
deferred tax assets cannot be assured. The income tax benefit for 1996 reflects
a benefit equal to the federal provision allocated to the extraordinary item (no
additional benefit has been provided because the ultimate realization of
additional deferred tax assets cannot be assured), net of a state income tax
provision.

Comparison of the years ended December 31, 1996 and December 31, 1995

Net revenues for 1996 were $639.2 million compared to $653.4 million in
1995. The decrease in revenues results, in part, because the average number of
fitness centers selling memberships decreased from 332 in 1995 to 322 in 1996,
reflecting the closure of 25 older, typically smaller and less profitable
facilities and the sale of a fitness center to Entertainment offset, in part, by
the opening of 13 new, larger facilities during 1996 and 1995. Initial
membership fees originated decreased $29.7 million (7%) in 1996, consisting of a
$19.6 million (6%) decrease in financed memberships originated and a $10.1
million (11%) decrease in paid-in-full memberships originated. The number of
contracts sold declined 12% and the average selling price of contracts sold
increased 6% as a result of the sale of more premium memberships in 1996. Dues
collected increased $5.1 million (3%) over 1995 despite the 3% reduction in the
average number of facilities operated, reflecting the Company's continuing
strategy of increasing renewal dues. Finance charges earned decreased $.5
million (1%) in 1996 compared to 1995. Fees and other revenues decreased $2.1
million (13%) primarily due to the reduction of personal trainer revenue in 1996
as a result of temporarily outsourcing the service and non-recurring income in
1995 pertaining to insurance recoveries.

Operating income for 1996 was $19.1 million compared to $5.0 million in
1995. The increase of $14.1 million was due to a $28.3 million (4%) reduction in
operating costs and expenses offset, in part, by the aforementioned decrease in
revenues. The reduction in operating costs and expenses was achieved despite an
$8.3 million increase in the provision for doubtful receivables and a $5.1
million charge related to restricted stock awards issued in conjunction with the
Spin-off for which restrictions lapsed due to the increase in the market price
of the Common Stock. Excluding the provision for doubtful receivables and charge
related to restricted stock awards, operating costs and expenses decreased $41.7
million (7%) in 1996 compared to 1995 primarily due to reductions in fitness
center operating expenses and member processing and collection center expenses.
Fitness center operating expenses for 1996 decreased $30.1 million (8%) from
1995 primarily due to a reduction in payroll and related costs and other
variable costs as a result of the continuing cost reduction program and the 3%
reduction in the average number of fitness centers operated in 1996 compared to
1995. In addition, insurance expenses declined due to favorable experience in
controlling general liability risks, and commissions decreased as a result of
the decline in initial membership fees originated. Member processing and
collection center expenses decreased $8.0 million (16%) primarily due to the
aforementioned RSC consolidation and computer projects.

The provision for doubtful receivables for 1996 was $80.4 million compared
to $72.1 million in 1995, an increase of $8.3 million (12%) despite the
aforementioned decrease in financed memberships originated. Management believes
the additional provision for doubtful receivables in 1996 adequately reserved
for collection experience to be ultimately realized from sales programs in
general, and specifically from sales promotions allowing very low downpayments
offered from time to time between July 1995 and October 1996 that have shown
indications of underperforming historical collection experience.

Interest expense was $47.6 million in 1996 compared to $43.8 million in
1995, an increase of $3.8 million (9%) principally reflecting a higher average
level of debt offset, in part, by lower average interest rates.

As a result of the Spin-off, the Company is no longer included in the
consolidated federal income tax return of Entertainment and files its own
separate consolidated federal income tax return. Accordingly, the income tax
benefit for 1996 reflects a benefit equal to the federal provision allocated to
the extraordinary item (no additional benefit has been provided because the
ultimate realization of additional deferred tax assets

17
<PAGE> 18

cannot be assured), net of a state income tax provision. Pursuant to a tax
sharing agreement with Entertainment, the effective rate of the income tax
benefit for 1995 was lower than the U.S. statutory tax rate (35%) due
principally to operating losses without a current year tax benefit and
non-deductible amortization of costs in excess of acquired assets.

LIQUIDITY AND CAPITAL RESOURCES

The Company is in the process of expanding and upgrading its facilities in
order to increase its membership base and more effectively capitalize on its
streamlined marketing and administrative functions. Management plans to make
capital expenditures of approximately $10 million to $12 million annually to
maintain and make minor upgrades to the Company's existing facilities, including
exercise equipment upgrades, heating, ventilation and air conditioning ("HVAC")
and other operating equipment upgrades and replacements, and locker room and
workout area refurbishments, among others. In addition, the Company expects to
invest approximately $10 million during the next year to complete its plans to
extensively add and upgrade exercise equipment, refresh interior and exterior
finishes to improve club ambience, and refurbish and make major upgrades to
approximately 25% of its clubs, including converting some low-usage pools and
racquet areas into expanded exercise areas and to a lesser extent retail and
outpatient rehabilitative and physical therapy service areas. For the last
several years, the Company has spent $6 million to $15 million annually, as
funds were available, to open new or replacement facilities. Beginning in 1998,
the Company intends to increase its spending to approximately $20 million to $25
million per year to open 15 to 20 new facilities based on its new prototype,
which is designed to cost less to construct and maintain than the Company's
older facilities. The new facilities are expected to range in size from 10,000
to 45,000 square feet and have the capacity to accommodate significantly more
members than older clubs of the same size because they will generally focus on
only the most widely used amenities.

During 1997, the Company repaid approximately $25 million of indebtedness,
including the repayment of amounts drawn under the Company's credit facility,
from the net proceeds of the 1997 Stock Offering, and used approximately $2
million to support the introduction of new initiatives. Cash receipts from the
sale of paid-in-full memberships during the six months ended December 31, 1997
were approximately $5 million less than during the six months ended June 30,
1997 due to the Company's emphasis on the sale of financed membership plans.
This emphasis during the last six months of 1997 resulted in a corresponding
increase of approximately $26 million in net installment contracts receivable
from June 30, 1997 to December 31, 1997, and primarily caused cash used in
operating activities to increase to $35.9 million in 1997 from $5.3 million in
1996. Prior to completing the 1997 Stock Offering, the Company was dependent on
availability under its credit facility and its operations to provide for cash
needs. The Company managed liquidity requirements in recent years by emphasizing
the sale of single-club paid-in-full membership plans and accelerating
collections of financed memberships and dues to increase available cash reserves
and, to a lesser extent, sales of non-strategic assets and sale/leaseback
arrangements. Management believes use of these techniques has had a negative
impact on operating results, and that available working capital has reduced the
need for these techniques to be continued.

In October 1997, the Company refinanced its subordinated debt to reduce
interest expense, extend debt maturities and improve financial flexibility. The
Company issued $225 million aggregate principal amount of the 9 7/8% Notes and
completed a tender offer and consent solicitation (the "Tender Offer") with
respect to its $200 million aggregate principal amount of 13% Senior
Subordinated Notes due 2003 (the "13% Notes"). Pursuant to the Tender Offer, the
Company purchased $177.4 million aggregate principal amount of the 13% Notes,
substantially all at a price of 108.3% of the principal amount, together with
accrued and unpaid interest. In January 1998, the Company redeemed the remaining
$22.6 million aggregate principal amount of the 13% Notes not tendered in the
Tender Offer at a price of 106.5% of the principal amount, together with accrued
and unpaid interest.

In November 1997, the Company entered into a new revolving credit agreement
with a group of banks which provides for a three-year $70 million credit line.
The amount available under the credit line is reduced by any outstanding letters
of credit, which cannot exceed $30 million. At December 31, 1997, the revolving
credit agreement was unused except for outstanding letters of credit totaling
$7.2 million.

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<PAGE> 19

The Company has no scheduled principal payments under the 9 7/8% Notes
until October 2007 and the principal amount of the certificates under the
Company's securitization facility remains fixed at $160 million through July
1999. Accordingly, exclusive of the remaining 13% Notes which were redeemed in
January 1998 using the remaining proceeds from the issuance of the 9 7/8% Notes,
debt service requirements (primarily interest) of the Company for the next
twelve months are approximately $43 million. Management believes that the
Company will be able to satisfy its debt service and capital expenditure
requirements over the next twelve months out of existing cash balances and cash
flow from operations. Management also believes that as a result of the 1997
Stock Offering, the refinancing of subordinated debt and the new credit
facility, the Company's liquidity and financial flexibility have significantly
improved.

19
<PAGE> 20

BUSINESS

OPERATING STRATEGIES

Core Business

- Emphasize the Sale of All-Club Membership Plans -- Prior to the 1997
Stock Offering, the Company managed its commission structure to emphasize
the sale of paid-in-full membership plans to generate immediate cash for
short-term liquidity at the expense of longer-term financial returns. The
1997 Stock Offering provided additional working capital, allowing the
Company to emphasize the sale of all-club membership plans, which are
typically financed, rather than single-club membership plans. In 1997, this
new emphasis contributed to an 18% increase in the weighted-average price
of memberships sold to approximately $970 from approximately $820 in 1996.
Management believes that it can continue to increase new member revenues
through an emphasis on financed membership plans.

20
<PAGE> 21

- Improve Collections on Financed Contracts -- The Company is
maintaining its focus on increasing downpayments on financed membership
plans and securing payments by EFT, which the Company's experience has
shown results in higher quality receivables. This effort yielded an
increase of 11% in the average down payment, from $73 in 1996 to $81 in
1997. In addition to seeking higher down payments, the Company continues to
develop improved collection practices based on information provided by
"credit scoring" and behavioral modeling, which management believes will
also improve the yield from the receivables portfolio.

Growth Opportunities

In order to build upon the improved core operations and accelerate the
growth of the Company's business, management has identified the following
external growth opportunities:

21
<PAGE> 22

New Business Initiatives

MEMBERSHIP PLANS

The Company currently offers prospective members a number of membership
plans which differ primarily by the inclusion of additional in-club services
(such as racquet sports and child care) and access to other fitness centers
operated by the Company, either locally or nationwide. From time to time, the
Company also offers special membership plans which limit access to fitness
centers to certain days and non-peak hours. The initial membership fees for
access to the Company's fitness center facilities presently range from
approximately $379 to $1,199 depending on the membership plan selected, the
diversity of facilities and services available at the club of enrollment and the
local business environment, as well as the effects of seasonal promotional
strategies.

In addition to the one-time initial membership fee, members pay monthly
membership dues in order to maintain their membership privileges. Dues during
the typical financing period for memberships presently being sold are
approximately $6.00 per month and vary based on the market and the type of plan
purchased by the member. Some promotional programs offered by the Company in the
past have waived dues payments for up to 36 months if the member paid the
initiation fee in full at the time the membership originated. Renewal dues (paid
after the typical financing period ends) vary significantly and are typically
increased as contractually permitted. At December 31, 1997, approximately 90% of
the Company's members were being

22
<PAGE> 23

charged dues ranging from $2.00 to $15.00 per month, with the overall average
$7.86 per month. The Company has experienced an average annual growth rate of
dues revenues of 7% from 1992 to 1997. The Company expects annual increases in
dues revenues will continue due to contractual terms of current membership plans
and the Company's belief it can continue to increase dues for its members who
are beyond their initial financing period without any material loss in
membership. The Company also offers renewal dues that vary depending on the
member's historical usage of the fitness center facilities. The Company's recent
experience has shown that members faced with a membership renewal decision for
the first time renewed at a rate of approximately 62%, and members faced with a
membership renewal decision for subsequent periods renewed at a rate of
approximately 85%.

Members selecting financed membership plans can choose from several payment
mechanisms and downpayment options. The Company expects to continue its focus on
increasing the downpayment it receives on financed membership contracts and on
securing payment by EFT. The Company believes both these strategies result in
better quality receivables. See "Account Servicing".

FINANCING OF INITIAL MEMBERSHIP FEE

Generally, the Company offers financing terms of 36 months. Shorter terms
are offered on a promotional basis or as required by applicable state law.
Contracts are financed at a fixed annual percentage rate (generally between 16%
and 18%, except as otherwise limited by applicable state retail installment
laws). Financed portions of initial membership fees may be prepaid without
penalty at any time during the financing term. Management expects approximately
85% of all new membership contracts originated during 1998 will be financed to
some extent.

The Company offers two payment methods for financed portions of initial
membership fees: coupon books and EFT. EFT plans are the most popular mechanism
for payment of the financed portion of initial membership fees. Under an EFT
plan, on approximately the same date each month a predetermined amount is either
(i) automatically transferred from a member's bank account to the Company, or
(ii) automatically charged to a member's designated credit card. Currently,
approximately 80% of all financed memberships sold are paid by EFT. The other
mechanism for payment financing is the use of a coupon book. This mechanism
requires the member to mail a check monthly, accompanied by a payment coupon, to
the RSC responsible for administering the membership account. Members may change
their payment method at any time.

On average, the Company received a downpayment of $81 on financed
memberships sold during 1997. This downpayment adequately defrays both the
initial account set-up cost as well as any collection costs should the account
become immediately delinquent. As a result, the Company is able to attract new
members who might otherwise be rejected while covering the incremental cost of
new membership processing and collection through the downpayment. The Company
does not perform individual credit checks on members at the time they join due,
in part, to the high cost associated with performing credit checks on the large
volume of new members. The Company satisfactorily manages its credit risk by
measuring, from past performance, the average realizable value of contracts for
coupon book and EFT payers based on various downpayment criteria. Historical
analysis performed by the Company indicates the collection experience of EFT
accounts is approximately 50% better than coupon book accounts. As of December
31, 1997, approximately 60% of membership contract receivables consisted of
EFT-financed memberships compared to 29% at December 31, 1992.

FITNESS CENTERS

Most of the Company's fitness centers are located near regional, urban and
suburban shopping areas and in downtown areas of major cities and are generally
operated under long-term leases. Fitness centers vary in size, available
facilities and types of services provided. Fitness centers contain a wide
variety of state-of-the-art progressive resistance, cardiovascular and
conditioning exercise equipment, as well as free weights. A member's use of a
fitness center may include planned exercise programs and instruction stressing
cardiovascular conditioning, strength development and improved appearance. The
Company requires a comprehensive

23
<PAGE> 24

training program for its service personnel and offers its members orientations
on the recommended use of exercise equipment.

Generally, the Company's fitness centers constructed prior to 1980 are
smaller and have fewer amenities than the fitness centers constructed in the
1980's, which average 35,000 square feet and generally include a colorful
workout area, sauna and steam facilities, a lap pool, free-weight rooms, aerobic
exercise rooms, an indoor jogging track and, in some cases, racquetball, squash
or basketball courts. The Company's current prototype fitness center focuses on
those fitness services that the Company's members most frequently use rather
than on a broader range of fitness services that generally receive a lower
degree of member use, such as pools, racquet courts or other athletic
facilities. The prototype club, which tends to be approximately 20,000 to 30,000
square feet, has recently averaged approximately $800,000 to construct,
exclusive of purchased real estate and exercise equipment and net of any
landlord contribution. The Company typically pays cash for the portion of the
construction costs it incurs directly for a new club. The Company invests
approximately $500,000 for exercise equipment for a prototype club, all or a
portion of which may be leased.

The Company is in the process of expanding and upgrading its facilities in
order to increase its membership base and more effectively capitalize on its
streamlined marketing and administrative functions. Management plans to make
capital expenditures of approximately $10 million to $12 million annually to
maintain and make minor upgrades to the Company's existing facilities, including
exercise equipment upgrades, HVAC and other operating equipment upgrades and
replacements, and locker room and workout area refurbishments, among others. In
addition, the Company expects to invest approximately $10 million during the
next year to complete its plans to extensively add and upgrade exercise
equipment, refresh interior and exterior finishes to improve club ambience, and
refurbish and make major upgrades to approximately 25% of its clubs, including
converting some low-usage pools and racquet areas into expanded exercise areas
and to a lesser extent retail and outpatient rehabilitative and physical therapy
service areas. For the last several years, the Company has spent $6 million to
$15 million annually, as funds were available, to open new or replacement
facilities. Beginning in 1998, the Company intends to increase its spending to
approximately $20 million to $25 million per year to open 15 to 20 new
facilities based on its new prototype, which is designed to cost less to
construct and maintain than the Company's older facilities. The new facilities
are expected to range in size from 10,000 to 45,000 square feet and have the
capacity to accommodate significantly more members than older clubs of the same
size because they will generally focus on only the most widely used amenities.
At December 31, 1997, the Company had 41 of the new prototype facilities in
operation, of which 30 had been in operation for at least two years. The average
1997 net revenues in excess of operating costs (excluding depreciation and
amortization) for these 30 facilities was approximately $940,000 compared to the
average 1997 results for all the Company's other fitness facilities of
approximately $750,000.

In 1997, the Company entered into an agreement pursuant to which three
fitness centers in Syracuse, New York, including one facility previously owned
by the Company, are operated by a third party under the service mark "Bally
Total Fitness". The Company plans to seek additional franchise relationships for
facilities located in smaller markets.

SALES AND MARKETING

The Company devotes substantial resources to the marketing and promotion of
its fitness centers and their services because the Company believes strong
marketing support is critical to attracting new members both at existing and new
fitness centers. In 1996, the Company completed the process of renaming its
fitness centers so substantially all use the service mark "Bally Total Fitness",
thereby enhancing brand identity, concentrating advertising and eliminating the
prior practice of using more than 25 different regional service marks and trade
names.

The Company's strategy is to cluster numerous fitness centers in major
media markets in order to increase the efficiency of its marketing and
advertising programs. The Company operates approximately 260 clubs in 26 of the
top 30 U.S. media markets.

The Company expects to spend approximately $50 million for advertising and
promotion during 1998 compared to approximately $45 million in 1997, $47 million
in 1996 and $50 million in 1995. The Company

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<PAGE> 25

primarily advertises on television, and, to a lesser extent, through newspapers,
telephone directories, direct mail, radio, outdoor signage and other promotional
activities.

The Company's sales and marketing programs emphasize the benefits of
health, physical fitness and exercise by appealing to the public's desire to
look and feel better. The Company's advertisements are augmented by individual
sales presentations made by its sales personnel in the fitness centers.
Management believes the various memberships and payment plans, in addition to
Bally's strong brand identity and the convenience of its multiple locations,
constitute distinct competitive advantages for the Company.

The Company's marketing efforts also include corporate membership sales and
insurance-eligible programs which are designed to reduce workers' compensation
costs and improve productivity. In addition to its advertising, personal sales
presentations and targeted marketing efforts, the Company is increasingly
utilizing in-club marketing programs. Open-houses and contests for members and
their guests foster member loyalty and introduce fitness centers to prospective
members. Referral incentive programs involve current members in the process of
new member enrollments.

Direct mail reminders encourage renewal of existing memberships. The
Company has a group of approximately 120 employees located at its Towson,
Maryland RSC dedicated primarily to inbound telemarketing renewal and outbound
service programs to existing members, although telemarketing is not currently
used to attract prospective new members.

The Company continually evaluates strategic marketing alliances to heighten
awareness of its fitness centers. For example, in February 1998 the Company
entered into an agreement with the owner and syndicator of the "Baywatch"
television series pursuant to which an episode of the show will be filmed on
location at one of the Company's fitness centers, and stars from the show will
make appearances at fitness center grand openings and other events for the
Company. In addition, the Company recently became the title sponsor for a series
of eight Olympic-length triathlons beginning in 1998.

ACCOUNT SERVICING

The Company administers and collects amounts owing under its membership
contracts according to uniform procedures implemented by its two RSCs. The RSCs
enable the Company to conduct centralized data processing of all membership
accounts. The RSCs employ approximately 800 people in the account processing and
collection areas, including approximately 150 employees dedicated to customer
service, approximately 350 employees dedicated to account processing and
administration and approximately 300 employees dedicated to account collections.
The two RSCs collectively receive, deposit and post more than $550 million of
membership transactions annually, including the processing of downpayments and
cash sales, and collections of financed receivables and dues. In addition, the
RSCs process, on average, 2,600 new membership accounts per day. RSC personnel
are also responsible for responding to and resolving member inquiries and
maintaining membership data.

All collections for past-due accounts are initially handled internally by
the RSCs. The Company systematically pursues past-due accounts by utilizing a
series of computer-generated correspondence and telephone contacts.
Computer-generated correspondence is sent to a delinquent member at 7 and 20
days after an account becomes past due. Collectors with varying levels of
experience are responsible for handling delinquent accounts, depending on the
period of delinquency. At 30 and 60 days past due, the accounts are assigned to
power dialer assisted collectors initially as a reminder and later as a demand
for payment. Accounts that have not been collected for a 90-day period are
transferred to a group of the most experienced collectors (unless the first
scheduled payment has not been received on such accounts, in which case they are
generally written off and any downpayment received is not refunded). All
remaining delinquent accounts are written off after 180 days without payment.
Accounts that are written off are reported to credit reporting bureaus and sold
to a third-party collection group. The Company is investigating opportunities to
enhance its collection efforts based on information provided by credit scoring
and behavioral modeling, which management believes will improve the yield from
the receivables portfolio. For example, the Company would not make costly
collection calls to a member with a strong credit history until late in the
collection cycle. Likewise, the Company would aggressively pursue collection
tactics on a member with a poor credit history

25
<PAGE> 26

early in the delinquency period and reduce collection efforts if results were
not quickly realized. By tailoring its collection approach to reflect a
delinquent member's likelihood of payment, the Company believes it can collect
more of its receivables at a lower cost. The Company uses a national bureau
which charges the Company a nominal fee per credit score. As of March 31, 1998,
the Company has credit scored a majority of its financed members with
outstanding balances. The Company is also testing other collection techniques,
such as the use of monthly statements.

COMPETITION

The Company is the largest (and only nationwide) commercial operator of
fitness centers in the United States in terms of revenues, the number of members
and the number and square footage of facilities. The Company is the largest
operator, or among the largest operators, of fitness centers in every major
market in which it has fitness centers. The Company believes its fitness centers
generally offer a high level of amenities to its members. Within each market,
the Company competes with other fitness centers, physical fitness and
recreational facilities established by local governments and hospitals and by
businesses for their employees, the YMCA and similar organizations and, to a
certain extent, with racquet and other athletic clubs, country clubs,
weight-reducing salons and the home-use fitness equipment industry. However, the
Company believes its operating experience, its ability to allocate advertising
and administration costs over all of its fitness centers, its nationwide
operations, its purchasing power and its account processing and collection
infrastructure provide the Company distinct competitive advantages. There can be
no assurance that the Company will be able to compete effectively in the future
in the markets in which it operates.

The Company believes competition has increased to some extent in certain
markets, reflecting the public's enthusiasm for fitness and a decrease in the
cost of entry into the market due to financing available from landlords and
equipment manufacturers. The Company believes its membership plans are
affordable and have the flexibility to be responsive to economic conditions.
However, the Company also competes with other entertainment and retail
businesses for the discretionary income of its target markets.

PROPERTIES

The Company operates approximately 320 fitness centers in 27 states and
Canada. The Company owns approximately 30 fitness centers and leases either
land, buildings or both for the remainder of its fitness centers. Aggregate rent
expense for real estate (including office and administrative space) was $86.8
million, $85.8 million and $84.9 million for 1997, 1996 and 1995, respectively.
Most leases require the Company to pay real estate taxes, insurance, maintenance
and, in the case of shopping center and office building locations, common-area
maintenance fees. A limited number of leases also provide for percentage rental
based on receipts. Various leases also provide for rent adjustments based on
changes in the Consumer Price Index, most with limits provided to protect the
Company. One fitness center accounted for between 1% to 2% of the Company's net
revenues during 1997. The Company believes its properties are adequate for its
current membership.

Leases for fitness centers entered into by the Company in the last five
years generally provide for an original term of no less than 15 years and, in
some cases, for 20 years. Most leases contain at least one five-year option to
renew and often two or more such options.

The Company's executive offices are located in Chicago, Illinois, where it
is a co-tenant at a monthly base rental cost to the Company of $50,200. The
lease expires in January 2003. The Company also leases space in Huntington
Beach, California and Towson, Maryland for RSC operations.

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<PAGE> 27

TRADEMARKS AND TRADE NAMES

In 1996, the Company completed the process of renaming its fitness centers
so substantially all use the service mark "Bally Total Fitness", thereby
enhancing brand identity, concentrating advertising and eliminating the prior
practice of using more than 25 different regional service marks or trade names.
The name "Bally Total Fitness" is a service mark of Hilton Hotels Corporation as
successor to Entertainment. In January 1996, the Company and Entertainment
entered into a 10-year trademark license agreement to allow the Company to use
certain marks, including the "Bally Total Fitness" service mark, in connection
with its fitness center business. The Company paid no royalty or license fee for
1996 and pays a fee of $1.0 million per year thereafter. Following the initial
ten-year term, the Company has the option to renew the license for an additional
five-year period at a rate equal to the greater of the then market rate or $1.0
million per year.

SEASONAL MEMBERSHIP FEE ORIGINATIONS

EMPLOYEES

The Company has approximately 13,900 employees, including approximately
7,300 part-time employees. Approximately 12,800 employees are involved in club
operations, including sales personnel, instructors, personal trainers,
supervisory and facilities personnel, approximately 800 are involved in the
operation of the RSCs and approximately 300 are administrative support
personnel, including accounting, management information systems, marketing,
legal, human resources, real estate and other national services.

The Company is not a party to any collective bargaining agreement with its
employees. Although the Company experiences high turnover of non-management
personnel, the Company historically has not experienced difficulty in obtaining
adequate replacement personnel, except regionally from time-to-time with respect
to sales personnel, which the Company believes periodically become somewhat more
difficult to replace due, in part, to increased competition for skilled retail
sales personnel.

GOVERNMENT REGULATION

The operations and business practices of the Company are subject to
regulation at federal, state and, in some cases, local levels. General rules and
regulations of the FTC, and of state and local consumer protection agencies,
apply to the Company's advertising, sales and other trade practices.

Statutes and regulations affecting the fitness industry have been enacted
or proposed in all of the states in which the Company conducts business.
Typically, these statutes and regulations prescribe certain forms and regulate
the terms and provisions of membership contracts, giving the member the right to
cancel the contract, in most cases, within three business days after signing,
requiring an escrow for funds received from pre-opening sales or the posting of
a bond or proof of financial responsibility and, in some cases, establishing
maximum prices and terms 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, financing and collection of
memberships including, among others, the Truth-in-Lending Act and Regulation Z
adopted thereunder, as well as state laws governing the collection of debts.
These laws and regulations are subject to varying interpretations by a large
number of state and federal enforcement agencies and the courts. The Company
maintains internal review procedures in order to comply with these requirements
and it believes its activities are in substantial compliance with all applicable
statutes, rules and decisions.

Under so-called "cooling-off" statutes in most states, members of fitness
centers have the right to cancel their memberships for a period of three to ten
days after the date the contract was entered into (depending on the applicable
state law) and are entitled to refunds of any payment made. In addition, the
Company's membership contracts provide that a member may cancel his or her
membership at any time for qualified medical reasons or if the member relocates
a certain distance away from a Bally fitness center, and a membership may be
canceled in the event of a member's death. The specific procedures for
cancellation in

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<PAGE> 28

these circumstances vary according 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.

The Company is a party to several state and federal consent orders. From
time to time, the Company makes minor adjustments in its operating procedures to
comply with such consent orders. The consent orders essentially require
continued compliance with applicable laws and require the Company to refrain
from activities not in compliance with applicable laws.

The provision of rehabilitative and physical therapy services is affected
by federal, state and local laws and regulations concerning the development and
operation of physical rehabilitation health programs, licensing, certification
and reimbursement and other matters, which may vary by jurisdiction and which
are subject to periodic revision. The opening of a rehabilitation facility may
require approval from state and/or local governments and re-licensure from time
to time, both of which may be subject to a number of conditions. In addition, a
substantial number of recipients of rehabilitative and physical therapy services
have fees paid by governmental programs, as well as private third-party payors.
Governmental reimbursement programs (including Medicare and Medicaid) generally
require facilities and services to meet certain standards promulgated by the
federal and/or state government. Additionally, reimbursement levels by
governmental and private third-party payors are subject to change which could
limit or reduce reimbursement levels and could have a material adverse effect on
the demand for rehabilitative and physical therapy services. Further, in a
number of states and in certain circumstances pursuant to federal law, the
referral of patients to rehabilitative and physical therapy services is subject
to limitations imposed by law, the violation of which may, in certain
circumstances, constitute a felony. Recently, federal and state governments have
focused significant attention on health care reform and cost control. These
proposals include cut-backs to Medicare and Medicaid programs. It is uncertain
at this time what legislation and health care reform may ultimately be enacted
or whether other changes in the administration or interpretation of government
health care programs will occur. There can be no assurance that future health
care legislation or other changes in the administration or interpretation of
government health care programs will not have a material adverse effect on the
provision of rehabilitative and physical therapy services by the Company.

LEGAL PROCEEDINGS

A class action which has been certified entitled Jackson v. Health & Tennis
Corporation of America was filed in the state district court in Bexar County,
Texas on May 8, 1995. The complaint alleges that the defendant, a subsidiary of
the Company, charged excessive amounts on its financed memberships in violation
of the Texas Credit Code and the Texas Deceptive Trade Practices -- Consumer
Protection Act. A purported class action which has not been certified entitled
Vasquez et al. v. Bally Total Fitness Corporation, d/b/a Bally's was filed in
state district court in Bexar County, Texas on September 18, 1997. The complaint
alleges that the defendant, a subsidiary of the Company, charged excessive
amounts on its financed memberships in violation of the Texas Credit Code, the
Federal Truth-in-Lending Act and Federal Reserve Board regulations. The relief
sought in both cases is damages equal to the alleged overpayments and statutory
remedies. The Company is currently unable to accurately determine within a
meaningful range the amount sought in these actions because Texas law on what
constitutes actual damages for any class member is unclear. The Company is
vigorously defending these actions. The outcome of this litigation is not
currently determinable and, consequently, the Company cannot predict whether it
will have a material adverse effect on the Company's financial condition or
results of operations in any future period.

The Company is involved in various other claims and lawsuits incidental to
its business, including claims arising from accidents at its fitness centers. In
the opinion of management, the Company is adequately insured against such claims
and lawsuits, and any ultimate liability arising out of such claims and lawsuits
will not have a material adverse effect on the financial condition or results of
operations of the Company.

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<PAGE> 29

UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Ladenburg Thalmann & Co.
Inc. ("Ladenburg Thalmann") and Chase Securities Inc. ("Chase Securities") are
acting as representatives (the "Representatives"), has severally agreed to
purchase from the Company, the respective numbers of shares of Common Stock set
forth opposite its name below at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. In the Purchase
Agreement, the several Underwriters have agreed, subject to the terms and
conditions set forth therein, to purchase all of the shares of Common Stock
offered hereby if any of such shares are purchased. In the event of default by
an Underwriter, the Purchase Agreement provides that, in certain circumstances,
the purchase commitments of the nondefaulting Underwriters may be increased or
the Purchase Agreement may be terminated.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 1,666,000
Ladenburg Thalmann & Co. Inc................................ 548,000
Chase Securities Inc........................................ 266,000
CIBC Oppenheimer Corp....................................... 80,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 80,000
Jefferies & Company, Inc.................................... 80,000
Mesirow Financial, Inc...................................... 80,000
---------
Total.......................................... 2,800,000
=========
</TABLE>

The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the 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 $.985 per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $.10 per
share to certain other dealers. After the Offering contemplated hereby, the
offering price and other selling terms may be changed by the Representatives.

The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
409,000 additional shares of Common Stock at the public offering price set forth
on the cover page hereof, less the underwriting discount. The Underwriters may
exercise such option only to cover over-allotments, if any, made in connection
with the sale of Common Stock offered hereby. To the extent that the
Underwriters exercise this option, each Underwriter will have a firm commitment,
subject to certain conditions, to purchase approximately the same percentage
thereof which the number of shares of Common Stock to be purchased by it shown
in the above table is of the 2,800,000 shares of Common Stock initially offered
hereby. If purchased, the Underwriters will offer such additional shares on the
same terms as those on which the 2,800,000 shares are being offered.

Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members (if any) to bid for and purchase the Common Stock. As an exception to
these rules, the Representatives are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.

If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell a greater number of shares of
Common Stock than is set forth on the cover page of this Prospectus), the
Representatives may reduce that short position by purchasing shares of Common
Stock in the open market. The Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.

29
<PAGE> 30

The Underwriters (a) have not offered or sold and, prior to the expiration
of the period of six months from the date of this Prospectus, will not offer or
sell in the United Kingdom, by means of any document, any shares of Common Stock
other than to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their business or otherwise in circumstances which have not resulted
and will not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995, (b) have complied
and will comply with all applicable provisions of the Financial Services Act
1986 with respect to anything done by them in relation to the shares of Common
Stock in, from, or otherwise involving the United Kingdom, and (c) have only
issued or passed on and will only issue or pass on to any person in the United
Kingdom any document received by them in connection with the issuance of the
shares of Common Stock if that person is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1996, as amended, or is a person to whom the document may otherwise be lawfully
issued or passed on.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act.

The Company and each of Arthur M. Goldberg, Chairman of the Board of
Directors, Lee S. Hillman, President, Chief Executive Officer and Director, and
John W. Dwyer, Executive Vice President, Chief Financial Officer and Treasurer,
have agreed not to, directly or indirectly, offer, pledge, sell, contract to
sell or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock
without the prior written consent of Merrill Lynch for a period of 120 days from
the date of this Prospectus, except that the Company may, without such consent,
issue shares of Common Stock upon the exercise or conversion of any outstanding
options or warrants, or grant options to purchase shares of Common Stock
pursuant to the Company's stock option and purchase plans.

In July 1997, Ladenburg Thalmann Capital Corporation ("LTCC"), an affiliate
of Ladenburg Thalmann, loaned the Company $7.5 million. The Company repaid the
loan from LTCC from the net proceeds of the 1997 Stock Offering. In connection
with the loan, LTCC received warrants to purchase 250,000 shares of Common Stock
at an exercise price of $10.05. The warrants, which are not transferable by LTCC
prior to August 1998, are exercisable for five years and have certain
registration rights.

From time to time, Merrill Lynch, Ladenburg Thalmann and Chase Securities
have provided investment banking services to the Company for which they received
normal and customary fees, including in connection with the placement of the
9 7/8% Notes, and in the case of Merrill Lynch and Ladenburg Thalmann, the 1997
Stock Offering. In addition, Chase Securities and its affiliates have engaged,
and may in the future engage, in various general financing and banking
transactions with the Company. In particular, Chase Securities was the arranger
of, and The Chase Manhattan Bank is the Administrative Agent and a lender under,
the Company's revolving credit agreement.

30
<PAGE> 31

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

The following documents filed by the Company with the Commission pursuant
to the Exchange Act are incorporated herein by reference:

(1) the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, as amended by Form 10-K/A filed with the Commission on
April 23, 1998 (file no. 0-27478);

(2) the Company's Form 8-K filed with the Commission on May 7, 1998
(file no. 0-27478); and

(3) the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A/A filed with the Commission on March 27,
1998 (file no. 0-27478).

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Offering shall be deemed incorporated by reference in
this Prospectus and a part hereof from the respective date of filing each such
document. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.

The Company undertakes to provide, without charge, to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon the written or oral request of any such person, a copy of any
and all of the documents referred to above that have been incorporated in this
Prospectus by reference, other than exhibits to such documents. Requests for
such copies should be directed to the Secretary, Bally Total Fitness Holding
Corporation, 8700 West Bryn Mawr Avenue, Chicago, Illinois 60631, telephone
(773) 380-3000.

LEGAL MATTERS

The validity, authorization and issuance of the shares of Common Stock
offered hereby will be passed upon for the Company by Benesch, Friedlander,
Coplan & Aronoff LLP of Cleveland, Ohio. George N. Aronoff, a partner in
Benesch, Friedlander, Coplan & Aronoff LLP, owns 22,359 shares of Common Stock.
Certain legal matters will be passed on for the Underwriters by Latham &
Watkins, Chicago, Illinois.

EXPERTS

The consolidated financial statements and schedule of the Company at
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997, appearing in this Prospectus and the Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.

31
<PAGE> 32

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of independent auditors.............................. F-2
Consolidated balance sheet at December 31, 1997 and 1996.... F-3
Consolidated statement of operations for the years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated statement of stockholders' equity for the years
ended December 31, 1997, 1996 and 1995.................... F-5
Consolidated statement of cash flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to consolidated financial statements for the years
ended December 31, 1997, 1996 and 1995.................... F-8
Supplementary data:
Quarterly consolidated financial information
(unaudited)............................................ F-21
</TABLE>

F-1
<PAGE> 33

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Bally Total Fitness Holding Corporation

We have audited the accompanying consolidated balance sheets of Bally Total
Fitness Holding Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Bally Total Fitness Holding Corporation at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

ERNST & YOUNG LLP
Chicago, Illinois
February 17, 1998

F-2
<PAGE> 34

BALLY TOTAL FITNESS HOLDING CORPORATION

CONSOLIDATED BALANCE SHEET
(In thousands, except share data)

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 61,679 $ 16,534
Installment contracts receivable, net..................... 168,011 153,235
Other current assets...................................... 31,743 24,075
-------- --------
Total current assets................................... 261,433 193,844
Installment contracts receivable, net....................... 175,575 146,972
Property and equipment, at cost:
Land...................................................... 21,667 22,550
Buildings................................................. 109,613 108,361
Leasehold improvements.................................... 402,503 400,340
Equipment and furnishings................................. 91,958 99,073
-------- --------
625,741 630,324
Accumulated depreciation and amortization................. 314,544 304,865
-------- --------
Net property and equipment............................. 311,197 325,459
Intangible assets, less accumulated amortization of $54,124
and $49,619............................................... 101,220 105,725
Deferred income taxes....................................... 4,171 13,656
Deferred membership origination costs....................... 86,737 82,140
Other assets................................................ 27,233 25,506
-------- --------
$967,566 $893,302
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 36,908 $ 41,565
Income taxes payable...................................... 2,342 2,258
Deferred income taxes..................................... 5,660 15,145
Accrued liabilities....................................... 50,464 55,063
13% Senior Subordinated Notes due 2003, called for 1998
redemption............................................. 22,555
Other current maturities of long-term debt................ 4,590 8,401
Deferred revenues......................................... 270,853 265,465
-------- --------
Total current liabilities.............................. 393,372 387,897
Long-term debt, less current maturities..................... 405,425 376,397
Other liabilities........................................... 7,459 6,824
Deferred revenues........................................... 90,989 98,032
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares
authorized; none issued -- Series A Junior
Participating; 300,000 shares authorized; none
issued.................................................
Common stock, $.01 par value; 60,200,000 shares
authorized; 20,575,092 and 12,495,161 shares issued and
outstanding............................................ 206 125
Contributed capital....................................... 392,718 303,811
Accumulated deficit....................................... (322,603) (277,733)
Unearned compensation (restricted stock).................. (2,051)
-------- --------
Total stockholders' equity............................. 70,321 24,152
-------- --------
$967,566 $893,302
======== ========
</TABLE>

See accompanying notes.
F-3
<PAGE> 35

BALLY TOTAL FITNESS HOLDING CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Membership revenues-
Initial membership fees on financed memberships
originated........................................... $352,661 $290,378 $309,974
Initial membership fees on paid-in-full memberships
originated........................................... 58,117 85,624 95,695
Dues collected......................................... 194,084 182,909 177,783
Change in deferred revenues............................ 961 29,791 16,813
-------- -------- --------
605,823 588,702 600,265
Finance charges earned.................................... 39,218 36,405 36,889
Fees and other............................................ 15,996 14,092 16,220
-------- -------- --------
661,037 639,199 653,374
Operating costs and expenses:
Fitness center operations................................. 384,120 366,466 396,564
Member processing and collection centers.................. 38,627 42,257 50,255
Advertising............................................... 45,042 47,428 50,037
General and administrative................................ 28,952 23,586 21,603
Provision for doubtful receivables........................ 96,078 80,350 72,145
Depreciation and amortization............................. 52,878 55,940 57,359
Change in deferred membership origination costs........... (4,597) 4,113 428
-------- -------- --------
641,100 620,140 648,391
-------- -------- --------
Operating income............................................ 19,937 19,059 4,983
Interest income............................................. 1,928 988 179
Interest expense............................................ (45,021) (47,644) (43,750)
-------- -------- --------
Loss before income taxes and extraordinary item............. (23,156) (27,597) (38,588)
Income tax benefit (provision).............................. (300) 2,700 7,188
-------- -------- --------
Loss before extraordinary item.............................. (23,456) (24,897) (31,400)
Extraordinary gain (loss) on extinguishment of debt......... (21,414) 5,655
-------- -------- --------
Net loss.................................................... $(44,870) $(19,242) $(31,400)
======== ======== ========
Basic and diluted earnings (loss) per common share (pro
forma for 1995):
Loss before extraordinary item......................... $ (1.51) $ (2.04) $ (3.25)
Extraordinary gain (loss) on extinguishment of debt.... (1.37) .46
-------- -------- --------
Net loss............................................... $ (2.88) $ (1.58) $ (3.25)
======== ======== ========
</TABLE>

See accompanying notes.
F-4
<PAGE> 36

BALLY TOTAL FITNESS HOLDING CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)

<TABLE>
<CAPTION>
COMMON STOCK UNEARNED
------------------ COMPENSATION TOTAL
NUMBER PAR CONTRIBUTED ACCUMULATED (RESTRICTED STOCKHOLDERS'
OF SHARES VALUE CAPITAL DEFICIT STOCK) EQUITY
---------- ----- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.... 19,000,000 $ 190 $261,738 $(227,091) $ $ 34,837
Net loss........................ (31,400) (31,400)
Effects of spin-off from Bally
Entertainment Corporation:
Forgiveness of income tax
obligation by Bally
Entertainment
Corporation............... 44,507 44,507
Increase in income tax
valuation allowance due to
adjustments to the income
tax basis of certain
assets.................... (20,147) (20,147)
Excess of sales price over
historical basis of assets
sold to Bally
Entertainment
Corporation............... 3,892 3,892
Reduction in number of
shares issued and
outstanding............... (7,154,839) (72) 72 --
---------- ----- -------- --------- ------ --------
Balance at December 31, 1995.... 11,845,161 118 290,062 (258,491) 31,689
Net loss........................ (19,242) (19,242)
Common stock issued under long-
term incentive plan........... 650,000 7 4,389 (4,396) --
Capital contributions by Bally
Entertainment Corporation..... 9,360 9,360
Amortization of unearned
compensation.................. 2,345 2,345
---------- ----- -------- --------- ------ --------
Balance at December 31, 1996.... 12,495,161 125 303,811 (277,733) (2,051) 24,152
Net loss........................ (44,870) (44,870)
Issuance of common stock through
public offering............... 8,000,000 80 88,310 88,390
Issuance of common stock upon
exercise of stock options and
other......................... 79,931 1 597 598
Amortization of unearned
compensation.................. 2,051 2,051
---------- ----- -------- --------- ------ --------
Balance at December 31, 1997.... 20,575,092 $ 206 $392,718 $(322,603) $ -- $ 70,321
========== ===== ======== ========= ====== ========
</TABLE>

See accompanying notes.
F-5
<PAGE> 37

BALLY TOTAL FITNESS HOLDING CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING:
Loss before extraordinary item..................... $ (23,456) $ (24,897) $ (31,400)
Adjustments to reconcile to cash used --
Depreciation and amortization, including
amortization included in interest expense..... 55,287 59,124 60,701
Provision for doubtful receivables.............. 96,078 80,350 72,145
Change in operating assets and liabilities...... (163,770) (119,764) (112,922)
Other, net...................................... (75) (114) 1,622
--------- --------- ---------
Cash used in operating activities............. (35,936) (5,301) (9,854)
INVESTING:
Purchases and construction of property and
equipment....................................... (27,065) (20,612) (22,469)
Proceeds from sale of property and equipment....... 10,946
Reserve fund deposit refunded (paid) pursuant to
securitization facility......................... 10,000 (20,000)
Other, net......................................... 833 353
--------- --------- ---------
Cash used in investing activities............. (16,119) (9,779) (42,116)
FINANCING:
Debt transactions --
Proceeds from long-term borrowings.............. 225,052 162,318 150,000
Repayments of long-term debt.................... (208,034) (155,912) (82,917)
Debt issuance costs............................. (8,466) (2,815) (6,654)
--------- --------- ---------
Cash provided by debt transactions............ 8,552 3,591 60,429
Equity transactions --
Proceeds from issuance of common stock through
public offering............................... 88,390
Proceeds from issuance of common stock upon
exercise of stock options..................... 258
Capital contribution by Bally Entertainment
Corporation................................... 6,760
--------- --------- ---------
Cash provided by financing activities......... 97,200 10,351 60,429
--------- --------- ---------
Increase (decrease) in cash and equivalents.......... 45,145 (4,729) 8,459
Cash and equivalents, beginning of year.............. 16,534 21,263 12,804
--------- --------- ---------
Cash and equivalents, end of year.................... $ 61,679 $ 16,534 $ 21,263
========= ========= =========
</TABLE>

See accompanying notes.
F-6
<PAGE> 38

BALLY TOTAL FITNESS HOLDING CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
(In thousands)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:

Changes in operating assets and liabilities, net of
effects from acquisitions or sales, were as
follows --
Increase in installment contracts receivable...... $(140,096) $ (75,491) $ (91,422)
(Increase) decrease in other current and other
assets............................................ (8,402) (4,063) 1,589
(Increase) decrease in deferred membership
origination costs............................... (4,597) 4,113 428
Decrease in accounts payable...................... (4,657) (475) (498)
Increase (decrease) in income taxes payable....... 84 (2,866) (503)
Decrease in accrued and other liabilities......... (5,141) (11,191) (5,703)
Decrease in deferred revenues..................... (961) (29,791) (16,813)
--------- --------- ---------
$(163,770) $(119,764) $(112,922)
========= ========= =========

Cash payments for interest and income taxes were as follows --
Interest paid........................................ $ 48,427 $ 44,604 $ 42,221
Interest capitalized................................. (511) (236) (278)
Income taxes paid (refunded), net.................... 216 166 (6,685)

Investing and financing activities exclude the
following non-cash transactions --
Acquisition of property and equipment through
capital leases/borrowings....................... $ 14,044 $ 5,266 $ 2,445
Forgiveness of income tax obligations by Bally
Entertainment Corporation/Hilton Hotels
Corporation..................................... 15,200 44,507
Common stock issued under long-term incentive
plan............................................ 4,396
Capital contribution by Bally Entertainment
Corporation..................................... 2,600
Increase in income tax valuation allowance due to
adjustments to the income tax basis of certain
assets upon spin-off from Bally Entertainment
Corporation..................................... 20,147
Excess of sales price over historical basis of
assets sold to Bally Entertainment
Corporation..................................... 3,892
</TABLE>

See accompanying notes.
F-7
<PAGE> 39

BALLY TOTAL FITNESS HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All dollar amounts in thousands, except share data)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying consolidated financial statements include the accounts of
Bally Total Fitness Holding Corporation (the "Company") and the subsidiaries
which it controls. The Company, through its subsidiaries, is a nationwide
commercial operator of fitness centers with approximately 320 facilities
concentrated in 27 states and Canada. The Company operates in one industry
segment, and all significant revenues arise from the commercial operation of
fitness centers, primarily in major metropolitan markets in the United States.
Unless otherwise specified in the text, references to the Company include the
Company and its subsidiaries.

The Company was a wholly owned subsidiary of Bally Entertainment
Corporation ("Entertainment") until the consummation of Entertainment's spin-off
of the Company. On November 6, 1995, the Board of Directors of Entertainment
declared a distribution in the form of a dividend (the "Spin-off") to holders of
record of its common stock as of the close of business on November 15, 1995 (the
"Record Date") on the basis of one share of common stock, par value $.01 per
share (the "Common Stock") of the Company, along with an associated stock
purchase right (a "Right") issued pursuant to a stockholder rights plan (the
"Stockholder Rights Plan"), for every four shares of Entertainment common stock
held on the Record Date. On January 9, 1996 (the "Distribution Date"),
11,845,161 shares of Common Stock were distributed. For financial accounting
purposes, the Company has reflected the effect of the Spin-off as of December
31, 1995.

The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which require the
Company's management to make estimates and assumptions that affect the amounts
reported therein. Actual results could vary from such estimates. In addition,
certain reclassifications (primarily interest income) have been made to prior
years' financial statements to conform with the 1997 presentation.

Cash equivalents

The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. The carrying amount
of cash equivalents approximates fair value due to the short maturity of those
instruments.

Property and equipment

Depreciation of buildings, equipment and furnishings (including assets
under capital leases) is provided on the straight-line method over the estimated
economic lives of the related assets and amortization of leasehold improvements
is provided on the straight-line method over the lesser of the estimated useful
lives of the improvements or the lease periods. Depreciation and amortization of
property and equipment was $45,739, $48,444 and $51,999 for 1997, 1996 and 1995,
respectively.

Deferred finance costs

Deferred finance costs are amortized over the terms of the related debt
using the bonds outstanding method. Included in "Other assets" at December 31,
1997 and 1996 were deferred finance costs of $9,828 and $8,252, respectively,
net of accumulated amortization of $2,511 and $4,430, respectively.

Intangible assets

Intangible assets consist principally of cost in excess of net assets of
acquired businesses (goodwill), which is being amortized on the straight-line
method over periods ranging up to forty years from dates of

F-8
<PAGE> 40
BALLY TOTAL FITNESS HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(All dollar amounts in thousands, except share data)

acquisition, and amounts assigned to acquired operating lease rights, which are
being amortized on the straight-line method over the remaining lease periods.

The Company evaluates annually whether the remaining estimated useful life
of goodwill may warrant revision or the remaining balance of goodwill may not be
recoverable, generally considering expectations of future profitability and cash
flows (undiscounted and without interest charges) on a consolidated basis. If
the sum of the Company's expected future cash flows were less than the carrying
value of the Company's long-lived assets and identifiable intangibles, an
impairment loss would be recognized equal to the amount by which the carrying
value of the Company's long-lived assets and identifiable intangibles exceeded
their fair value. Based on present operations and strategic plans, the Company
believes that no impairment of goodwill exists at December 31, 1997. However, if
future operations do not perform as expected, or if the Company's strategic
plans for its business were to change, a reduction in the carrying value of
these assets may be required.

Membership revenue recognition

The Company's fitness centers primarily offer a dues membership, which
permits members, upon paying initial membership fees, which may be financed, to
maintain their membership on a month-to-month basis as long as monthly dues
payments are made. Initial membership fees may be paid-in-full when members join
or may be financed via installment contracts over periods ranging up to 36
months. Revenues from initial membership fees (net of any related allowances)
are deferred and recognized ratably over the weighted average expected life of
the memberships, which for paid-in-full memberships and financed memberships
sold after December 31, 1993 have been calculated to be 36 months and 22 months,
respectively (previously 34 months and 20 months, respectively). Costs directly
related to the origination of memberships (substantially all of which are sales
commissions paid, which are included in "Fitness center operations") are also
deferred and are amortized using the same methodology as for initial membership
fees described above. The allowance for cancellations of memberships under
so-called "cooling-off" statutes in most states, contractually permitted
cancellations and first payment defaults is charged directly against membership
revenue. The provision for doubtful receivables represents the allowance for all
other uncollectible memberships. Dues revenue is recorded as monthly services
are provided. Accordingly, when dues are prepaid, the prepaid portion is
deferred and recognized over the applicable term. Installment contracts bear
interest at, or are adjusted for financial accounting purposes at the time the
contracts are sold to, rates for comparable consumer financing contracts.
Unearned finance charges are amortized over the term of the contracts on the
sum-of-the-months-digits method, which approximates the interest method.

Components of deferred revenues as of December 31, 1997 and 1996 are as
follows:

<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
CURRENT LONG-TERM TOTAL CURRENT LONG-TERM TOTAL
-------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Financed initial membership
fees deferred................ $169,298 $ 43,901 $213,199 $148,251 $ 31,981 $180,232
Paid-in-full initial membership
fees deferred................ 61,453 36,703 98,156 75,614 55,278 130,892
Prepaid dues................... 40,102 10,385 50,487 41,600 10,773 52,373
-------- -------- -------- -------- -------- --------
$270,853 $ 90,989 $361,842 $265,465 $ 98,032 $363,497
======== ======== ======== ======== ======== ========
</TABLE>

F-9
<PAGE> 41
BALLY TOTAL FITNESS HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(All dollar amounts in thousands, except share data)

Components of the change in deferred revenues for the years ended December
31, 1997, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Financed initial membership fees:
Originating.................................... $(352,661) $(290,378) $(309,974)
Less provision for doubtful receivables........ 96,078 80,350 72,145
--------- --------- ---------
Originating, net............................... (256,583) (210,028) (237,829)
Recognized..................................... 223,270 228,681 220,885
--------- --------- ---------
Decrease (increase) in deferral............. (33,313) 18,653 (16,944)
Paid-in-full initial memberships fees:
Originating.................................... (58,117) (85,624) (95,695)
Recognized..................................... 90,666 94,870 116,608
--------- --------- ---------
Decrease in deferral........................ 32,549 9,246 20,913
Decrease in prepaid dues......................... 1,725 1,892 12,844
--------- --------- ---------
Change in deferred revenues...................... $ 961 $ 29,791 $ 16,813
========= ========= =========
</TABLE>

Components of the change in deferred membership origination costs for the
years ended December 31, 1997, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Incurred......................................... $ (84,104) $ (77,257) $ (82,720)
Amortized........................................ 79,507 81,370 83,148
--------- --------- ---------
Change in deferred membership origination
costs.......................................... $ (4,597) $ 4,113 $ 428
========= ========= =========
</TABLE>

Income taxes

For tax periods after January 9, 1996, the Company files its own separate
consolidated federal income tax return. For tax periods prior to and including
January 9, 1996, taxable income or loss of the Company was included in the
consolidated federal income tax return of Entertainment. Pursuant to a tax
sharing agreement with Entertainment, income taxes were allocated to the Company
based on amounts the Company would pay or receive if it filed a separate
consolidated federal income tax return, except that the Company received from
Entertainment an amount equal to the tax benefit of the Company's net operating
losses and tax credits, if any, that could be utilized in Entertainment's
consolidated federal income tax return, whether or not such losses or credits
could be utilized by the Company on a separate return basis. As a result of the
Spin-off, the Company and Entertainment entered into the Tax Allocation and
Indemnity Agreement that defines the parties' rights and obligations with
respect to deficiencies and refunds of federal income taxes for tax periods
through January 9, 1996. In connection therewith, Entertainment assumed
substantially all responsibility for any federal income tax adjustments related
to the Company for tax periods through January 9, 1996. The Tax Allocation and
Indemnity Agreement was amended in 1996 to include a portion of the Company's
losses in Entertainment's consolidated federal income tax return. As a result,
capital contributions totaling $9,360 were received by the Company ($6,760 in
cash and $2,600 as an offset to certain indebtedness) representing a portion of
the benefit that Entertainment receives from the utilization of the Company's
loss carrybacks.

Earnings (loss) per common share

In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No.
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic

F-10
<PAGE> 42
BALLY TOTAL FITNESS HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(All dollar amounts in thousands, except share data)

earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is computed similarly to the
way fully diluted earnings per share was computed pursuant to Accounting
Principles Board Opinion ("APB") No. 15. Earnings (loss) per share amounts for
all years have been presented to conform to SFAS No. 128.

Basic and diluted earnings (loss) per common share are computed by dividing
loss before extraordinary item, extraordinary gain (loss) on extinguishment of
debt, and net loss by the weighted average number of shares of common stock
outstanding during each year, which totaled 15,557,491 shares and 12,174,601
shares for 1997 and 1996, respectively. The assumed exercise of outstanding
warrants and stock options for diluted earnings (loss) per common share was not
applicable in either 1997 or 1996 because their effect was anti-dilutive. See
"Pro forma information (unaudited)" regarding 1995's pro forma loss per common
share.

EXTRAORDINARY ITEMS

The extraordinary loss on extinguishment of debt for 1997 of $21,414 ($1.37
per share) results from a refinancing of the Company's subordinated debt and
credit facility.

The extraordinary gain on extinguishment of debt for 1996 consists of (i) a
gain of $9,880 ($.81 per share), net of income taxes of $5,320, resulting from a
$15,200 tax obligation to Entertainment which was forgiven as part of the
December 1996 merger (the "Merger") of Entertainment with and into Hilton Hotels
Corporation ("Hilton") and (ii) a charge of $4,225 ($.35 per share), net of
income taxes of $2,270, resulting from a refinancing of the Company's
securitization facility.

INSTALLMENT CONTRACTS RECEIVABLE

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current:
Installment contracts receivable.......................... $239,448 $226,173
Unearned finance charges.................................. (27,709) (24,467)
Allowance for doubtful receivables and cancellations...... (43,728) (48,471)
-------- --------
$168,011 $153,235
======== ========
Long-term:
Installment contracts receivable.......................... $226,735 $195,978
Unearned finance charges.................................. (14,357) (11,382)
Allowance for doubtful receivables and cancellations...... (36,803) (37,624)
-------- --------
$175,575 $146,972
======== ========
</TABLE>

The carrying amount of installment contracts receivable at December 31,
1997 and 1996 approximates fair value based on discounted cash flow analyses,
using interest rates in effect at the end of each year comparable to similar
consumer financing contracts.

ACCRUED LIABILITIES

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Payroll and benefit-related liabilities..................... $ 19,530 $ 16,384
Interest.................................................... 6,603 11,938
Taxes other than income taxes............................... 3,922 3,853
Other....................................................... 20,409 22,888
-------- --------
$ 50,464 $ 55,063
======== ========
</TABLE>

F-11
<PAGE> 43
BALLY TOTAL FITNESS HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(All dollar amounts in thousands, except share data)

LONG-TERM DEBT

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Nonsubordinated:
Revolving credit agreement................................ $ -- $ --
Securitization facility................................... 160,000 160,000
Capital lease obligations................................. 13,126 6,686
Other secured and unsecured obligations................... 11,889 18,112
Subordinated:
9 7/8% Senior Subordinated Notes due 2007................. 225,000
13% Senior Subordinated Notes due 2003.................... 22,555 200,000
-------- --------
Total long-term debt........................................ 432,570 384,798
13% Senior Subordinated Notes due 2003, called for 1998
redemption................................................ (22,555)
Other current maturities of long-term debt.................. (4,590) (8,401)
-------- --------
Long-term debt, less current maturities..................... $405,425 $376,397
======== ========
</TABLE>

In November 1997, the Company entered into a new revolving credit agreement
with a group of banks which provides for a three-year $70,000 credit line. The
amount available under the credit line is reduced by any outstanding letters of
credit, which cannot exceed $30,000. At December 31, 1997, the revolving credit
agreement was unused except for outstanding letters of credit totaling $7,157.
The rate of interest on borrowings is at the Company's option, generally based
upon either the agent bank's prime rate plus 2% or a Eurodollar rate plus 3%. A
fee of 2.25% on outstanding letters of credit is payable quarterly. A commitment
fee of 1/2 of 1% is payable quarterly on the unused portion of the credit
facility. The revolving credit agreement is secured by substantially all real
and personal property (excluding installment contracts receivable) of the
Company.

In December 1996, the Company refinanced its securitization facility by
completing a private placement of asset-backed securities (the "Securitization")
pursuant to which $145,500 of 8.43% Accounts Receivable Trust Certificates and
$14,500 of Floating Rate Accounts Receivable Trust Certificates (the "Floating
Certificates") were issued as undivided interests in the H&T Master Trust (the
"Trust"). The Floating Certificates bear interest (8.55% at December 31, 1997)
at 2.57% above the London Interbank Offer Rate ("LIBOR"), with the interest rate
on the Floating Certificates capped at 9.43% pursuant to an interest rate cap
agreement. The Trust was created for the issuance of asset-backed securities and
was formed pursuant to a pooling and servicing agreement. The Trust includes a
portfolio of substantially all of the Company's installment contracts receivable
from membership sales and the proceeds thereof. The amount by which installment
contracts receivable in the Trust exceeds the $160,000 principal amount of
certificates issued by the Trust is generally retained by the Company. The
Company services the installment contracts receivable held by the Trust and
earns a servicing fee which approximates the servicing costs incurred by the
Company. Through July 1999, the principal amount of the certificates remains
fixed and collections of installment contracts receivable flow through to the
Company in exchange for the securitization of additional installment contracts
receivable, except that collections are first used to fund interest
requirements. The amortization period commences in August 1999, after which
collections of installment contracts receivable will be used first to fund
interest requirements and then to repay principal on the certificates. The
amortization period ends upon the earlier to occur of the certificates being
repaid in full or August 2002.

The Company leases certain fitness center facilities and equipment under
capital leases expiring in periods ranging from one to twenty years. Included in
"Property and equipment" at December 31, 1997 and 1996 were assets under capital
leases of $18,194 and $7,125, respectively, net of accumulated amortization of
$1,751 and $586, respectively.

F-12
<PAGE> 44
BALLY TOTAL FITNESS HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(All dollar amounts in thousands, except share data)

In October 1997, the Company refinanced its subordinated debt by issuing
$225,000 aggregate principal amount of 9 7/8% Senior Subordinated Notes due 2007
(the "9 7/8% Notes") and completing a tender offer and consent solicitation (the
"Tender Offer") with respect to its $200,000 aggregate principal amount of 13%
Senior Subordinated Notes due 2003 (the "13% Notes"). Pursuant to the Tender
Offer, the Company purchased $177,445 aggregate principal amount of the 13%
Notes, substantially all at a price of 108.3% of the principal amount, together
with accrued and unpaid interest. In January 1998, the Company redeemed the
remaining $22,555 aggregate principal amount of the 13% Notes not tendered in
the Tender Offer at a price of 106.5% of the principal amount, together with
accrued and unpaid interest. The 9 7/8% Notes are not subject to any sinking
fund requirement, but may be redeemed beginning in October 2002, in whole or in
part, with premiums ranging from 4.9% in 2002 to zero in 2005 and thereafter.
The payment of the 9 7/8% Notes is subordinated to the prior payment in full of
all senior indebtedness of the Company, as defined (approximately $192,000 at
December 31, 1997).

The revolving credit agreement and the indenture for the 9 7/8% Notes
contain covenants that, among other things and subject to certain exceptions,
restrict the ability of the Company to incur additional indebtedness, pay
dividends, prepay certain indebtedness, dispose of certain assets, create liens
and make certain investments or acquisitions. The revolving credit agreement
also requires the maintenance of certain financial covenants.

Maturities of long-term debt (excluding the $22,555 aggregate principal
amount of the 13% Notes redeemed in January 1998) and future minimum payments
under capital leases together with the present value of future minimum rentals
as of December 31, 1997 are as follows:

<TABLE>
<CAPTION>
LONG-TERM CAPITAL
DEBT LEASES TOTAL
--------- ------- --------
<S> <C> <C> <C>
1998............................................... $ 2,527 $ 3,498 $ 6,025
1999............................................... 67,054 3,129 70,183
2000............................................... 96,092 2,076 98,168
2001............................................... 1,118 1,523 2,641
2002............................................... 3,002 1,413 4,415
Thereafter......................................... 227,096 16,177 243,273
-------- ------- --------
396,889 27,816 424,705
Less amount representing interest.................. (14,690) (14,690)
-------- ------- --------
$396,889 $13,126 $410,015
======== ======= ========
</TABLE>

The fair value of the Company's long-term debt at December 31, 1997 and
1996 approximates its carrying amount except for the Company's subordinated
debt, which had a fair market value (based on quoted market prices) of $251,666
and $190,875 at December 31, 1997 and 1996, respectively. The fair values are
not necessarily indicative of the amounts the Company could acquire the debt for
in a purchase or redemption.

INCOME TAXES

The income tax benefit (provision) applicable to loss before income taxes
and extraordinary item consists of the following:

<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Federal (all current).............................. $ -- $ 3,050 $ 7,069
State and other (all current)...................... (300) (350) 119
-------- ------- --------
$ (300) $ 2,700 $ 7,188
======== ======= ========
</TABLE>

F-13
<PAGE> 45
BALLY TOTAL FITNESS HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(All dollar amounts in thousands, except share data)

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial accounting
and income tax purposes. Significant components of the Company's deferred tax
assets and liabilities as of December 31, 1997 and 1996, along with their
classification, are as follows:

<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Installment contract revenues............. $ 1,677 $ -- $ 27,466 $ --
Amounts not yet deducted for tax purposes:
Bad debts............................... 33,259 33,509
Other................................... 13,079 14,275
Amounts not yet deducted for book
purposes:
Deferred membership origination costs... 36,042 32,412
Depreciation and capitalized costs........ 2,439 2,308
Tax loss carryforwards.................... 174,105 118,313
Other, net................................ 2,359 1,460
--------- ------- --------- -------
224,559 $38,401 193,563 $36,180
======= =======
Valuation allowance....................... (187,647) (158,872)
--------- ---------
$ 36,912 $ 34,691
========= =========
Current................................... $ 19,538 $25,198 $ 7,420 $22,565
Long-term................................. 17,374 13,203 27,271 13,615
--------- ------- --------- -------
$ 36,912 $38,401 $ 34,691 $36,180
========= ======= ========= =======
</TABLE>

Upon consummation of the Spin-off, a portion of Entertainment's federal tax
loss and Alternative Minimum Tax ("AMT") credit carryforwards were allocated to
the Company pursuant to U.S. Treasury Regulations. The amount of carryforwards
allocated to the Company may ultimately be different as a result of Internal
Revenue Service (the "IRS") adjustments. At December 31, 1997, estimated federal
AMT credit and tax loss carryforwards of $2,987 and $366,873, respectively, have
been recorded by the Company. The AMT credits can be carried forward
indefinitely, while the tax loss carryforwards expire through 2012. In addition,
the Company has substantial state tax loss carryforwards which begin to expire
in 1998 and fully expire through 2012. Based upon the Company's past performance
and the expiration dates of its carryforwards, the ultimate realization of all
of the Company's deferred tax assets cannot be assured. Accordingly, a valuation
allowance has been recorded to reduce deferred tax assets to a level which, more
likely than not, will be realized.

A reconciliation of the income tax benefit (provision) with amounts
determined by applying the U.S. statutory tax rate to loss before income taxes
and extraordinary item is as follows:

<TABLE>
<CAPTION>
1997 1996 1995
----------- ------- -----------
<S> <C> <C> <C>
Benefit at U.S. statutory tax rate (35%)............... $ 8,105 $ 9,659 $13,506
Add (deduct):
Operating losses without a current year tax
benefit........................................... (6,748) (5,509) (4,904)
State income taxes, net of related federal income tax
effect and valuation allowance.................... (195) (770) (96)
Amortization of cost in excess of acquired assets.... (1,412) (1,411) (1,391)
Other, net........................................... (50) 731 73
------- ------- -------
Income tax benefit (provision)......................... $ (300) $ 2,700 $ 7,188
======= ======= =======
</TABLE>

F-14
<PAGE> 46
BALLY TOTAL FITNESS HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(All dollar amounts in thousands, except share data)

STOCKHOLDERS' EQUITY

The Series A Junior Participating Preferred Stock, $.10 par value (the
"Series A Junior Stock"), if issued, will have a minimum preferential quarterly
dividend payment equal to the greater of (i) $1.00 per share and (ii) an amount
equal to 100 times the aggregate dividends declared per share of Common Stock
during the related quarter. In the event of liquidation, the holders of the
shares of Series A Junior Stock will be entitled to a preferential liquidation
payment equal to the greater of (a) $100 per share and (b) an amount equal to
100 times the liquidation payment made per share of Common Stock. Each share of
Series A Junior Stock will have 100 votes, voting together with the shares of
Common Stock. Finally, in the event of any merger, consolidation or other
transaction in which shares of Common Stock are exchanged, each share of Series
A Junior Stock will be entitled to receive 100 times the amount received per
share of Common Stock. These rights are protected by customary antidilution
provisions.

The Board of Directors of the Company adopted the Stockholder Rights Plan
and issued and distributed a Right for each share of Common Stock distributed to
Entertainment stockholders pursuant to the Spin-off. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Stock at a price of $40.00 per one one-hundredth of a share of
Series A Junior Stock, subject to adjustment (the "Purchase Price").

The Rights are not exercisable or transferable apart from the Common Stock
until the occurrence of one of the following: (i) ten days (or such later date
as may be determined by action of the Board of Directors of the Company prior to
such time as any person or group of affiliated persons becomes an Acquiring
Person) after the date of public announcement that a person (other than an
Exempt Person, as defined below) or group of affiliated or associated persons
has acquired, or obtained the right to acquire, beneficial ownership of 10% or
more of the Common Stock (an "Acquiring Person"), or (ii) ten days after the
date of the commencement of a tender offer or exchange offer by a person (other
than an Exempt Person) or group of affiliated or associated persons, the
consummation of which would result in beneficial ownership by such person or
group of 20% or more of the outstanding shares of Common Stock. "Exempt Persons"
include the Company, any subsidiary of the Company, employee benefit plans of
the Company, directors of the Company on January 5, 1996 who are also officers
of the Company, Entertainment and any person holding the warrant to purchase
2,942,805 shares of Common Stock initially issued to Entertainment.

In the event that, at any time after a person or group of affiliated or
associated persons has become an Acquiring Person, (i) the Company consolidates
with or merges with or into any person and is not the surviving corporation,
(ii) any person merges with or into the Company and the Company is the surviving
corporation, but the shares of Common Stock are changed or exchanged, or (iii)
50% or more of the Company's assets or earning power are sold, each holder of a
Right will thereafter have the right to receive, upon the exercise thereof at
the then current exercise price of the Right, that number of shares of Common
Stock (or under certain circumstances, an economically equivalent security or
securities) of such other person which at the time of such transaction would
have a market value of two times the exercise price of the Right. The Rights,
which do not have voting privileges, are subject to adjustment to prevent
dilution and expire on January 5, 2006. The Company may redeem or exchange all,
but not less than all, of the Rights at a price of $.01 per Right, payable in
cash or Common Stock, at any time prior to such time as a person or group of
affiliated or associated persons becomes an Acquiring Person.

In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights that are or were owned beneficially by the
Acquiring Person (which, from and after the later of the Rights distribution
date and the date of the earliest of any such events, will be void), will
thereafter have the right to receive, upon exercise thereof at the then current
exercise price of the Right, that number of shares of Common Stock (or, under

F-15
<PAGE> 47
BALLY TOTAL FITNESS HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(All dollar amounts in thousands, except share data)

certain circumstances, an economically equivalent security or securities of the
Company) having a market value of two times the exercise price of the Right.

At December 31, 1997, 6,432,874 shares of Common Stock were reserved for
future issuance (3,192,805 shares in connection with outstanding warrants and
3,240,069 shares in connection with certain stock plans).

WARRANTS

In July 1997, in connection with a $7,500 bridge loan provided to the
Company by an affiliate of an underwriter of the August 1997 public offering of
Common Stock, the Company issued warrants entitling the affiliate to acquire
250,000 shares of Common Stock at an exercise price of $10.05 per share,
expiring in July 2002.

In connection with the Spin-off, the Company issued a warrant entitling
Entertainment to acquire 2,942,805 shares of Common Stock at an exercise price
of $5.26 per share (equal to 110% of the average daily closing price of the
Common Stock for the twenty consecutive trading days beginning on the first
trading day after the Distribution Date), expiring in December 2005. At the time
of the Merger, Entertainment sold the warrant to the Chairman of the Board of
Directors and the President and Chief Executive Officer of the Company.

STOCK PLANS

In January 1996, the Board of Directors of the Company adopted the 1996
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). The
Directors' Plan provides for the grant of non-qualified stock options to
non-employee directors of the Company. Initially, 100,000 shares of Common Stock
were reserved for issuance under the Directors' Plan and at December 31, 1997,
80,000 shares of Common Stock were available for future grant under the
Directors' Plan. Stock options may not be granted under the Directors' Plan
after January 3, 2006.

Pursuant to the Directors' Plan, non-employee directors of the Company are
granted an option to purchase 5,000 shares of Common Stock upon the commencement
of service on the Board of Directors, with another option to purchase 5,000
shares of Common Stock granted on the second anniversary thereof. Options under
the Directors' Plan are generally granted with an exercise price equal to the
fair market value of the Common Stock at the date of grant. Option grants under
the Directors' Plan become exercisable in three equal annual installments
commencing one year from the date of grant and have a 10-year term.

Also in January 1996, the Board of Directors of the Company adopted the
1996 Long-Term Incentive Plan (the "Incentive Plan"). The Incentive Plan
provides for the grant of non-qualified stock options, incentive stock options
and compensatory restricted stock awards (collectively "Awards") to officers and
key employees of the Company. Initially, 2,100,000 shares of Common Stock were
reserved for issuance under the Incentive Plan. In 1997, the Incentive Plan was
amended to increase the aggregate number of shares of Common Stock which may be
granted under the Incentive Plan to 3,600,000 shares. At December 31, 1997,
1,005,608 shares of Common Stock were available for future grant under the
Incentive Plan. Awards may not be granted under the Incentive Plan after January
3, 2006.

Pursuant to the Incentive Plan, non-qualified stock options are generally
granted with an exercise price equal to the fair market value of the Common
Stock at the date of grant. Incentive stock options must be granted at not less
than the fair market value of the Common Stock at the date of grant. Option
grants become exercisable at the discretion of the Compensation Committee of the
Board of Directors (the "Compensation Committee"), generally in three equal
annual installments commencing one year from the date of grant. Option grants in
1997 and 1996 have a 10-year term.

F-16
<PAGE> 48
BALLY TOTAL FITNESS HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(All dollar amounts in thousands, except share data)

A summary of 1996 and 1997 stock option activity under the Directors' Plan
and Incentive Plan is as follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-
SHARES AVERAGE RANGE OF
REPRESENTED EXERCISE EXERCISE
BY OPTIONS PRICE PRICES
----------- --------- -------------
<S> <C> <C> <C>
Granted.......................................... 1,594,580 $ 4.23 $ 4.125-5.125
Forfeited........................................ (249,920) 4.125 4.125
---------
Outstanding at December 31, 1996, none of which
were exercisable............................... 1,344,660 4.25 4.125-5.125
Granted.......................................... 729,000 16.32 12.00-17.5625
Exercised........................................ (59,931) 4.125 4.125
Forfeited........................................ (109,268) 4.125 4.125
---------
Outstanding at December 31, 1997, 391,820 of
which were exercisable......................... 1,904,461 8.88 4.125-17.5625
=========
</TABLE>

The Company has elected to follow APB No. 25, "Accounting for Stock Issued
to Employees" and related Interpretations in accounting for its stock options
because, as discussed below, the alternative fair value accounting provided for
under SFAS No. 123, "Accounting for Stock-Based Compensation" requires use of
option valuation models that were not developed for use in valuing stock
options. Under APB No. 25, because the exercise price of the Company's stock
options equals the market price of the Common Stock on the date of grant, no
compensation expense is recognized.

SFAS No. 123 requires the disclosure of pro forma net loss and loss per
share information as if the Company had accounted for stock options under the
fair value method prescribed by SFAS No. 123, which for 1997 is $45,783 and
$2.94 per share, and for 1996 is $20,032 and $1.65 per share, respectively. In
addition, the weighted-average fair value of stock options granted in 1997 and
1996 was $2.88 per share and $1.93 per share, respectively. The fair value for
stock options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1997 and 1996:
risk-free interest rate of 5.67% and 6.22%, respectively; no dividend yield;
volatility factor of the expected market price of the Common Stock of 0.164 and
0.413, respectively; and a weighted-average expected life of the options of five
years. Pro forma results under SFAS No. 123 in 1997 and 1996 are not likely to
be representative of future pro forma results because, for example, options vest
over several years and additional awards may be made in future years.

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

Pursuant to the Incentive Plan, restricted stock awards are rights granted
to an employee to receive shares of stock without payment but subject to
forfeiture and other restrictions as set forth in the Incentive Plan. Generally,
the restricted stock awarded, and the right to vote such stock or to receive
dividends thereon, may not be sold, exchanged or otherwise disposed of during
the restricted period. Except as otherwise determined by the Compensation
Committee, the restrictions and risks of forfeiture will lapse in three equal
annual installments commencing one year after the date of grant.

F-17
<PAGE> 49
BALLY TOTAL FITNESS HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(All dollar amounts in thousands, except share data)

In 1996, the Compensation Committee awarded 650,000 shares of restricted
Common Stock to certain executive officers of the Company. Restrictions on these
shares generally lapsed based upon the market price of the Common Stock reaching
certain targeted stock prices unless less than half of such shares awarded
vested within two years after the date of grant, at which time a number of
shares would vest so that the total number of vested shares equaled 50% of the
original grants. In addition, a recipient of these restricted stock awards
receives a cash payment from the Company upon the lapse of restrictions in an
amount sufficient to insure that the recipient receives the Common Stock net of
all taxes imposed upon the recipient because of the receipt of such Common Stock
and cash payment. Restrictions applicable to these shares generally lapsed upon
reaching certain targeted stock prices in 1997 and 1996 and, accordingly, the
fair value of these shares was amortized to expense ($2,051 in 1997 and $2,345
in 1996) in connection therewith. In addition, the tax gross-up expense related
to these restricted shares totaled $3,856 and $2,764 in 1997 and 1996,
respectively. The weighted-average fair value of restricted Common Stock awarded
in 1996 was $4.87 per share as determined under SFAS No. 123.

In November 1997, the Board of Directors of the Company adopted the Bally
Total Fitness Holding Corporation Employee Stock Purchase Plan (the "Stock
Purchase Plan"). The Stock Purchase Plan provides for the purchase of Common
Stock by eligible employees (as defined) electing to participate in the plan.
The stock can generally be purchased semi-annually at a price equal to the
lesser of: (i) 95% of the fair market value of the Common Stock on the date when
a particular offering commences or (ii) 95% of the fair market value of the
Common Stock on the date when a particular offering expires. For each offering
made under the Stock Purchase Plan, each eligible employee electing to
participate in the Stock Purchase Plan will automatically be granted shares of
Common Stock equal to the number of full shares which may be purchased from the
employee's elected payroll deduction, with a maximum payroll deduction equal to
10% of eligible compensation, as defined. The first offering under this plan
commenced on January 1, 1998 and expires on March 31, 1998. Thereafter,
offerings shall commence on each April 1 and October 1 and expire on the
following September 30 and March 31, respectively, until the Stock Purchase Plan
is terminated or no additional shares are available for purchase. At December
31, 1997, 250,000 shares of Common Stock were available for future purchases
under the Stock Purchase Plan. Pursuant to APB No. 25, no expense is recorded by
the Company in connection with this plan.

Prior to the Spin-off, certain officers and key employees of the Company
participated in the 1989 Incentive Plan of Entertainment (the "1989 Plan"),
pursuant to which Entertainment granted these individuals options (generally
becoming exercisable in three equal annual installments commencing one year
after the date of grant) to purchase Entertainment common stock at a price equal
to the fair market value of the stock at the date of grant. Pursuant to the 1989
Plan, following the Spin-off, these officers and key employees no longer
affiliated with Entertainment could no longer participate in this plan. As a
result, their unexercisable options were cancelled on January 9, 1996, and their
vested options terminated 90 days thereafter to the extent not exercised prior
thereto.

SAVINGS PLANS

The Company sponsors several defined contribution plans that provide
retirement benefits for certain full-time employees. Eligible employees may
elect to participate by contributing a percentage of their pre-tax earnings to
the plans. Employee contributions to the plans, up to certain limits, are
matched in various percentages by the Company. The expense related to the plans
totaled $1,106, $974 and $557 in 1997, 1996 and 1995, respectively.

F-18
<PAGE> 50
BALLY TOTAL FITNESS HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(All dollar amounts in thousands, except share data)

COMMITMENTS AND CONTINGENCIES

Operating leases

The Company leases various fitness center facilities, office facilities,
and equipment under operating leases expiring in periods ranging from one to
twenty-five years excluding optional renewal periods. Certain of the leases
contain contingent rental provisions generally related to cost of living
criteria or revenues of the respective fitness centers. Rent expense under
operating leases was $89,384, $90,060 and $90,318 for 1997, 1996 and 1995,
respectively.

Minimum future rent payments under long-term noncancellable operating
leases in effect as of December 31, 1997, exclusive of taxes, insurance, other
expenses payable directly by the Company and contingent rent, are $84,519,
$82,807, $78,265, $73,782 and $70,353 for 1998 through 2002, respectively, and
$405,425 thereafter.

Included in the amounts above are leases with real estate partnerships in
which certain of the Company's then current executive officers had ownership
interests. Rent expense under these leases was $808, $2,002 and $1,991 for 1997,
1996 and 1995, respectively. In addition, these leases require minimum rent
payments of $845 for 1998.

Litigation

A class action which has been certified entitled Jackson v. Health & Tennis
Corporation of America was filed in the state district court in Bexar County,
Texas on May 8, 1995. The complaint alleges that the defendant, a subsidiary of
the Company, charged excessive amounts on its financed memberships in violation
of the Texas Credit Code and the Texas Deceptive Trade Practices-- Consumer
Protection Act. A purported class action which has not been certified entitled
Vasquez et al. v. Bally Total Fitness Corporation, d/b/a Bally's was filed in
state district court in Bexar County, Texas on September 18, 1997. The complaint
alleges that the defendant, a subsidiary of the Company, charged excessive
amounts on its financed memberships in violation of the Texas Credit Code, the
Federal Truth-in-Lending Act and Federal Reserve Board regulations.
The relief sought in both cases is damages equal to the alleged overpayments and
statutory remedies. The Company is currently unable to accurately determine
within a meaningful range the amount sought in these actions because Texas law
on what constitutes actual damages for any class member is unclear. The Company
is vigorously defending these actions. The outcome of this litigation is not
currently determinable and, consequently, the Company cannot predict whether it
will have a material adverse effect on the Company's financial condition or
results of operations in any future period.

TRANSACTIONS WITH ENTERTAINMENT

In January 1996, the Company and Entertainment entered into a Trademark
License Agreement pursuant to which Entertainment (Hilton after the Merger)
licenses the use of the name "Bally" and certain trademarks, trade names and
service marks to the Company in connection with its fitness center business. The
license is for a period of ten years, subject to termination in certain
circumstances. The Company paid no royalty or license fee for 1996 and pays a
fee of $1,000 per year thereafter. Following the initial ten-year term, the
Company has an option to renew the license for an additional five-year period at
a rate equal to the greater of the then market rate or $1,000 per year.

F-19
<PAGE> 51
BALLY TOTAL FITNESS HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(All dollar amounts in thousands, except share data)

In connection with the Spin-off, Entertainment purchased a fitness center
from the Company for $6,200. The Company and Entertainment entered into a
management agreement pursuant to which the Company provides certain
administrative services to Entertainment in connection with the operation of
this fitness center, including membership contract processing, membership card
issuance, collections, processing cash receipts and renewal solicitation.
Entertainment pays the Company a management fee equal to 4% of membership
revenues and 2% of total revenues of this fitness center for these services,
which was $213 and $279 for 1997 and 1996, respectively. In addition,
Entertainment purchased from the Company all of the shares of capital stock and
warrants to purchase shares of capital stock of Holmes Place PLC owned by the
Company, as well as a note receivable from Holmes Place PLC held by the Company,
for $1,800. For financial accounting purposes, because of Entertainment's
ownership interest at the time, the excess of the sales price over the
historical net book value of the fitness center and Holmes Place PLC assets of
$5,988 was accounted for as an increase to stockholders' equity, net of income
taxes of $2,096.

In January 1996, the Company and Entertainment entered into a Transitional
Services Agreement pursuant to which Entertainment provided the Company certain
services for a period of one year following the Spin-off. The services provided
to the Company by Entertainment included services relating to insurance, tax
matters, accounting and other financial services and the administration of
employee benefit programs. The Company provided payroll services to
Entertainment during this period. The net amount charged to the Company by
Entertainment in 1996 pursuant to the Transitional Services Agreement was
$2,344, based on the costs incurred for such services. Prior to the Spin-off,
the Company and Entertainment reimbursed each other for the proportionate share
of costs (salaries, benefits, rent, etc.) related to employees performing
functions on behalf of both companies, based on estimates of time spent on
behalf of each company. The net amount charged by Entertainment in 1995 was
$3,045. Management believes that the method used to allocate these costs was
reasonable. In addition, certain of the Company's insurance coverage was
obtained by Entertainment pursuant to corporate-wide programs and Entertainment
charged the Company its proportionate share of the respective insurance
premiums, which totaled $4,625 and $5,668 for 1996 and 1995, respectively.

Pursuant to the Transitional Services Agreement, the Company indemnified
Entertainment against (i) debts and liabilities of the Company and (ii)
liabilities relating to litigation currently pending or claims, controversies or
other causes of action relating to the Company's business arising through the
Distribution Date. The Transitional Services Agreement also provided for the
payment by the Company of $15,200 due Entertainment under the prior tax sharing
agreement (plus interest at 10% per annum from the Distribution Date). At the
time of the Merger, the $15,200 of indebtedness was forgiven by Hilton, which
the Company reflected as an extraordinary gain. The Company also paid interest,
calculated primarily at a prime rate, on advances from Entertainment. Interest
paid to Entertainment was $1,551 and $430 for 1996 and 1995, respectively.

PRO FORMA INFORMATION (UNAUDITED)

The net loss for 1995 reflects a federal income tax benefit arising from
the Company's prior tax sharing agreement with Entertainment of $7,069. Pro
forma loss per common share for 1995 has been determined giving effect to (i)
adjustments made to reflect the income tax benefit as if the Company had filed
its own separate consolidated income tax return for the year, which results in a
pro forma net loss of $38,469, and (ii) the distribution of 11,845,161 shares of
Common Stock to Entertainment stockholders as if such distribution had taken
place as of the beginning of the year.

F-20
<PAGE> 52

BALLY TOTAL FITNESS HOLDING CORPORATION

SUPPLEMENTARY DATA
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
(All dollar amounts in millions, except share data and footnotes)

<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------------- --------------- --------------- ---------------
1997 1996 1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................... $168.4 $163.7 $161.8 $158.7 $165.1 $156.6 $165.7 $160.2
Operating income (loss)......... 6.2 (.2) 3.2 4.0 .9 2.8 9.6 12.5
Income (loss) before
extraordinary item............ (5.7) (12.0) (7.3) (7.9) (10.3) (9.2) (.2) 4.2
Extraordinary gain (loss) on
extinguishment of debt........ (21.4) 5.7
Net income (loss)............... (5.7) (12.0) (7.3) (7.9) (10.3) (9.2) (21.6) 9.9
Basic earnings (loss) per common
share:
Income (loss) before
extraordinary item....... $ (.46) $ (.98) $ (.59) $ (.65) $ (.60) $ (.76) $ (.01) $ .35
Extraordinary gain (loss)
on extinguishment of
debt..................... (1.04) .46
Net income (loss).......... (.46) (.98) (.59) (.65) (.60) (.76) (1.05) .81
Diluted earnings (loss) per
common share:
Income (loss) before
extraordinary item....... $ (.46) $ (.98) $ (.59) $ (.65) $ (.60) $ (.76) $ (.01) $ .33
Extraordinary gain (loss)
on extinguishment of
debt..................... (1.04) .44
Net income (loss).......... (.46) (.98) (.59) (.65) (.60) (.76) (1.05) .77
</TABLE>

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

1. The Company's operations are subject to seasonal factors.

2. The Company was a wholly owned subsidiary of Entertainment until January 9,
1996, the date 11,845,161 shares of Common Stock were distributed by
Entertainment in the Spin-off. For financial accounting purposes, the Company
has reflected the effect of the Spin-off as of December 31, 1995.

3. The extraordinary loss on extinguishment of debt for the quarter ended
December 31, 1997 results from a refinancing of the Company's subordinated
debt and credit facility. The extraordinary gain on extinguishment of debt
for the quarter ended December 31, 1996 consists of (i) a gain of $9.9
million ($.81 per share basic and $.77 per share diluted) resulting from a
$15.2 million tax obligation to Entertainment which was forgiven as part of
the December 1996 merger of Entertainment with and into Hilton and (ii) a
charge of $4.2 million ($.35 per share basic and $.33 per share diluted)
resulting from a refinancing of the Company's securitization facility.

F-21
<PAGE> 53

=========================================================

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, 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
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... 2
Prospectus Summary...................... 3
Special Note Regarding Forward-Looking
Statements............................ 8
Risk Factors............................ 8
Use of Proceeds......................... 11
Dilution................................ 11
Price Range of Common Stock and Dividend
Policy................................ 12
Capitalization.......................... 13
Selected Consolidated Financial Data.... 14
Management's Discussion and Analysis of
Results of Operations and Financial
Condition............................. 15
Business................................ 20
Underwriting............................ 29
Incorporation of Certain Information by
Reference............................. 31
Legal Matters........................... 31
Experts................................. 31
Index to Consolidated Financial
Statements............................ F-1
</TABLE>

=========================================================
=========================================================

2,800,000 SHARES

BALLY
LOGO

BALLY TOTAL FITNESS
HOLDING CORPORATION

COMMON STOCK
---------------------------
PROSPECTUS
---------------------------

MERRILL LYNCH & CO.
LADENBURG THALMANN & CO. INC.
CHASE SECURITIES INC.
MAY 8, 1998

=========================================================